Rural Multifamily, who is doing it?

Rural Multifamily, who is doing it?

Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes

My question is simple. Who is investing in rural America, why are you doing it and what is your experience? Is it your longterm goal or is it a temporary goal to achieve cash flow?

Lets define rural America as towns of less than 20k population without a major metro within 15 miles. 

I will start by saying that I am one of these investors. I have 23 units (a 3, 4, and 16 unit) in a rural town of 15k population. Overall, my experience has been fantastic from the perspective of stability, modest rent growth and long-term tenants. It amazed me how many people thought I was crazy for buying into the small town, but the cash flow and ability to find sellers who are willing to get creative on closing has offered the ability to scale with minimal funds available. 

I have also found that the lack of other options in many of these towns has positioned me to easily be viewed as one of the more or most professional management companies. Its common to only have a few available rental units on the market in the entire town for rent at a given time. 

My preference is to expand to larger markets, and I have added an 8 unit into a larger market which has also been a very positive experience.

My frustration has been getting more opportunities in larger markets that offer decent cash flow via purchasing around an 8cap. My ideal property is $1m to $2m right now. There seems to be a regular flow of opportunities in these smaller towns that I can get a 10cap or 12cap on, solid properties that I can depend on longterm, and provide me with cashflow. 

The biggest con is obviously the microeconomic risks are more acutely affected by changes in employment by one of the local major employers and the issue of lack of opportunity for appreciation since there arent tons of buyers on the market for these assets. 

Would love to get others feedback on their opinion of these smaller towns a long term or short term strategy. 

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Member since 2019 · 1 post · 8 votes
7y

I've done all kinds of investing, including rural investing in some apartment complexes.  The properties tend to offer decent returns and sometimes it is easier to get a deal.  I'm about to sell a 16 unit apartment complex about 25 miles from Waco TX, so meets your definition.  Town is Marlin, TX, about 6,000 people for an amazing price--$399,000 or less than 25K a unit.  It would be a 10+ cap rate.  All units are 2-1.5 townhouse config at about 1000sqft each.  It stays fully rented most of the time until a move out and then it will fill back up.  There is one lady that has been in it 20+ years...  It would be hard to find a deal like this in current markets in a bigger town...  So that is a real deal to answer your question--so smaller towns offer opportunities out there that aren't in bigger ones.  There is some risk to the things you mentioned like large employer closing, etc but at the end of the day, if the size of property is smaller, there is probably always a tenant.

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  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Shiva Bhaskar:
    Originally posted by @Joel Florek:

    My question is simple. Who is investing in rural America, why are you doing it and what is your experience? Is it your longterm goal or is it a temporary goal to achieve cash flow?

    Lets define rural America as towns of less than 20k population without a major metro within 15 miles. 

    I will start by saying that I am one of these investors. I have 23 units (a 3, 4, and 16 unit) in a rural town of 15k population. Overall, my experience has been fantastic from the perspective of stability, modest rent growth and long-term tenants. It amazed me how many people thought I was crazy for buying into the small town, but the cash flow and ability to find sellers who are willing to get creative on closing has offered the ability to scale with minimal funds available. 

    I have also found that the lack of other options in many of these towns has positioned me to easily be viewed as one of the more or most professional management companies. Its common to only have a few available rental units on the market in the entire town for rent at a given time. 

    My preference is to expand to larger markets, and I have added an 8 unit into a larger market which has also been a very positive experience.

    My frustration has been getting more opportunities in larger markets that offer decent cash flow via purchasing around an 8cap. My ideal property is $1m to $2m right now. There seems to be a regular flow of opportunities in these smaller towns that I can get a 10cap or 12cap on, solid properties that I can depend on longterm, and provide me with cashflow. 

    The biggest con is obviously the microeconomic risks are more acutely affected by changes in employment by one of the local major employers and the issue of lack of opportunity for appreciation since there arent tons of buyers on the market for these assets. 

    Would love to get others feedback on their opinion of these smaller towns a long term or short term strategy. 

     I love this strategy you're using - as a city guy (mainly have lived in LA and NYC and invested locally), I've always wondered about the potential of some of these more rural areas. Seems to me like if it's within an hour's drive of some sizable employers, or a metro area of 150K or more, it could be a good play overall, in the sense that there are jobs for folks. I hear great things, from a cash flow standpoint, about investing in the smaller, outlying towns from major Texas cities, and I think the same is true for CA, if you go deep into San Bernardino or Riverside counties.

    One concern I do have, and I think you alluded to, is the concentration of one industry in a metropolitan area. In following the recent GM layoffs in Ohio (near Youngstown I believe), it seems like there are some smaller outlying suburbs that will be hit badly by this. I think in the Midwest especially (not to pick on the region), this seems like an issue. 

    Assuming that isn't a huge issue, seems like a good play for cash flow - with the kind of cap rates you're getting, it's hard to say no to more deals! Of course, the city does offer appreciation and ease of selling in future, so diversifying makes sense, but as long as these generate strong cash flow,  sounds like you should continue to expand. 

     Thanks for your input. I certainly challenge myself whether I should continue and I often tell myself I will stick to larger metros. Then a deal comes along and I run the numbers and thing about the extra vacation I could go on or that it could provide us with a car payment and insurance to upgrade my wife's vehicle... Such a tease! 

    Management is my big challenge. If I only have 20 or 30 units in a town I can't hire people full time and there generally isn't a solid management companies to go to. Makes it tough to scale that up. I certainly have an idea on how I will continue to do it but would love to know how other are. 

  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Jacob Phillips:

    @Joel I live in a small college town of 13k in mid Missouri and am looking to do the same thing! I am 26 and brand new to the game with no properties currently to my name and no capital to speak of. What kind of creative financing have you been able to use for your deals?

    There’s a group of four duplexes in in my town that the seller is asking $650k for and it seems like a crazy thing to even consider but I can’t help but be curious as to how I might be able to tackle that (if it’s a good deal, that is).

     On my 16 unit and 8 unit I have used 80% bank financing and a 10% to 16% of the remaining as a seller 2nd position mortgage. It has worked well for me to date and I look forward to using the strategy again in the future. 

    $650k for 8 units seems very high for a rural area? What are avg rents? Typically a multi is always going to be 40% to 60% NOI to gross potential rents which is why I ask. Gives a quick indicator whether or not its in the ball park to dig deeper.

  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Michael Ablan:

    @Joel Florek  Glad to hear you're finding success! I'm in a market slightly bigger (25k population) and share very similar pros and cons.

    Pros:

    • Steady deal flow
    • Lots of tired landlords
    • Become well known easily and easier to become the "go-to" guy.
    • Less competition
    • Steady rents

    Cons:

    • Limited number of contractors
    • Limited number of large 30+ unit deals
    • No property appreciation
    • Slower flipping speeds
    • Slower closing speeds due to lawyers constantly being bogged down

    All in all I'm very happy here, and will continue to grow my portfolio here.  However, I'm eventually going to branch into a new market where bigger multi-family deals are more available

     Thanks for the input. Have to agree with what you have said on the pros and cons. To be honest I have yet to use a lawyer for closing so that hasn't been an issue for me. But scaling up is a concern as I look to opportunities in other small markets.

    I met an owner who had 600 units spread out in about 8 small to medium size markets in Indiana. None of his properties seemed to be running great and can't say he had any good systems in place. The largest market he had was 90 units in a town. Seeing him run around in his truck and have different full or part-time people in each town just didn't seem like the type of business I want to build. 

  • Ed GroganPro Member
    Wayne, NJ · Member since 2018 · 12 posts · 1 vote
    7y
    Joel, I have been thinking of building two family modulars in Brunswick county NC. Replacing rundown mobile hi ome properties. I will be meeting builders in February. Glad your doing well. Ed Grogan
  • Developer · Houston, TX · Member since 2017 · 161 posts · 134 votes
    7y

    @Joel Florek just reiterating what others are saying. Less competition and possibility to really excel in the market over less experienced operators but the exit risk is much greater. Less buyers for a rural market. Prepare for the long haul.

  • Developer · Houston, TX · Member since 2017 · 161 posts · 134 votes
    7y

    @Joel Florek we are developing a 168 unit $21m property in a rural market that hasn’t had new construction in 30 years. The fundamentals are solid though but always scary investing in emerging markets. Most people will challenge your decision. Not for the inexperienced or starting investor.

  • Rental Property Investor · Miami, FL · Member since 2018 · 22 posts · 9 votes
    7y
    @Joel Florek Congrats on your portfolio Joel! It seems that you found a niche. I live in Miami where prices won't allow that type of return any more but I found submarkets in Central Florida that will. I started looking at the numbers and the 8+cap is achievable. Need more time to find the ideal town but I am working on it. Care to discuss Florida?
  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Cesar Gamarra:
    @Joel Florek Congrats on your portfolio Joel! It seems that you found a niche. I live in Miami where prices won't allow that type of return any more but I found submarkets in Central Florida that will. I started looking at the numbers and the 8+cap is achievable. Need more time to find the ideal town but I am working on it. Care to discuss Florida?

     St Petersburg is where my wife and I want to call home some day. We love the water and warmth. Both of us a really into sailing and do extensive racing on the Great Lakes. My mother spends her winters in Fort Myers so we will be down that way in March. Always open to discussing. PM me and we can schedule a call. 

  • Daniel DietzPro Member
    Rental Property Investor · Reedsburg, WI · Member since 2011 · 1k+ posts · 857 votes
    7y

    Great discussion going on! 

    It is interesting to see the perspective of 'the other side' in the small town/metro debate.

    We, two partners and I, invest in a rural county - 60K county, two towns of 10-12K and the rest towns of 500-5000 people. LOTS of open farmland etc... It sounds like we have a very diverse economy compared to some rural areas maybe? Two medical centers that each have over 500 employees, almost 20K industrial/manufacturing jobs in the two largest towns, etc... HUGE tourism base too. We are also 1 hour from Madison which has a huge stable jobs base in health care, tech, and education.

    What I like about it is a lot of what others are saying - good deals, low turnover, low crime, etc....

    I have to disagree on appreciation though. Historically our area has seen about 3-4% over the last 40-50 years. We budget 2.5% when using the BP Rental Property Calculator to be conservative. 

    Our general 'target' is 1-4 units that we can get 1% rents on that are 30 years old or newer in good shape. When leveraged with 20% down on 20 year notes we project a 16%-20% return all day long. It seems like that would be harder to find in larger more competitive markets, at least when looking at the metro areas within say a two hour drive of us. 

    Dan Dietz

  • Rental Property Investor · San Antonio, TX · Member since 2011 · 266 posts · 158 votes
    7y

    @Joel Florek I love this topic. Having grown up in a rural Missouri town, I’ve witnessed how one or two investors can corner the real estate market quickly. Cool to read about everyone’s experiences.

    For me, the shortage of professional management is a significant drawback to investing in small metros. Managers in sleepy towns are not sophisticated, don’t effectively employ systems, or are plain out of touch with an investor’s needs.

    I think market selection can mitigate the challenges of day-to-day operations in a small town. Possibly select a slightly larger town or one closer to metro area that offers more vendors/services to meet your investing needs.

    Remember Brandon Turner’s complaints regarding managing his properties in Podunk, WA? He knew the challenges existed and the returns were worth the hassle (at that point in his investing career).

    Approach rural markets with an eyes wide open view and enjoy the ride!

    Best of luck to all in 2019!

    -Andrew

  • Palmetto, GA · Member since 2016 · 27 posts · 11 votes
    7y

    I've been following this conversation with great interest but I've seen no mention of today's national economy.

    What impact will developing changes have to buyers of rural property, developed as well as large acreage with maybe small farm buildings or a single home?

  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Andrew K.:

    @Joel Florek I love this topic. Having grown up in a rural Missouri town, I’ve witnessed how one or two investors can corner the real estate market quickly. Cool to read about everyone’s experiences.

    For me, the shortage of professional management is a significant drawback to investing in small metros. Managers in sleepy towns are not sophisticated, don’t effectively employ systems, or are plain out of touch with an investor’s needs.

    I think market selection can mitigate the challenges of day-to-day operations in a small town. Possibly select a slightly larger town or one closer to metro area that offers more vendors/services to meet your investing needs.

    Remember Brandon Turner’s complaints regarding managing his properties in Podunk, WA? He knew the challenges existed and the returns were worth the hassle (at that point in his investing career).

    Approach rural markets with an eyes wide open view and enjoy the ride!

    Best of luck to all in 2019!

    -Andrew

     You are 100% spot on. 

    What I have done so far is manage all the leasing inquiries, manage paying bills and recording who owes what and how much has been paid. For my 23 units that are about 400 miles from me I have a resident manager who can open doors, do showings for me when I schedule them, deposit rent checks at the local bank(I can view them online to record on my end) and receives maintenance requests/calls and schedules contractors.

    My goal is that as I scale up enough I can hand over the tenant communication I do to an employee that I would hire. Its easy work and they can do it from where ever. This makes it so I don't need to have a superstar in the local area which has made it easy. Their scope of work is limited and therefore I can't get too frustrated with them.

    I am curious to see what this would look like at scale.  

  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Daniel Dietz:

    Great discussion going on! 

    It is interesting to see the perspective of 'the other side' in the small town/metro debate.

    We, two partners and I, invest in a rural county - 60K county, two towns of 10-12K and the rest towns of 500-5000 people. LOTS of open farmland etc... It sounds like we have a very diverse economy compared to some rural areas maybe? Two medical centers that each have over 500 employees, almost 20K industrial/manufacturing jobs in the two largest towns, etc... HUGE tourism base too. We are also 1 hour from Madison which has a huge stable jobs base in health care, tech, and education.

    What I like about it is a lot of what others are saying - good deals, low turnover, low crime, etc....

    I have to disagree on appreciation though. Historically our area has seen about 3-4% over the last 40-50 years. We budget 2.5% when using the BP Rental Property Calculator to be conservative. 

    Our general 'target' is 1-4 units that we can get 1% rents on that are 30 years old or newer in good shape. When leveraged with 20% down on 20 year notes we project a 16%-20% return all day long. It seems like that would be harder to find in larger more competitive markets, at least when looking at the metro areas within say a two hour drive of us. 

    Dan Dietz

     Love the pushback from what others are saying. Great to hear proof of a different experience. Madison WI(I am assuming) is a great city. Wisconsin, in general, has also had very low cap rates on properties that are being listed in rural towns when compared with Indiana or northern Michigan/UP. The small town I invest in is just over the border on the north side of the state in Iron Mountain MI. 

    When I first bought into the town market rents were $450 for 1 beds and $550 to $600 for 2 beds. Right away I got $650 for 2 beds and $550 for the 1 beds. As I had turnover I have pushed 2 beds as high as $750 and 1 beds to $610. Adding an extra $100 to $150 per month in cash flow per door makes a big difference to the bottom line. 

    Part of me thinks that the mentality of old-time investors in the small towns simply have limiting beliefs that they can't get higher rents so they never push them up. By just going in and putting a higher sticker price up and doing some minor upgrades to freshen up the interior I have been amazed. I have been thinking its just this little town, but maybe its a broader trend and their arent enough people testing it out. 

  • Real Estate Investor · Union, NJ · Member since 2016 · 30 posts · 6 votes
    7y

    @Dan Scarborough

    Good point. Keeping it on a macro level, as money becomes more expensive, I would assume development in these rural areas would be unlikely making it a better play for an older & stable product?

    BTW - this thread is a great topic!!!

    Julian

  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Joseph Bramante:

    @Joel Florek we are developing a 168 unit $21m property in a rural market that hasn’t had new construction in 30 years. The fundamentals are solid though but always scary investing in emerging markets. Most people will challenge your decision. Not for the inexperienced or starting investor.

    Great to hear the commitment! One of the things investors in my circle in Iron Mountain talk about is how we wish we could get some experienced developers in. Lots of workers currently commute or the good ones get discouraged by the seeming lack of progress in the town and opt to leave for a city with more going on. As I have followed towns over the last 10 years the ones that got some early development have been followed up by a slew of other small and large developers that have not only helped the residential picture, but the retail and small business environment as well. 

    Development seems to follow development which can end up helping everyone. Brings attention to a market and helps to encourage economic risk and growth. 

    I think you would benefit from networking with a developer in my hometown of Marquette MI. They have been seeing a lot of success and growth getting more and more ambitious in their work. You can check them out at. The founder, Bob is a really stand up guy that I have appreciated getting the opportunity to sit down with time to time and learn from. If you PM me with your email I am happy to make an intro.  http://www.verideagroup.com/

  • Developer · Houston, TX · Member since 2017 · 161 posts · 134 votes
    7y

    @Joel Florek We developed a unique underwriting model for our current rural new development and identified several key factors that, on paper, made this town attractive to us. Before I go and apply that same methodology to your town, let me first get through lease up on this property (Winter 2019) to prove our math was correct. (though i am pretty sure we are correct)

  • Flipper/Rehabber · Brandon, MS · Member since 2017 · 30 posts · 7 votes
    7y

    @Joel Florek

    Thanks for sharing Joel! And I’ll be following responses. I’m researching and evaluating multifamily right now. And being in Mississippi, a rural property will most likely be my first purchase.

  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Joseph Bramante:

    @Joel Florek We developed a unique underwriting model for our current rural new development and identified several key factors that, on paper, made this town attractive to us. Before I go and apply that same methodology to your town, let me first get through lease up on this property (Winter 2019) to prove our math was correct. (though i am pretty sure we are correct)

     Certainly happy to give you the pitch on the town where I have investments but that certainly was not my intention. Just interesting to hear someone making a big move in a small town and thought I would pass on a contact who is doing some great things as well with bigger development projects. 

    Best of luck and look forward to reading a success story on the forums of the work next year. 

  • Bjorn AhlbladPro Member
    Investor · Shelton, WA · Member since 2017 · 6k+ posts · 6k+ votes
    7y

    @Joel Florek Great thread you got going here. Two shortcomings in a smaller market for me are a lack of PM and a shortage of more buildings to buy. I self manage-correction my wife manages-so that is not a problem. We only invest within an hours drive and driving in the countryside is more pleasant anyway. As far as appreciation goes on my 12 unit I do not plan on selling; appreciation will either be forced or rise as income rises-which has been pretty steep anyway. Units that the prior owner was reting for 575, we are painting and doing some new flooring as needed and turning them over for 775+35 for garage, and they may even be under market at that. I do understand that small town investing may be at an increased risk, the returns more than make up for that. Also if you are not too leveraged then you can choose when to sell, or not, and that to me is the game anyway. The real risk is that the big city slicker investor types may be reading this thread and wanting in on this action!

  • Real Estate Agent · Phoenix, AZ · Member since 2016 · 69 posts · 83 votes
    7y
    Originally posted by @Joel Florek:
    Originally posted by @Marjeanne Fields:
    @Joel Florek We have been finding great deals in tertiary markets of larger cities. Specifically bedroom communities. Close enough to metro to ensure demand but far enough to still find 10%cap rates. Closing on one next week that is only $35k per door. For us if it's less than 100k population it must be at least within 30 min of the major metro.

     That is a great rule of thumb. I always find it funny when you go into some of those small towns and wonder why the heck there is a building boom of really nice single family homes... its those willing to drive a bit to their jobs but want a slower quiet life. Thanks for sharing your criteria! 

    Out of curiosity, is there a unit count that you typically like to shoot for with your deals? Do you invest in a lot of these smaller markets to build your portfolio or just sticking with one or two?

    We typically look for min 50 units but we prefer 100+ units. If we are in these smaller markets we only buy up to two. Just to minimize the risk. 

    When you are investing in these smaller markets how many units do you seek and how many deals is your max? 

  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Marjeanne Fields:
    Originally posted by @Joel Florek:
    Originally posted by @Marjeanne Fields:
    @Joel Florek We have been finding great deals in tertiary markets of larger cities. Specifically bedroom communities. Close enough to metro to ensure demand but far enough to still find 10%cap rates. Closing on one next week that is only $35k per door. For us if it's less than 100k population it must be at least within 30 min of the major metro.

     That is a great rule of thumb. I always find it funny when you go into some of those small towns and wonder why the heck there is a building boom of really nice single family homes... its those willing to drive a bit to their jobs but want a slower quiet life. Thanks for sharing your criteria! 

    Out of curiosity, is there a unit count that you typically like to shoot for with your deals? Do you invest in a lot of these smaller markets to build your portfolio or just sticking with one or two?

    We typically look for min 50 units but we prefer 100+ units. If we are in these smaller markets we only buy up to two. Just to minimize the risk. 

    When you are investing in these smaller markets how many units do you seek and how many deals is your max? 

     My general rule of thumb was to always build up to at least 20 units. Keep in mind I started investing only 3.5 years ago with minimal funds and am only at 31 units. Now I look at it from the perspective of cash flow. I dont want to invest into a new market unless I can get myself to $2k in monthly cash flow. This makes the return on time worth it. There is a lot of time eaten up when going after a new market especially if its an extra hour or two drive each way every time you need to check on stuff with your own eyes. 

  • Rental Property Investor · Michigan City, IN · Member since 2015 · 530 posts · 741 votes
    7y
    Originally posted by @Bjorn Ahlblad:

    @Joel Florek Great thread you got going here. Two shortcomings in a smaller market for me are a lack of PM and a shortage of more buildings to buy. I self manage-correction my wife manages-so that is not a problem. We only invest within an hours drive and driving in the countryside is more pleasant anyway. As far as appreciation goes on my 12 unit I do not plan on selling; appreciation will either be forced or rise as income rises-which has been pretty steep anyway. Units that the prior owner was reting for 575, we are painting and doing some new flooring as needed and turning them over for 775+35 for garage, and they may even be under market at that. I do understand that small town investing may be at an increased risk, the returns more than make up for that. Also if you are not too leveraged then you can choose when to sell, or not, and that to me is the game anyway. The real risk is that the big city slicker investor types may be reading this thread and wanting in on this action!

     Thats fantastic! $2400 in extra monthly cash flow on top of however much you had when you bought it is great. That is what makes multifamily so exciting! Great deal Bjorn!

  • Daniel SomersPro Member
    Rental Property Investor · Tiffin, OH · Member since 2015 · 37 posts · 20 votes
    7y

    I have 2 duplexes in my small town of around 17k people. Have had really good luck with long term tenants and always looking to add more properties. The major issue is not many multi family places for sale, or hard to get a hold of current owners. Considered expanding to bigger markets but like the small market. 

  • Rental Property Investor · Grand Jct, IA · Member since 2011 · 17 posts · 5 votes
    7y

    The four duplexes in small college town first time investing, my experience has been they are over priced and high turn over, which in turn every time a apartment turns over your spending funds to clean up and re-rent etc. 650k for a 8 plex seems awfully over priced. unless the NOI supports it,, and provides a nice positive cashflow. is this a A class property or B.

  • Yuma, AZ · Member since 2015 · 140 posts · 137 votes
    7y
    @Joel Florek good job.. Cash is no longer King..Cash Flow is King.
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