Big city versus Small Town multifamily?

Question

Hey there BP,

So I'm looking around at expanding my portfolio into some out of state rentals, mostly because my home market is really hot right now and pricing is through the roof, depressing cap rates to unacceptable levels for me.

So - I've found some deals through work, and one in particular is really catching my eye.  Its a 6-unit building, 100% occupied, with 26% cap rate and deferred maintenance.  Construction doesn't bother me a bit, and I'm working on getting over my fear of remote-landlording, but I do have some questions for the world about the success of small-town stuff.

This place is located in a small agricultural town in Texas, with good local economy, and is occupied by what appears to be immigrant farm workers and their families.  When i say small, I mean 3500 people.  I'm no stranger to small-town life, and it seems that turnover here is really, really low, which I like.  Things are cheaper in small towns, and the local economy is stable, if slightly monotone.

What have people's experiences been like in small towns?  The cap rates I see are unbelievable, but I can't imagine there is much appreciation at all.

Positive/negative stories all welcome, or well-informed criticism.  Trust me I can take it.

LuAnn Vigen · Answer

Just my two cents worth. I have rentals in small towns the largest town has 13000 residents. The smallest town has under 2000. Surprisingly, I get better cash for from the smallest towns. The towns are all about an hours drive from a large city of 115000 people.

I have thought about rentals in the bigger cities, but all I see is bigger problems. There are over 100 units available on craigslist at any given time. In the small towns, you have no competition. The turn over is small towns seems to be less, because there is no were to move to unless my tenants purchase a home. The trouble usually stays in the larger cities so that is also a plus.

If your looking for properties management, you might have problems finding them in small towns. I have to do my own management. If you don't have local plumbers,electricians or other service people, it might cost more for those services if they have to come from the larger areas.

Greg H. · Answer

I have made a living flipping and buying rentals in small towns all over small towns in Texas. Send me a PM and more than likely I can give my thoughts on the area. Most small towns are starving for nice rentals and I usually have a waiting list via word of mouth.

Steve Vaughan · Answer

Great points @LuAnn Vigen.  Hopefully some local tradesman will be there. I have 18 in a town of about 1200.  I also self-manage and it's about 40 mins away.  I have enough scale to have a maintenance guy who is also a tenant.  Without him, I'd be a lot more busy!

Asking a quality PM (if you can find it) to manage remotely would be tough and even tougher for them to deliver.

I've found good cash-flow in the small town and bought there for value.  When I bought my first 10 unit, mixed-use it was a 2%er.  $25k per unit for about $500/mo rents.  That was in 2003.  Rents are closer to $600 now. Locally for me, 1% was and still is difficult.

I like my multi's better than the couple single-families I have there because I can force appreciation in those with improved financial metrics.  The houses haven't seen any real appreciation.

Small communities are just neat.  People walk, they smile and they wave.  They ask you how you are doing and mean it.  Good cash-flow, crummy appreciation, but I don't regret investing in a small town.  Hope this helps!

Darwin Crawford · Answer

That, and one of my favorite book/movies of all time is "the big short".  Guys who went against popular sentiment and just crushed it.

Darwin Crawford · Answer

@Bob Bowling - To be honest, it comes from growing up and traveling through small towns, and the "rent-mindset" of a lot of people.  This is also the kind of cap rate you could only get in hardcore urban areas, but is in a well-ordered ag town.  Most small-town tenants tend to stay a long time, and stuff is just easier in small towns.  Permits, construction, etc.

Account Closed · Answer

Why is investing in a market that not desirable to most of the investors in the market appealing to you?

Big city versus Small Town multifamily?

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