Small town REI... how small is too small? And why?

19 Replies

Hi Folks,

I've been looking at communities surrounding my area (Portland and SW Washington) and considering investing there for a buy and hold strategy.  I am wondering, though, if I should be excluding any of them by population.   I've heard a podcast guest mention filtering out cities smaller than 250,000 people, but then I know Josh jokes about Brandon owning his whole town...

So, is there point at which a small town becomes too small to invest, all other things being equal like job growth, rental rates, etc.?  Why?   

Thanks!

I invest in Salem and do quite well. There are several small growing towns in the area that you may consider looking into.

Hey Keith!

The real estate investing company I work for also looks at houses in the Portland and SW Washington area. Here, we do not exclude potential properties based on the population of the town they are in, because this is too general of a factor that could apply to some good deals. Good deals we would miss out on if we eliminated them as an option just for being in a lowly populated area. If a property comes your way and the properties surrounding it are of significantly higher value, then it is a good sign that it is a good deal. You can use websites like (http://www.ziprealty.com/) or (http://www.eppraisal.com/) to be a starting point for an appraisal on the property. We tend not to put too much efforts in advertising in places with a small population, but there is no reason not to invest in a property that is a good deal just because the population of the town is not very large. You just have to make sure that all the other variables make it a logical purchase. I hope this helps!

Rob

For me the size of the tone a not important. I evaluate the work force, transient nature of the town and basically my tenant base. There are small military towns that I can know with an 80% certainty are not going anywhere. These town are perfect investing areas.  There are a coule of larger towns that has such a small transient population they can't support the natural transient nature of the area. So those areas the rents are nothing compared to sales price. For example we are buy and holds in Handord/lemoore ca. There is a large military base and 3 federal prisons that creates a huge transient population that exceeds town needs. So there is a premium on rental supply and demand.  Whereas Visalia and Fresno only has a "touch" of these groups. Therefore the rent is much lower than these areas even though the cost is much higher. Therefore I evaluate the supply and deman than I evaluate the number. That being said it is important to know how many houses exist. I don't buy super high end because there are only 5-7 transient people in this class.

Hello Keith,

What a great question!  Here's my two cents on the subject.

Opportunity exists everywhere!  To illustrate my point, I'll tell you a story I heard called, Acres of Diamonds.  It is an old story about an African farmer who once owned a farm. The farmer had heard stories from other settlers about the millions that could be made by discovering diamond mines. The tales so excited the farmer that he could hardly wait to sell his farm so he could search for diamonds himself. So, he sold his farm and spent the rest of his life wandering the vast African continent, searching unsuccessfully for the gleaming gems that brought such high prices on the markets of the world.

Finally, in a fit of despondency, broke and desperate, he threw himself into a river and drowned. Meanwhile, the man who had bought his farm, found a large and unusual stone in a stream that ran through the property. The stone turned out to be a great diamond of enormous value. He discovered his farm was covered with these stones and his property went on to become one of the world's riches diamond mines.

The original farmer had owned literally acres of diamonds, but he sold his farm for next to nothing in order to look for them elsewhere. If he had only taken the time to study and prepare himself to learn what diamonds look like in their rough state and to study the land he presently owned he would have found the diamonds he sought right on his own property.

This story illustrates the point that taking time to explore your immediate surroundings is often overlooked because of stories one hears about other areas. If a person takes time to stay with something with something long enough, they will usually find what they seek. Look for opportunities that are right in front of you before making a decision that the grass is greener because some else said so.

@Keith K.  

Demand.

Real estate values are impacted by supply and demand.  Supply and demand for real estate is impacted mainly by population growth and job growth.  Larger cities will generally have more employment opportunities and more of a mix of different types of employment (although not always...ex. Las Vegas).  Small cities will not have as strong a demand for housing as large cities.    These are mainly the reasons why investors focus on larger cities.

That said, if you're less focused on appreciation, can generate cash flow in a market, and have a solid property management model, go for it!  I'm sure there are plenty of investors on BP making good money in smaller markets.

In general we avoid very small towns because there is insufficient data for comps of sales and rental pricing.  And just not enough activity - demand, as Jon points out - to give us confidence that we can move inventory in a reasonable time frame.

Here at WeBuyHouses.com, we've gotten many calls from people in small towns who are unable to find an investor (some even telling us "I'll GIVE you the house to out from under the obligations").  It's like the opposite of our problem of finding motivated sellers.

My town has right at 1000 people in the city limits but I mostly invest outside the limits.  There are 60,000 people in the county total.  We are mostly the exurbs of Ft Worth / Dallas and about a third of the population commutes into the city about 30-50 miles.  Most of my tenants either work from home, work for local industries, or one is a long haul trucker.  The biggest problem is there just isn't that much good rental property.  There are a few big landlords with lots of units, but they are a small step above slum lords from what I have seen and heard.

I invest primarily in a small town (2,400 people). A couple things that made this an easy choice for me was:

1) I grew up there. So, I knew the area and market very well.

2) It has a great school district. This attracts many people to the area.

3) There were many older homes in good condition in the area which allowed me to get into the business at a low entry point.

I would not limit yourself to the size of the town. As many others have mentioned there is opportunity everywhere. 

@Dev Horn  

You get any of those calls from the smaller town, send them my way.  I'd rather be in the smallish towns than most of Dallas proper.  :-)

If you are in the central valley... I probably wouldn't purchase a investment property that is supplied by the well.  The drought is a massacre on the smaller populated towns that primarily rely on ground water..  An investment in a property with a very nice well at a very cheap price would be a good investment.  

I think the size of town or employer will have little impact if you are buying properties that rent for a affordable price.  When renter lose jobs or have less money they tend to step down to lower income properties which make the demand for lower income properties higher and increases the lower income rents.  

Where ever you buy, buy smart, find a problem, clean the problem up, treat everyone with respect, be fair and you will have rental that will produce steady income.

Frank

You are all amazing!  Thanks so much for your replies.  

@Rusty Thompson   thanks for the tip on Salem.  I was considering that as I have a mentor (from another career) who owns property there and may want to become the bank soon instead of the landlord.  Do you find there is enough job variety there to support a rental tenant pool or do the politics of the state capitol provide enough customers?

@Victoria Winters I follow your story's message. I was originally going to look long distance because so many folks on BP are getting good cash flow in other parts of the country. For a less experienced REI such as myself however, I don't think 'long-distance' rentals is a good strategy -- sounds like people chasing the next shiny object. I don't want this thread to turn into an argument about that topic, so I'll leave it at that. Targeting neighboring towns (within an hour drive) for better cash-flow is really my way of investing long distance without blindly throwing my money to others who probably don't care as much about it as I do.

@Elizabeth Colegrove thanks for your insight regarding the makeup of the population (transient versus permanent).  Have you found other professions or industries that have similar transient populations offering a good rental tenant pool?

@Jonathan Cochran Wow... 2,400 people? If there was a hard population minimum for successful REI, I thought it would be greater than that! You gave me hope. Thanks so much.

@Keith K.   military contracting companies :) I am sure oil industry, manufactures, etc. Any large business that is transient. I know some large companies even provide a stipend if their employees RENT and not buy. So honestly just look around and evaluate the area.

Apparently no one in small towns pays rent, or a mortgage?

Silliness.  Opportunities exist everywhere.

There are differences.  When I read chest-thumping, "I'll show 'em who's boss!" stuff from landlords here, I find it amusing to imagine how long they would last in a location where everyone knows everyone and your reputation is everything (hint:  Not Long).  So you do have to tailor your approach to your market.  

But people make money everywhere.

Originally posted by @Richard C. :

There are differences.  When I read chest-thumping, "I'll show 'em who's boss!" stuff from landlords here, I find it amusing to imagine how long they would last in a location where everyone knows everyone and your reputation is everything (hint:  Not Long).  So you do have to tailor your approach to your market.  

 This is very true.  There are a couple of "property managers" around me that have a bad reputation because of bad service and junk properties with bad or no repairs.  Tenants try to avoid them if possible.  I use the term in quotes because they are not licensed and usually do not own any houses themselves or just of few of the ones they "manage".  I want to be known as the guy with the great properties that are well maintained and everyone wants to get into.

@Richard C.   and @Paul Ewing thanks.  Your perspective is interesting.  The issue of small town politics was just one of the things on my mind when I asked the question -- not problems with tenants, but from the city council.  I'm dealing with it now on one of my properties where the local officials are going for an authoritarian approach instead of a democratic one.  I wonder if there is more exposure to these situations in small towns than large ones, or if I am just skewed by my data sample size of 1.

I'm a city gal myself.  Have always lived in urban environments and naturally assumed bigger cities are the better opportunities because of more people, more movement.

But I've recently started looking at real estate in Southern Mississippi and some of the houses I came across are in small towns of less than 5,000 people.  However, when I would research the towns themselves, the percentage of the population that rented was usually 40-60%.  One town had population of only 2500 people and 1460 of them were renters.  I was quite surprised by that and it changed my mind a bit about the opportunity in small towns.

Thanks, Jennifer, for that interesting perspective.  I haven't considered the percent of population as renters, but you're right: a small town might still make a big pool of potential renters (or employees, as Butler calls them!).  I'll see if I can track this data point down for my areas of interest.  Is that sort of thing on city-data.com or did you have to look more local?  

I am trying something new in my town. We have less than 7K people living here and about 15MHP (that look like the slums). I am developing a SFH and Duplex Rental Subdivision. Yes this is kinda odd, but we (my family) have the land, experience to build and the business plan and support of local banks. In my area we are a poor community and people are paying 500+ each month for a 100 year old single wide trailer. I can easily get that for my SFH or Duplex.

Piece of my plan. 12-1400 sqft homes sale for 80-110K in this area. We are doing the work and the first house we build we are going to "doll" it up. When we finance we will be getting about 50k back. With that we can build at least 1 sfh or a duplex. SO basically for every mortgage we are getting at least double the properties and tripling the mortgage payment, and creating a nicer living environment for my community. (There are other factors, and money but this is in a nutshell). 

Have yall seen this before? 

If there is a chance of extreme growth in that town, go for it all the way. A small down close to me had an opportunity to almost double in job growth and population and every investor should have been very excited, either they would have sold the properties for 2 or 3 fold or rent went though the roof. But back to the original question you can make money investing in rental in a small town. No matter how mall the town as long as there is people they will need a place to live.

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