SS228: Buying Rentals in Small Towns

SS228: Buying Rentals in Small Towns

Purchasing rental properties in small towns can be a great investment strategy. In this episode, Charles discusses the advantages and disadvantages of this strategy.

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Talking Points:

  • Purchasing rental properties in smaller towns can be lucrative investments, but they have advantages and disadvantages that investors must consider before getting started. Before we go through the pros and cons, I want to lay out a few factors that every investor should review and understand before choosing a market.
    • 1. Jobs. Jobs, job growth, and industry diversity are the most important metrics when choosing a market. Renters usually have jobs, and if employers are moving in consistently and there is diversity in industries and employers, this is an excellent sign that you will have a steady pool of tenants for your units. You do not want to see one employer employing more than 20% of the tenants at your subject property, and you also don’t want one major industry ruling the town; think Las Vegas during COVID with a 33.3% unemployment rate. More than twice the national average of 14.8%.
    • 2. Population Trends. Over the past 20 years, what has been the population trend?
    • 3. Crime. What has been the crime trend over the past 20 years? Hopefully, it has been the inverse of the population trend.
    • These are just 3 of our top factors. To learn more in depth how we choose markets for multifamily properties, listen to episodes SS2 and SS3. With these factors in mind, let’s continue with the pros and cons of small-town investing.
  • What are the benefits of buying rentals in small towns?
    • Lower Purchase Prices. Typically, purchase prices are lower in small towns than in larger cities.
    • Less Competition. In small towns, there is less competition from other investors when buying properties and less competition for tenants. Rental property development is less likely in small towns than in larger cities. When developers start building properties, landlords in that immediate area compete for tenants as those units are absorbed, which can push down lease renewals and rental rates.
    • Long-term Tenants. It’s common for tenants in smaller towns to move less, minimizing your turnover costs, which is key to making money in multifamily investing and reducing landlord hassles.
    • Possibility of Higher Cashflow. Lower purchase prices, consistent rental rates, and less competition for tenants are perfect for higher cash flow.
  • What are the possible challenges of buying rentals in small towns?
    • Liquidity. There is a higher likelihood of liquidity issues in smaller markets. Possibly making it harder to finance, refinance, or sell your property.
    • Market Risk. If one employer leaves or if an industry dries up, it might cripple the job market in the town, forcing tenants to move to find work.
    • Less Likely to Gentrify. Pinpointing properties in the gentrification wave is the key to above-average real estate returns. It usually requires a longer hold time than previously expected, but if the investor is even somewhat correct, they could see a bump in their property’s value. The problem with small towns is that with fewer investors buying and renovating properties, these areas do not gentrify that much, and if they do, it usually is on a longer time horizon.
    • Smaller Potential Renter Base. With fewer people to rent apartments to, your unit’s downtime between tenants might be higher, even if they stay longer.
  • This episode is not meant to dissuade investors from buying properties in small towns but rather is a guide to obstacles to be aware of when locating markets, choosing towns, and ultimately purchasing rental properties.

Transcript:

Charles:
What if your next best investment isn’t in a major city, but in a small town? Most investors are asking the wrong questions about small town rentals. Ignoring job growth and population trends can significantly impact rental income. So welcome to Strategy Saturday, I’m Charles Carillo, and in this episode we’re discussing buying rentals in small towns, the good, the bad, and the parts that no one talks about. Whether you’re a new investor or already building your portfolio. Understanding small town investing is crucial to avoiding costing mistakes and identifying hidden opportunities. So purchasing rental properties in smaller towns can be a lucrative investment, but it has advantages and disadvantages that investors must consider before getting started. Now, before we examine the pros and the cons, I would like to outline a few key factors that every investor should consider and understand before selecting a market. So number one is jobs.

Charles:
So jobs, job growth and industry diversity are the most crucial metrics to consider when selecting a market. And renters typically have jobs and employers are consistently relocating to that area. There is diversity in industries and in employers. And this is an excellent sign that you’ll have a steady pool of tenants for your units and you don’t wanna see one employer employ more than 20% of tenants at your subject property. And you also don’t want one primary industry to dominate the town. Consider Las Vegas during covid with a 33.3% unemployment rate. Literally one out of three people were unemployed more than twice the national average during covid of 14.8%. Number two is population trends. So over the past 20 years, what has been the trend in population growth? Number three, what has been the crime trend over the past 20 years? So hopefully it has been inverse to the population trend.

Charles:
So over the last 20 years, you can just easily pull up these maps, right on Google. We have a number of different websites. If you wanna reach out, we’ll put ’em also in the show notes that we check when we’re looking at population trends. But really what you wanna see is with your population trends pull up over the last 20 years, you wanna see a slightly uptick over that time. Maybe there’ll be some down years and higher years, but it’s really gonna be a consistent line if you do 20 years ago and today. And then you wanna see the inverse of that with crime where small trickles down the thing with crime, which you don’t really see. Just as another side note here is why 20 years, 20 years is the big thing. ’cause It gives you the real picture of what’s happening. So in population, you can have something.

Charles:
So if we just chose, let’s say Florida, right? Just during covid, we’re gonna see these massive spikes, right of that happen. Now, if we went over 20 years, we might see in that same market, like in Tampa, let’s just say it would be, you know, it’s, it’s looking good over 20 years, but it might not be really accurate if you’re just taking a small sliver of that, right? That’s what we do 20 years. The same thing with crime. And crime can be very misleading because if a new administration comes into an area, a small government or whatever, it might be a state, and they start locking up a ton of people, okay? So maybe you’ll see a decrease in crime from, you know, two or three to five years, right? If you just take that sliver of that last 20 years and you might say, okay, look, it’s decreasing.

Charles:
But the thing though is that crime is not just about locking up people. It’s about education and healthcare. And you see which communities and governments are investing into education and healthcare when you look at it over a 20 year term. Okay? So over that 20 year term, if I see it ticking down, I know that not only is they, they’re working on crime and they’re decreasing it, but when the people are coming through the system, they’re actually being rehabilitated, right? And this is something that we know that this is, if they’ve got it working now, it’s most likely gonna continue. That’s why the 20 year trends. But these are just three out of our top factors to learn more in depth about how we choose markets for multifamily properties. You really wanna listen to SS two and SS three. And with these factors in mind, let’s continue with the pros and cons of small town investing there.

Charles:
So what are the benefits of purchasing rental properties in small towns? And first off, lower purchase prices. Typically, purchase prices are lower in small towns than in larger cities. Less competition in small towns. There is less competition from other investors when buying properties and less competition for tenants. Now, rental property development is less likely in small towns than in larger cities. And when developers start building properties, landlords in the immediate area compete for tenants as those units are absorbed, which can lead to lower lease renewals and lower rental rates. Another thing is long-term tenants. It’s common for tenants in smaller towns to move less frequently, which minimizes turnover costs and is key to making money in multi-family investing as well as reducing landlord hassles possibility of higher cash flow. So lower purchase prices, consistent rental rates and reduce competition for tenants are ideal for generating higher consistent cash flow.

Charles:
So what are the possible challenges of buying rentals in small towns? Liquidity, there is a higher likelihood of liquidity issues in smaller markets. This may make it more challenging to finance, refinance, or sell your property, meaning that there’s gonna be less players, there, most less investors that you can sell your property to. There’s also gonna be less lenders that are more likely to lend on those properties. And if there’s any kind of pullback, you know, lenders that aren’t in that immediate area, like maybe nationwide lenders, they’re gonna be the first ones to pull out, right? So it’s really comes down to, as we always talk about local banks and local credit unions, they’re gonna be the ones that are probably gonna be in their longer and they’re gonna be your friend during any type of small town investing. Number two is market risk. If one employer leaves or if an industry dries up, it might cripple the job market in your town of forcing tenants to move to find work, right?

Charles:
It’s less likely to gentrify. So identifying properties in gentrification wave is really the key to achieving above average real estate returns, right? So we can buy and hold in areas that are growing a little bit. There’s gonna be great solid wealth building assets if you’re looking to kind of move the needle a little bit more, you really have to get a little granular in really identifying properties in this gentrification wave as you can find properties in areas, in neighborhoods that are on the upswing. Okay? And this could take longer, this is where some investors might make a mistake, is you know, the wave is coming, they’re in the water. However it might take longer to catch that wave than they expect it, right? So it’s difficult when you’re having investors where you’re trying to like value add something in three to five years.

Charles:
It’s much easier if you’re buying something and you go, I know it’s 10 years, I’m gonna stay here for 10 years. And these are the neighborhoods where you’re driving through and you’re gonna see properties that are in tough shape or that haven’t been touched in decades. You’re gonna see some with dumpsters outside and crews out there working on them. And then you’re gonna see some other ones that look like they just went through the whole renovation process. And you can really see what is happening in that area and knowing that if you buy in that area, there’s money that’s being put into that area. And when the money is put in from other investors, it’s exactly where you wanna kind of get yourself into because this is where the wave has started. And some people might be early, but finding properties that haven’t been touched is gonna get you in there as well.

Charles:
The problem is really timing what that timeframe is gonna be. So at that point, it’s difficult to time that just as like a little side note there. And you might come back after 10 years if you’ve never been in a neighborhood and you go, wow, this has really changed. However, if you’re the investor there and you’ve been banking on higher rents, they might be harder to obtain. The other thing too is in this area is it becomes a little trickier figuring out how much you really want to renovate those units. Are we gonna go with granite or are we going with a really nice laminate? You know, these are the questions that you have to really figure out when you’re doing your market analysis because the market not, might not be there for granite yet. It might not be there for many years for granite, but this is what we have to do now so that we can rent it.

Charles:
It’s gonna give us the best return on our investment at this point. And the problem with small towns is that fewer investors are buying renovating properties and these areas do not really gentrify as much. So you’re buying properties in a tertiary market, a small little town that’s maybe 45 minutes outside the main city. There’s not gonna be as many investors going in there and pumping dollars into those areas to change them, okay? It’s much different if you’re kind of like in a main city, right? And you have investors from all over that want to come in and they know that they’re gonna be able to do the work, they’re gonna have a large tenant base to choose from. They have a lot of employers there that are pulling people there, and they know that it lowers their risk. It increases your risk when you come into do large renovations in smaller towns.

Charles:
And if they do, it usually occurs over a longer time horizon. The next is a smaller potential renter base. So with fewer people to rent apartments, your unit’s downtime between tenants could be higher even if they stay longer. So as we talked before, one of the benefits is they’re gonna stay there longer than the properties. However, you also have to know that yes, they might, you know, normal tenant might stay two years, right? In a normal market, let’s just say in this market they might stay for four years, right? But then you think the time between it, it, hey, usually in a normal market I can do it. There’s two, three months of downtime. This might be six months of downtime, right? So you have to also pencil this in that when it’s rented it’s great, but when it’s not, it’s gonna take longer downtime.

Charles:
You’re gonna be paying people probably more to rent those units right than you would’ve in a larger city where they have a consistent, you know, inflow of potential tenants. Now this episode is not meant to dissuade investors from buying properties in small towns but rather serve as a guide to obstacles to be aware of when locating markets, choosing towns, and ultimately purchasing rental properties. So, I hope you enjoyed, please remember, rate, review, subscribe, submit common central show topics at globalinvestorspodcast.com. If you’re interested in actively investing in real estate, please check out our courses and mentoring programs at syndicationsuperstars.com. That is syndicationsuperstars.com. Look forward to two more episodes next week. See you then.

Links Mentioned In The Episode:

  • SS2: Choosing Target Markets When Investing in Multifamily Real Estate – 1 of 2
  • SS3: Choosing Target Markets When Investing in Multifamily Real Estate – 2 of 2

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