Buying Multifamily properties in small towns a bad idea?

Question

I’m new to real estate investing and I want my first investment property to be close to home just for comfort level. I live in the Phoenix area and have been looking for months for small multi family properties that have potential to cash flow. Unfortunately, the market in Phoenix and the nearby cities/suburbs for about a 40 miles radius is the same. Inflated housing prices and not high enough rent for there to be any opportunity. But, taking a look at the available properties in the whole state, there are some very small towns that have multi family properties for cheap. I was wondering if anyone has experience with these types of properties?

Property 1: $150,000

Located in Arizona City, Arizona. Population 10,500

Duplex both units identical 3b2ba 1300 sq ft each. 1 car garage each

There’s 2 other 3b2ba single family houses listed for rent at $1,100 and $1,200 (they have been rehabbed.)

I believe rent could be $700/$750

Property 2: $180,000

Located in Sierra Vista, Arizona. Population 43,000

6 unit property, all 1b1ba units 475 sq ft, 6 parking spaces

Rent at $450/$500

When I plug in the numbers everything works out to positive cash flow. Are there specific issues I should look for in small towns like this?

Thyra Dixon · Answer

@Ryan Pollack I am an investor based out of Surprise, AZ and am seeing the same thing you are here in the valley. SFR aren't close to cash-flowing and MFU aren't much better. And all the wholesalers in the area seem to be over-inflating ARVs and under-estimating repair costs. I too have started looking in the Casa Grande/AZ City area. I actually went to AZ City last week to check out the area. It is a bit of an odd duck area but I spoke to some locals - hardware shop, realtors, business owners, etc - and they all have been feeling an inflow of people lately. Duplexes that sold for $25k in 2008 are up to $169k and selling. And the property managers that I spoke with that work in the area say they are having a hard time finding properties to rent. Based on this and other research I've done, I tend to agree with @Doug McVinua . I will definitely be investing in the CG/AZC area!

Doug McVinua · Answer

@Ryan Pollack Interesting subject Ryan, I think you should look closely at the Arizona City area. Personally, I think that area is poised for a strong surge in the coming years as the Casa Grande/Arizona City area grows. Multiple employment centers are in the works, being developed etc in the area.

Arizona City is also sort of the mid-point between Tucson and the Valley and as each area grows the middle should become more popular. I have seen models that show the two metro areas converging in time, not unreasonable to envision.

Pamela Sandberg · Answer

I'd be real hesitant to buy MF in an area that doesn't have a good, constant influx of tenants (and as was mentioned, a lack of tenants you'd actually want in your properties). I think it's worth considering what kind of deals you might be able to do closer to town. What are the barriers you've found so far? Why isn't the math working out? What creative work-arounds might you be able to find to make something like that work?

Feel free to PM me if you want to discuss further!

Ryan Swan · Answer

@Ryan Pollack MF properties in Phoenix are higher priced due to demand, which is driven by market stability, large tenant pool, low vacancy rate, job prospects, and growth potential of all of the above.

I'd say the risk of a property in a small town is that all of those success factors are tenuous at best. A major employer and economic driver in Sierra Vista is nearby Fort Huachuca. What happens if it downsizes or closes? You could be left with a vacant property that's worth a fraction of what you paid for it. There's no free lunch in RE, and that's why a 6-unit property is sitting on the market for $180k in Sierra Vista, but may sell for $600-$700k in parts of Phoenix today.

Chris Michael · Answer

@Ryan Pollack Dunedin, FL Safety Harbor, FL Tarpon Springs, FL. Small Beach towns on the gulf coast. $60k annually per rental unit.

Doug McVinua · Answer

@Ryan Pollack Yes, that is an area of growth for us as well. I already have vendors that service the area etc so it's a natural growth pattern. I live in the SE anyway so the distance is less of a factor. In this city, an hour feels normal many days. lol

Dan H. · Answer

We used to own a property in a rural area (not even a little town with 15 minutes drive).  It was slow to find a tenant but fortunately the tenants stayed a long time.  We owned in over 10 years and only had 2 sets of tenants.  Realize it is a very small sample size (a single SFR).

Where most of our rentals are (not rural), the smaller the unit the faster the turnover.  In our market ,I would expect at least a 2 to 1 turnover rate (and likely far worst) of the 1/1 475' versus the 3/2 1300'.  We get virtually no turnover in our 3 or 4 BR units (last one turned over was >10 years ago).  The 2 BRs are a little worse than the 3 and 4 BR.  The one BR turnover regularly in less than 2 years.  We now mostly stay away from 1 BR units.

I am not sure your market will be similar to my market in how fast 1 BR units turnover but, without evidence to the contrary, I would go in with the mindset that the 1 BR will turnover at least twice as fast as the 3 BR units.

I suspect, even though the rent to cost ratio is better in the 6 unit RE, the duplex will have the better actual cash flow and be less work (assuming they are in comparable areas: similar expected appreciation, similar employment outlooks, similar class, similar schools, similar crime rates, etc.).

Good luck.

John A. · Answer

I live in Sierra Vista.  I can tell you the MF you describe in town will attract C- tenants at best.

Dave Turner · Answer

@Thyra Dixon Thorough research !!!

Ryan Pollack · Answer

@Thyra Dixon great information Thyra. The property I reference to in the original post was sold for $152,000 in 2005 and is now listed for about $155,000, virtually no appreciation.  I imagine with the growth in the valley and in neighboring towns like Casa Grande this will change.

Buying Multifamily properties in small towns a bad idea?

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