Would you smartypants (with "bigpockets") please weigh in and innumerate the pros and cons of investing in markets of varying sizes? A commonly stated risk of a smaller population is possibly having an employer, that's providing jobs to a rather large segment of the population, leave/shut down.
What are other things to consider (I know there are many!)? How does your strategy play into your decision of location as it relates to population size?
It can be a very mixed bag. Cleveland, Akron, Detroit and other cities with large populations were hit very hard in certain areas. Small cities can be vulnerable too, and it is often difficult to assess the health of a dominant employer. They can look good on the outside and even their own employees don’t know what is up. I invest in smaller towns-15,000 pop. Mitigate risk by doing homework, city budget, crime rates, vacancy rate, etc. Still I expect a premium for doing business there; without it I look at another opportunity in the same town or elsewhere. I invest in the neighborhood, the quality of the tenants, walk ability, crime rates etc. This is not an easy business, it pays to be conservative and play by the rules.
Biggest risks for a small town:
1. Hiring quality property managers and contractors can be a challenge. If there are only one or two outfits, what happens when they don't work out?
2. Financing is harder and usually more expensive. Agency debt is harder to get and you will pay more and have a larger down payment. There are less local banks as well
3. Tenants: It is harder to replace tenants in smaller cities. Vacancy time tends to be longer
4. Unless it is a fast growing small town, rents raise slowly.
Thanks for the input!
I suppose it would be helpful if I knew what size we're talking about if we say "small town," "mid-size," etc. For example, I've been eyeing some places that run between 50k and 150k population. What size is that considered?
Regarding financing -- is the lending on such a micro level? I was under the impression lenders worked in a state, providing the same terms, regardless of part of that state. That's not right, I guess?
So how about pros to smaller areas? I imagine there's less competition for deals in smaller areas and that can be a good thing. What else?
Population of 50k to 150k would be tertiary or secondary market. As you say, competition is less (for a reason) so usually you will find deals with higher cap rates. Not as much anymore as investors chasing yield have left the larger markets and found the secondary markets more accommodating.