Cold Feet: Buy Rental Property in Rural Area?

Question

Hi, we'd like your experienced opinion! My husband and I are interested in buying rental properties to augment our retirement income (10 years from retirement). We're new to this, but have been reading and visiting open houses for several months. We live in CA, so cash positive opportunities are generally far from home.  After pursuing several good buys in the last couple of months -- and losing them to more aggressive bidders, we decided to offer cash (at lower-than-asking price) for a multi-unit rental property in a small town, three hours from big cities, in another state. We have contacts there who alerted us to the opportunity. We received our counter offer, and we're in the ballpark, but now REALLY wish we had an experienced investor to check our assumptions.

Positives:

• Great cash flow -- full occupancy at current rents, with local property management, will net us more than 10-15% of home value annually. 
• While home prices are low, rentals are in demand, and our local contacts (hotel owner and realtor) tell us there is high unmet demand for rentals, and tell us there would be no problem finding good tenants. Could also use Airbnb to rent furnished units to traveling nurses.
• Property is in good neighborhood of quaint town. Inspection is pending, but property appears to be in good condition, considering age.

Negatives:

• Town is quaint but low income -- rural, out of the way, no major industries, with published vacancy rate of 20%. Looking at recent activity, there are a lot of properties for sale, almost none for rent, and a lot sales happened in 2017. Prices have gone up 25% in past year. 
• It is far away from us -- a 2.5 hour plane ride then three hour drive. 
• Structure is 80-100 years old (I told you, this place is quaint). 
• Units vary from nice to funky, but all in working order. 
• Cash offer got us to the front of the line, but would consume 75% of the money we have available for investment right now (still leaving enough for one mortgaged rental property).

Question. Would like your opinion on the wisdom of this purchase. Current counter offer by seller is about 6% less then asking.

Brian Ploszay · Answer

You didn't mention where this property is located - understandable because you are in the middle of negotiation.  Real estate in California works very differently that most of the rest of the country.  California has barriers to building new housing stock, which sends the prices upwards.  Plus it is a wealthy state.

Many of the smaller towns, especially in the midwest, are places that are in decline.  Your upside on the property might be minimal.  There are quite a few towns that might be toxic to invest as they are losing population over the next 20 years.

Also, many of these small towns have a mediocre renter base.  In towns where basic homes are under 100K, home ownership is very affordable.  You can make 25K a year and afford to buy a home.

Eric James · Answer

I like buying properties in smaller towns. However, I don't think I'd try it from out of state. Good luck.

Account Closed · Answer

Interesting question Anna, have given thought to rural investments myself. Usually the ROI is higher. 20% vacancy is really high. I would probably avoid somthing that old rural, as the return on improvements will be more marginal. Suspect the best rural tenants are old and rent due to lack of good condos, think pre nursing home ranch style apartments, ideally with garages.

Art Mimnaugh · Answer

@Anna Runkle at the core a "Deal is a Deal!"   Now with that said not every deal is the right deal for a given person or situation.   You need to make sure you have clearly defined goals prior to getting started and make sure this property fits into those.

From reading your summary I see a lot of "hearsay" information.   The great part of investing in real estate is there is so much data out there you should always be able to either substantiate or dis-prove that hearsay with this data.   Zillow has a great data product you can run and see rent trends, DOM, etc for a given zip code over a defined period of time.   There is similar government data around population growth, job, etc as well.

A few other items to consider:

1) As some else referenced in all deals you have to understand your exit but especially in rural markets.    Should market turn or your vacancy goes up to 20-25% does that still pencil out given you are deploying most of your working capital.

2) You mention your Real Estate agent is also the property manager.   In my view this is NEVER a good idea and there is a clear conflict of interest.   On an average deal they are getting paid a year of management fees as a commission, so when there phone rings who is going to get their attention a buyer or tenet.    As @David Greene mentions get Rock Stars on your team and give them their swim lanes!   You want the expert in their field not a generalist that is an inch deep and mile wide.

3) Make some calls and check with other property owners in the area.   How are they seeing market, how long is it taking them to fill.  How are utilities handled (Bill back, owner paid, etc) What is the mix that is or isn't renting.   I would imagine that in rural area 2+ BD's are what is in demand and buying a bunch of 1 BD or studios may prove problematic.

Hope this helps and best of luck making the best decision for your goals!

Cheers,ART

Sylvia B. · Answer

So there's a "high demand for rentals" and 20% vacancy rate?? Those two don't jive. I would also be concerned about the friend's statement that the demand is high "this year". Why? What has changed from last year to this year? Is it something that one could reasonably expect to continue, or is it temporary?

Also, your statement, "Current counter offer by seller is about 6% less then asking." tells me that you are not looking at the purchase price from an investor's perspective. The asking price is irrelevant. What you need to concern yourself with is the selling price - do the numbers work, or do they not. A seller could come down 60% from his asking price and it still not be a good deal, or he might not be willing to discount at all and it's a home run for you.

Jill F. · Answer

I would love to find some "small town" properties in Ohio. I wouldn't buy out in the middle of farm country but in the small towns that dot the state between the larger and midsized cities... I'd go for it here in smallish towns west of columbus, between dayton and columbus, between akron and columbus or akron and toledo. I'd be happy to find something.

Lionel Li · Answer

Hi Anna,

This doesn't seem like the deal that I would want to test if this is supposed to supplement your retirement income along with the long commute from the airport to the area. If I do invest, I would want to fully understand the area and I wouldn't want it to be based on hearsay. Small towns should have every aspect looked at with scrutiny even more so than big metro areas. I would want to see a track record of good growth or reasons for growth and not just one or two years of shortage and high demand. However if you're positive this area is doing well and it doesn't have:

Population decline or stagnation

Companies leaving the area with none taking its place

Declining average income

Rising average age of population

Rising tax delinquencies or foreclosures

I would only take the leap if you understand these and there are still risks such as the aging property which might have a lot of deferred CapEx work which will eat up profits if not forecasted and budgeted correctly. Also, there must be a viable exit strategy. Who will your buyer be when you're ready to sell, how long will it take? Plenty of things to think about..I'm sure you know but it will be very rewarding when you've made a good deal. I wish you the best luck with your investments!

Cold Feet: Buy Rental Property in Rural Area?

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