Sometimes the middle of nowhere is right where you want your real estate investment. Small towns and populations might scare some people away, but they’re pretty good at not scaring your money away.
If you’re an investor living in a big city, a small town real estate investment could make even more sense for you than for other investors.
Some of the obvious benefits to investing in a smaller town are lower home prices, lower costs, lower vacancies, less competition, and less legal stuff to worry about. Great!
But doesn’t that mean lower returns? Not necessarily, that’s the beauty.
The Drawbacks of Investing in Smaller Towns
Most investors recognize the downsides to investing in a small town including commute time, smaller returns, slower appreciation, limited access to resources (like property management), and fewer job opportunities.
There are ways to mitigate these drawbacks.
A smaller city doesn’t mean you need to drive to the middle of the country and look for a population of 3,000. Let’s be clear – a “smaller town” can be less than an hour drive from a metropolitan city.
In fact, the listed top seven cities with the highest returns include metropolitan cities and smaller surrounding cities.
Let’s look at an example. According to Mashvisor’s data, the average monthly rental income in Seattle, WA is $2,329 whereas the average in Redmond, WA is $2,504.
Seattle is a huge city with a population of over 600,000 while Redmond’s population is only over 60,000 and there’s about a 20 minute drive between the two cities.
[Image by Chrismiceli – Own work, CC0, https://commons.wikimedia.org/w/index.php?curid=19139609]
Clearly, small or medium towns don’t always mean your rental income will be cut in half.
The Bright Side…
In some cases, the returns are even higher because large companies offer a generous housing allowance when hiring or relocating employees, which can keep your cash flow the same or even better than the metropolitan areas.
As an investor, you should consider reaching out to such companies and striking a housing deal or contract.
Most investors prioritize cash flow over appreciation, but if you’re going to invest long-distance, you’re certainly going to want the long-term benefits like appreciation.
However, the slower appreciation rates in smaller cities are balanced out by lower property tax and condo fees, if there are any at all.
If you find a city with a limited amount of rental properties, the city might offer you a break on taxes for a couple of years if you agree to keep the property during that time. The wait might be worth it, especially if you’re enjoying higher cash flow and lower costs.
Your Real Estate Investment Network
The limited access to resources is usually a result of limited options or the distance. That can get tricky, which is why a real estate investment network is so important.
Among your network should be handymen and property managers. If there’s an emergency at your property, a reliable handyman that can quickly get to your property is a must.
Likewise, property management might not be an option at all in your area, so you might have to hire a private manager, which has its advantages. Form relationships with such people that can provide such services.
Finally, the Job Market
This is an essential criterion when looking for a market to invest in. Do not invest in an area that has only one dominant industry because if that industry fails, so does your investment.
This has happened to investors who invested in oil towns, then suffered after oil prices caused many employees (hence, tenants) to leave the area.
The Keys to Your Success…
There are three solid things investors need to create lucrative investments in smaller town.
- Know the market well. Don’t pick up and invest without knowing the market. It might not be easy traveling back and forth to inspect the area, especially if a real estate agent isn’t around. Use online tools like Mashvisor to understand any market remotely. Key calculations like average cap rate, cash-on-cash return are provided along with other important information, such as tenant insights.
As I mentioned before, resources are limited and that may include agents and realtors. Such data can give at least give an investor the basic margins they need to know before even consulting a professional.
- Exit strategy. Believe it or not, sometimes it’s harder to leave that town than it is to enter it. If rental prices go down and your property doesn’t appreciate, what’s your strategy? Can you handle the lower income? Do Airbnb users visit the area at all? A short-term rental property could maintain income. Have a back-up plan.
- Contacts. Let’s say it together: It’s not what you know, it’s who you know. Take advantage of networking sites and forums to form contacts who can help you with your small town, big return investments.
Do your research and look out for any diamonds in the rough!