Would you purchase a deal in a small town?

Question

Hi all,

I'm hoping for some advice on a deal I found.
Purchase price is 140,000 for a four flex with monthly rental income at 3545. So CoC and ROI is pretty great (about 1100 a month after vacancies, maintenance, etc.) Apparently the sellers are motivated so I could probably get it under asking as well.

The only downfall is it's in a small town of 6,000 people. So in my opinion might cause a headache trying to find new tenants. Doesn't seem like there's much population growth. Average vacancy rate that I found is about 6.7 - 8.3 which is a lot higher than I'd typically go for. But again, return looks great, IF it can be rented steadily.
It does have about 2 dozen colleges/universities within a short drive. Top jobs are Health care, casino, education, grocery, manufacturing.

Would you purchase this deal?

Jessica Stevenson · Answer

@Erika Geoffrey You can absolutely ask for updated lease agreements, rent rolls, etc, and you should!  Seller may push back and want you to have an executed P&S prior to giving out sensitive information, which is fine (just make it part of your due diligence).  At the very least you should know exactly how long each tenant has lived there and if they are on an annual lease or month-to-month agreement.  Completely agree with @Jonathan R McLaughlin - sounds like this is a classic scenario of trading cash flow for appreciation.  Some people seek out these deals - all depends on your long term investing goals! Good luck :)

Christopher Liu · Answer

Every small town is different with unique characteristics and features (good and bad) so I wouldn't rule out a deal because it's in a small town. We recently bought multi-unit buildings in a small town (Owego) similar in size and we found that just because there isn't population growth doesn't mean that there isn't build-up demand.

We renovated four units to a higher standard to test a theory based on our research that there was a gap in the market for the professional work force. Lockheed Martin has a large machining factory close by and sure enough these units rented as soon as they were finished.

Trevor Naumann · Answer

In NY, there are numerous small towns, each with their own unique vibe. However, if you're within a reasonable commuting distance to employment opportunities, I believe it will likely work out fine. The return on investment (ROI) is strong here, providing a great buffer for getting your property rented out in the worst-case scenario. Additionally, it's highly probable that your tenants will want to continue living there.

I'm curious about where you obtained the vacancy number from? In my area, the reported vacancy rate is typically higher than the rental demand.

Another thought would be to go above the norm when turning the units over. By doing so, you'll likely have the most desirable rental units in the area, reducing vacancy rates. I'm not sure where you are but I'm willing to bet that there aren't any Class A buildings being constructed in that area, so the bar is probably quite low when it comes to creating a wonderful living space for your tenants

Tom Gotuzzo · Answer

100%. Most of my best ROI deals are in smaller towns

Joseph R. Smith · Answer

Upstate NY investor here. I go wherever the best deal is-likely scattered across many small towns all over the State. I haven't really ran into any tenancy/vacancy issues.

Rodney Sums · Answer

When considering small towns, and particularly small towns here are concerns that come to mind:

Available quality property managers

Availability of trades and services

Politics in the area. I don't just mean political party but who's in power, who is affiliated and what impact small town relationships may have on you. Consider and look up "Old Boy Networks"

Local court systems, especially with you being foreign.

Erika Geoffrey · Answer

Thanks for your input! That’s where my mind is as well. This would likely be a property solely purchased for cash flow and likely wouldn’t gain much equity / wouldn’t even bank on resale at all.

Jonathan R McLaughlin · Answer

@Erika Geoffrey 6k is t too bad in a place like NH (for instance) about the smallest you can get and have some infrastructure, especially if the downtown is functioning. Good news on the college and hospitals.

Balance the cash flow against the difficulty in selling. That hasn’t been an issue lately, certainly but it won’t be the most liquid thing you have ever bought.

But the numbers seem to work very well if there isn’t a lot of work required, even if you hit or exceed that vacancy rate

Erika Geoffrey · Answer

Thanks for your input!We are working with a realtor - however we are actually from Canada, so it's hard to tell who's trust worthy and looking out for your best interest vs. who's just trying to sell you anything to make money. When I asked how long tenants have been there, the response was "well I think two of them are still on leases and the other two are longer term"

I tried to ask for updated lease agreements, proof of payment, etc. but apparently that's not really something they ask for in the states.

I'm also curious why the sellers are so motivated if the cash flow is so good, you'd think they'd just sit and wait until it sells for the right price. Who knows

Theresa Harris · Answer

How long have the tenants been in the building?  I have rentals in a smaller town, but the vacancy rate is 0 as it is a popular town to live in.  $140K for a 4plex renting for over $3500 sounds like a really good deal.  I'd ask some more questions and talk to a local realtor to find out more about the rental and housing market.

Would you purchase a deal in a small town?

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