Investing in small towns and distant markets?

Question

Hi Everyone! I am a newbie looking to hit the ground running! I have been researching real estate investing with the help of Bigger Pockets for about 6 weeks now. I am so excited about the opportunities that real estate offers!

I have five young children, and I am an adjunct professor. My husband works from home, which is awesome! We recently added a dog to our family. So we are super busy, but I am ready to get on the road to financial freedom!

I am interested in pursuing the BRRRR strategy on our way to becoming financially free. I have been scouring my area of the Twin Cities, MN, which is really hot right now! Maybe too hot for us: I don't know that we have the finances to invest in our backyard first.

So I began looking at my hometown where I grew up yesterday, and the prices are so much better for us! But this town is about an hour and 15 minutes from the Twin Cities. It has about 26,000 people living there. One draw is the large insurance company there, which brings in new employees and their families. The other draw is Cabela's, which has led to a boom in shopping areas.

I also began looking in the Belleville area of Illinois, where my husband and I used to live: some really nice small towns there that are close to Saint Louis, MO. The prices are better in these small towns too.

Two questions:

1. What positives and negatives have other people found while pursuing the BRRRR strategy in small towns?

2. What difficulties could a newbie encounter while trying to invest in a distant market?

Bruce Runn · Answer

How are you going to do a BRRRR from a distance especially if you are a newbie?  Do you know all that is involved?

John Woodrich · Answer

I am with the group - a distant investment is not the best way for a new investor to get going.  If I you are indeed going to be renovating a property it will take you 2 times longer on your first deal and the added stress and cost in traveling will put stress on your numbers.

You didn't mention what your cash available is to get going but you will likely need to put 20% down to purchase and have a way to finance the repairs....  This is a little different than most people who use the BRRRR approach who start off with an FHA loan which allows for a smaller down payment.

Todd Dexheimer · Answer

I invest out of state in apartment buildings, but I highly suggest that you do not invest out of state as a new investor unless you're investing in a syndication or crowd fund  or you're able to dedicate time in the market if things go wrong. I believe you are talking about Owatonna, Minnesota. The good thing with that city is you mentioned you are from there and it is big enough to be able to find contractors. I don't think Cabela's is going to be going anywhere since bass pro shop purchased them, but there will not be much growth in that city so you need to look at something that has really positive cash flow.

Andrew Syrios · Answer

Small markets have fewer buyers, so you may have problems reselling it. You might also have a problem finding banks willing to lend since there usually aren't very many. I would probably talk to some of the local banks first to see what their rates and appetites are. As far as buying at a distance, I wrote an article on how to approach it. The TLDR version is be very careful: https://www.biggerpockets.com/renewsblog/2014/12/23/investing-out-of-state-essential-items-to-vet/

Bruce Runn · Answer

One thing you will find is that even though MSP has higher prices, it delivers higher returns.  When I talk with new investors, they think if they buy a smaller, cheaper place, that will fit for them when a bigger , more expensive duplex cash flows much more with a higher return.  I'm talking in terms of size of the duplex/number of bedrooms not number of units as I only buy 2-4 unit properties

Astrid Dymond · Answer

Hi Kristin,

I started pursuing the BRRR strategy in St. Louis last year, so far so good. One of the big challenges I had was putting good teams in place - finding the right contractors takes time (and in my case plenty of 'tuition' paid along the way).   I think it is best you start by investing in your "backyard" in an area close to your home so you can closely monitor project progress while learning the ropes.

Austin Hendrickson · Answer

Welcome to BP! First of all would you want to live an hour and 15 minutes from the Twin Cities, assuming you work in the Cities? Your husband works from home so it may be doable.

I would really recommend studying the local market there because while correlated with the Twin Cities market it could be very much different. For example with the Cabela's and the large insurance employer, what happens if one of them decides to shut down or relocate?

Getting solid rent prices and ensuring you have enough vacancy and capex expenses built in while analyzing properties is crucial. Be sure to also factor in a property manager because I am assuming you will move away from there eventually and not want to manage a long distance rental.

Getting contractors is sometimes tough if you are out in a smaller town as some of them have schedules booked up for months. I know the BP podcasts have a lot of info on investing out of state.

I live in the Twin Cities myself and the idea has intrigued me although I do not think there is enough future appreciation potential in the smaller markets for me to invest right now. If you are looking strictly cash flow and have a solid team set up in that location then it could be a great strategy!

Investing in small towns and distant markets?

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