Small town REI... how small is too small? And why?

Question

Hi Folks,

I've been looking at communities surrounding my area (Portland and SW Washington) and considering investing there for a buy and hold strategy.  I am wondering, though, if I should be excluding any of them by population.   I've heard a podcast guest mention filtering out cities smaller than 250,000 people, but then I know Josh jokes about Brandon owning his whole town...

So, is there point at which a small town becomes too small to invest, all other things being equal like job growth, rental rates, etc.?  Why?

Thanks!

Victoria Winters · Answer

Hello Keith,

What a great question!  Here's my two cents on the subject.

Opportunity exists everywhere!  To illustrate my point, I'll tell you a story I heard called, Acres of Diamonds.  It is an old story about an African farmer who once owned a farm.  The farmer had heard stories from other settlers about the millions that could be made by discovering diamond mines.  The tales so excited the farmer that he could hardly wait to sell his farm so he could search for diamonds himself.  So, he sold his farm and spent the rest of his life wandering the vast African continent, searching unsuccessfully for the gleaming gems that brought such high prices on the markets of the world.

Finally, in a fit of despondency, broke and desperate, he threw himself into a river and drowned.  Meanwhile, the man who had bought his farm, found a large and unusual stone in a stream that ran through the property.  The stone turned out to be a great diamond of enormous value.  He discovered his farm was covered with these stones and his property went on to become one of the world's riches diamond mines.

The original farmer had owned literally acres of diamonds, but he sold his farm for next to nothing in order to look for them elsewhere.  If he had only taken the time to study and prepare himself to learn what diamonds look like in their rough state and to study the land he presently owned he would have found the diamonds he sought right on his own property.

This story illustrates the point that taking time to explore your immediate surroundings is often overlooked because of stories one hears about other areas.  If a person takes time to stay with something with something long enough, they will usually find what they seek.  Look for opportunities that are right in front of you before making a decision that the grass is greener because some else said so.

Keith K. · Answer

You are all amazing!  Thanks so much for your replies.

@Rusty Thompson  thanks for the tip on Salem.  I was considering that as I have a mentor (from another career) who owns property there and may want to become the bank soon instead of the landlord.  Do you find there is enough job variety there to support a rental tenant pool or do the politics of the state capitol provide enough customers?

@Victoria Winters I follow your story's message.  I was originally going to look long distance because so many folks on BP are getting good cash flow in other parts of the country.  For a less experienced REI such as myself however, I don't think 'long-distance' rentals is a good strategy -- sounds like people chasing the next shiny object.  I don't want this thread to turn into an argument about that topic, so I'll leave it at that.  Targeting neighboring towns (within an hour drive) for better cash-flow is really my way of investing long distance without blindly throwing my money to others who probably don't care as much about it as I do.

@Elizabeth  Colegrove thanks for your insight regarding the makeup of the population (transient versus permanent).  Have you found other professions or industries that have similar transient populations offering a good rental tenant pool?

@Jonathan Cochran Wow... 2,400 people?  If there was a hard population minimum for successful REI, I thought it would be greater than that!  You gave me hope.  Thanks so much.

Jennifer T. · Answer

I'm a city gal myself.  Have always lived in urban environments and naturally assumed bigger cities are the better opportunities because of more people, more movement.

But I've recently started looking at real estate in Southern Mississippi and some of the houses I came across are in small towns of less than 5,000 people.  However, when I would research the towns themselves, the percentage of the population that rented was usually 40-60%.  One town had population of only 2500 people and 1460 of them were renters.  I was quite surprised by that and it changed my mind a bit about the opportunity in small towns.

Account Closed · Answer

@Keith K.

Demand.

Real estate values are impacted by supply and demand.  Supply and demand for real estate is impacted mainly by population growth and job growth.  Larger cities will generally have more employment opportunities and more of a mix of different types of employment (although not always...ex. Las Vegas).  Small cities will not have as strong a demand for housing as large cities.    These are mainly the reasons why investors focus on larger cities.

That said, if you're less focused on appreciation, can generate cash flow in a market, and have a solid property management model, go for it!  I'm sure there are plenty of investors on BP making good money in smaller markets.

Carson Utley · Answer

If there is a chance of extreme growth in that town, go for it all the way. A small down close to me had an opportunity to almost double in job growth and population and every investor should have been very excited, either they would have sold the properties for 2 or 3 fold or rent went though the roof. But back to the original question you can make money investing in rental in a small town. No matter how mall the town as long as there is people they will need a place to live.

Tyler Merrell · Answer

I am trying something new in my town. We have less than 7K people living here and about 15MHP (that look like the slums). I am developing a SFH and Duplex Rental Subdivision. Yes this is kinda odd, but we (my family) have the land, experience to build and the business plan and support of local banks. In my area we are a poor community and people are paying 500+ each month for a 100 year old single wide trailer. I can easily get that for my SFH or Duplex.

Piece of my plan. 12-1400 sqft homes sale for 80-110K in this area. We are doing the work and the first house we build we are going to "doll" it up. When we finance we will be getting about 50k back. With that we can build at least 1 sfh or a duplex. SO basically for every mortgage we are getting at least double the properties and tripling the mortgage payment, and creating a nicer living environment for my community. (There are other factors, and money but this is in a nutshell).

Have yall seen this before?

Keith K. · Answer

Thanks, Jennifer, for that interesting perspective.  I haven't considered the percent of population as renters, but you're right: a small town might still make a big pool of potential renters (or employees, as Butler calls them!).  I'll see if I can track this data point down for my areas of interest.  Is that sort of thing on city-data.com or did you have to look more local?

Keith K. · Answer

@Richard C.  and @Paul Ewing thanks.  Your perspective is interesting.  The issue of small town politics was just one of the things on my mind when I asked the question -- not problems with tenants, but from the city council.  I'm dealing with it now on one of my properties where the local officials are going for an authoritarian approach instead of a democratic one.  I wonder if there is more exposure to these situations in small towns than large ones, or if I am just skewed by my data sample size of 1.

Paul Ewing · Answer

This is very true.  There are a couple of "property managers" around me that have a bad reputation because of bad service and junk properties with bad or no repairs.  Tenants try to avoid them if possible.  I use the term in quotes because they are not licensed and usually do not own any houses themselves or just of few of the ones they "manage".  I want to be known as the guy with the great properties that are well maintained and everyone wants to get into.

Richard C. · Answer

Apparently no one in small towns pays rent, or a mortgage?

Silliness.  Opportunities exist everywhere.

There are differences.  When I read chest-thumping, "I'll show 'em who's boss!" stuff from landlords here, I find it amusing to imagine how long they would last in a location where everyone knows everyone and your reputation is everything (hint:  Not Long).  So you do have to tailor your approach to your market.

But people make money everywhere.

Small town REI... how small is too small? And why?

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