Was I being naive?

Question

I'm still at the beginning of my investing. I know that I want to buy and hold (with some rehab as needed) for long-term passive income. Still deciding on SFR and/or multifamily, but that's a whole other discussion.

My question is in regards to picking a location. I live in a semi-rural, pretty small town that I was pretty much ignoring from an REI perspective because I was thinking it's mostly home owners here and always pictured rentals being near colleges and in much more dense areas. But, as I pay more attention to properties all around me, I'm seeing more apartment buildings and small multifamily properties all over in places I would have previously not expected.

So, what do you think? Are there areas that really don't work as well for buy and hold? Or does the simple existence of apartment buildings verify that people want to or must rent?

On the one hand, I worry that the renter pool in a community that has more single family homes might be artificially increased due to recent economic/housing downturn and as people get back on their feet, they won't want to stay renters forever whereas in a more dense area, people tend to be renters for life. On the other hand, I could convince myself that people who rent in a smaller community may be doing it for a specific reason (ie jobs or school) rather than living in a more congested area, so they might have less turnover.

Please share your thoughts...

Brett Russell · Answer

@Jeff Spicer , thanks for reinforcing a lot of the motivations for people to rent that many of us tend to forget about (or at least I was ignoring early on). @Matt Devincenzo , thanks for your input as well. I am coming around full circle now. Whereas I was previously only focusing on congested areas and then started to warm up a bit to more rural locations, I am now thinking I might favor them for the reasons you mentioned. @Ben Skove , I guess I should be careful with my definitions. "Rural" might not be the best term for what I'm looking at. Growing up, the only thing that surrounded my suburb, was more suburbs... for about as long as you could drive. I'm talking now about small cities/towns of 5-20K people but pretty much surrounded by farmland but still within 20 minutes or so of Ann Arbor or Lansing. I think there is good potential in some of these areas because people would be drawn to probably better schools, a bit more space, but still be close enough if they had economic reasons to need to be near the bigger cities. Thanks everyone.

Jeff Spicer · Answer

People rent for many reasons. There are many that just do not want the responsibility for the upkeep and maintenance and thus will pay rent to have someone take care of those things or feel they do not or can not afford to care care of them. There is a new generation come of age larger than the baby boomers and they need housing. The baby boomers are aging and many chose to no longer take care of a house or can no longer afford to. Many now have temporary jobs as "consultants / contractors" in which the contract is renewed yearly. These consultants or contractors many times do not want to risk a mortgage as next year they may have to pick up and move to another location in order to stay employed and the last thing they want is to have to worry about selling a home and buying a new one or having two mortgage payments. Then you have many that were burned in the housing market and just do not want to lose on purchasing a house again. Then there are the typical renters that you likely in-vision and of course still many other reasons why people chose to rent vs. buying a house. Now weather the area you are looking at will be a good rental area or stay a good rental area or be flooded with too many units requires knowing the current area and then watching and keeping up with the trends. Even then there is no 100% guarantee. However, as long as, there are jobs available in the area I would image that there will always be a need for rentals. My wife and I have discussed selling our home and just renting an apartment as we could get a better layout at close to half the cost (taking into account maintenance, taxes, etc...) allowing us to have more income to save and pay things off quicker as we are wanting to move out of the area. Thus, when we are ready to move on in a few years we would not need to worry about selling the house and we would have eliminated all of our debt (at least debt not used as leverage for investments) and increased our savings. Not to mention being able to free up our current equity for investing. This was all before we were even looking at investing in real estate. I am of course now trying to see if we would be better off purchasing an apartment complex instead of just renting. Owning a home to us is not really that important. We are looking at traveling especially overseas and are trying to prep things so that we are no longer tied to any one location.

Tom Goans · Answer

@Brett Russell, Employment options and reliability are major considerations. Your thoughts of considering the target market is one that I embrace.

Matt Devincenzo · Answer

I'd suspect if you looked there are a lot more renters than you think, and the rural renters tend to actually stay in a home for a long-long time. My in laws live in OK and have rented pretty much everyday of their life that I know of. They stayed in their last place for 10-15 years, and have been in this one for five or so I think. Also those types of tenants tend to be handier and more capable of taking care of the minor maintenance issues on their own. As far as your concern that this may be temporary and they want to buy houses later; Great! They live in that area because they want to or it's where work is so they will look to buy there as well. That will either push values up a little making your property worth more if you decide to sell, or if they are already a long term tenant that likes you home they could just buy from you and you can move on to the next one.

Ben Skove · Answer

@Brett Russell Back when I lived in a very, very rural area (and prior to becoming involved in real estate investing), I noticed that - at least in that particular area - decent SFR rentals were hard to come by and seemed to rent quickly. Since it seemed like everyone in the county was related to everyone else, people tended to stay close to home. There were also section 8 renters, if that's something that interests you, in addition to people who rented houses to seasonal farm labor. (That seems like a tough niche - umpteen people crammed into a single house...I would have hated to see what it looked like afterwards.) What's your target market? Are you within commuting range of a larger town/city? Farming and the seasonal labor that goes with it? Decent-sized local employers?

Aaron Yates · Answer

@Brett Russell , this is a good question. I have the same train of thought about lense dense areas. Yeah I have seen rentals in these areas as well, but do people rent long term here? Any experience in this from BP investors would be educational.