Deal in small < 1900 population town

15 Replies

I came across a deal in a very small (tiny) town. Population is about 1800 people and trend seems to be downward from past couple of years. It is a multifamily building with all 12 units rented out. The seller owns the  building for 2 years and he is looking to sell because he is in Fix and flip business and not in the long term hold. He also mentioned that all units are rented out and have long term leases. Rough estimates of what I was given so far seems to show 7.8% cap rate and 12% Cash on cash return. My real question is, would you consider buying a multifamily building in a very small town? is it purely depend on numbers? are there any benefits of going into small town? what are cons beside obvious ones.

Thanks in advance.

@Imran Raz So maybe a couple of thoughts:

1.) Not all "small towns" are created equal.  Some are 30 minutes to a decent job epicenter and just appeal to people looking for a little more space.  You might end up with a handful of apartment buildings for the people that want to live/work at the local businesses.  In other cases, a small town is a dying or dead town where nobody is buying and everyone is leaving.  I'd hazard to guess it's more risky buying in a small sub-2,000 population town, it's less like that I'd do it, but it doesn't mean that I would never do it.

2.) Take the "why is the owner selling" and just throw it in the trash.  You'll never know (unless you have some unbiased 3rd party data) about their strategy, what their plans were 2 years ago, etc.  I'm a buy-and-hold investor but if I were to sell I doubt I'll shout from the rooftops:  BUY MY WORST PERFORMING PROPERTY!  It doesn't make any sense.  But let's suppose this is his profession.  He's better have detailed records for all of the collected rents, expenses, etc.  After all, he's a professional and does this a lot...right?  So there should be more than "rough estimates"...

So the net of this is that I wouldn't rule out buying in a tertiary market.  But if that main market (for some reason I'm thinking about Buffalo, NY which has lost a massive percentage) isn't growing I don't know that I'd be running to invest it's a 2,000 population suburb or a sururb...

@Imran Raz Not to mention you could have significant challenges finding good property management there.  With 2,000 residents there might be just one option in the town.  And if you're going "the next town over" it's going to be harder to make your 12 units (likely not super high rents) a big priority on their list.

Originally posted by @Brendon Woirhaye :

Does the town have a future?  What is the income source for your target residents?  If there is one employer in town and they leave, you may have unrentable units.

 I've done bit more research and it seems median income of this town is very low ($22k). 30% population is below poverty line. 

Originally posted by @Andrew Johnson :

@Imran Raz So maybe a couple of thoughts:

1.) Not all "small towns" are created equal.  Some are 30 minutes to a decent job epicenter and just appeal to people looking for a little more space.  You might end up with a handful of apartment buildings for the people that want to live/work at the local businesses.  In other cases, a small town is a dying or dead town where nobody is buying and everyone is leaving.  I'd hazard to guess it's more risky buying in a small sub-2,000 population town, it's less like that I'd do it, but it doesn't mean that I would never do it.

2.) Take the "why is the owner selling" and just throw it in the trash.  You'll never know (unless you have some unbiased 3rd party data) about their strategy, what their plans were 2 years ago, etc.  I'm a buy-and-hold investor but if I were to sell I doubt I'll shout from the rooftops:  BUY MY WORST PERFORMING PROPERTY!  It doesn't make any sense.  But let's suppose this is his profession.  He's better have detailed records for all of the collected rents, expenses, etc.  After all, he's a professional and does this a lot...right?  So there should be more than "rough estimates"...

So the net of this is that I wouldn't rule out buying in a tertiary market.  But if that main market (for some reason I'm thinking about Buffalo, NY which has lost a massive percentage) isn't growing I don't know that I'd be running to invest it's a 2,000 population suburb or a sururb...

Thank you for good insights, looking further into this town, it doesn't sound like a "up and coming place" Population is on steady decline. 

Originally posted by Account Closed:

Your 12 unit multi houses nearly 1% of the entire town. Also mentioned that in the Last couple of years, population is decreasing. Seems like there is not much future for the town. And even now it is only a 7.8% cap rate? Also there is 12 tenants to deal with. What if one or two leaves suddenly? Is there enough people looking for rental in the town? 

That's a good point, according to the owner it is fully occupied but if any tenant  leaves, it might be challenging to get it rented.  

IMO-  I noticed you are in Florida,  so is it close enough, that you have other property in the area that it can use the same property management company or close enough for you to self manage.  I enjoy the small markets but there are some that I stay out of.  Is there jobs, or do they have to drive a distance to work?  No Job, community getting smaller,  probably going to turn into a Section 8 property, that I do not invest in.  

I would want it to be well over a 10 cap and still would wind up passing on it.

Originally posted by @Carlos Zapata :

@Imran Raz  

Low income, low population, i will not invest if population is decreasing,  are you planning to manage the property?  i agreed with Account Closed  you can find better deal in a growing market here in Florida

 I will not be self managing since I am few hours away form this location. Looking deeper into this, I am convinced that this town is not growing at all and there are no big companies nearby to support strong job market. Thanks for all the input. 

Originally posted by :

Don't worry, something will turn up just keep looking. Missing a bad deal is better than doing a deal just for the sake of dealing. 

I completely agree with you, I've got excited for this deal but looking at all the responses and further research, I don't think it make any sense to pursue this deal. I rather wait for a better deal  to come along. 

Many of the points discussed here will further your experience in evaluating your next deal.   You might not ever find the "perfect" deal, but keep looking for the one where you can mitigate the down side.  

Or make an offer that takes the risks into account.   If the seller sold it to you at a 15% cap rate you might look at those risks differently and have different mitigations.