Question about investing in rural communities

[Bill Meeks]

Hi, I'm a new investor with 1 rental property under my belt. Looking to acquire either a second rental or do a rehab project. The thing I was wondering about is what is the general thought regarding investing in smaller, rural communities? The prices are much more affordable and I could scale a rental portfolio much quicker than in the city/suburbs, just wondering if they are too risky with the lack of employment opportunities in the immediate area. I'm in NE Oklahoma.

[Joe Hines]

@Bill Meeks

I've invested primarily in SFH in rural areas of North Florida with about 15 units online at this point. My acquisition strategy focuses on older homes in solid, nice areas. The neighborhoods are well established. The homes are typically brick ranch style and need some updates. As in all things, there is good and bad, but I'm happy to share my observations and experiences.

• Overall demographics: Income levels in these areas are low.  Average income is about $40K.  If you estimate 30% of income spent on housing, that leaves the average renter at around $12K/year or $1,000/month to spend on rent.  I would not target that market.  Instead, I shoot for the demographic that is a tier up from there.  These are people who are seeking decent homes in established areas.  I never have vacancies.  
• ROI: The returns are not stellar, but they are steady. I see 5% to 8% annual ROI. I've purchased most of my homes with modest appreciation. Last year, the economic indicators pegged SFH appreciation in the area at 8%. It's not the Bay Area, but it's okay.
• Home prices: Even though home prices have increased significantly in these areas, I have not ramped down. As I've become more established in the market, I get presented with a lot of 'off market' deals. As with any For Sale By Owner (FSBO), some are good deals (meaning they easily exceed the 1% rule) and bear out a good ROI after more rigorous analysis. My average acquisition cost is around $100K with ARV in the $150K - $200K range.
• Rents:  Rents have steadily increased and that has put some of my earlier purchases, which were at the worst point of the Great Recession, in the 2% rule territory.  I have steadily increased rents with the market.  In an annual business review with my property manager, we raised rents on nearly the entire portfolio.  It was exhilarating experience to basically make an entirely new unit's rent by raising the costs of existing units.  That means more income without the acquisition expense. 
• Expenses: Because of the age of these homes, they sometimes need roofs, kitchen remodels, etc. You just have to build that into the cost models because those expenses will come. I typically put aside 3% of the purchase price into a CapEx fund and monthly transfer 10% of rent. Time is proving that this is probably a little on the heavy side, but I'm going to keep it at that level and accumulate the cash and await other opportunities.
• Evictions:  In my 8 years in this business, I have not yet had one.  I realize I am extremely lucky, but I do attribute some of this to my core business strategy:  Buy and maintain decent homes and make sure you get decent people.  Hopefully my luck will hold out.   

That's a summary of what I've seen.  I'm not sure I'd go so far as to recommend investing in rural areas, however.  You really have to know the area and the people to make it work.  I'd also go for sunbelt states that have growing populations.