Big Profits in Smaller Markets

As I started my real estate investing career, I looked at many different assets classes and markets across the Midwest. I was immediately interested in residential and multi-family real estate because I understood it the best and learned how to flip houses while I was in college. Next, I had to select my market. Being from Chicago, I was automatically drawn to invest there. It didn't take long to figure out, at this time in the market, the barriers were high and the returns were not as attractive as smaller markets. Of course there will be challenges in any market, let me tell you why I chose to invest in the smaller, tertiary market in which I still invest today.

1. You can learn the market very quickly.

I began driving the streets of my market when I was in college. I spent around 10 hours per week for 2 weeks and I quickly learned which areas I wanted to invest in and which I wanted to avoid. It does not take a great amount of time to learn the best areas to invest to fit your goals in these types of markets.

2. Low barriers to entry due to low cost and less competition

Starting off investing in my market (which is the Quad Cities - right on the border of IL/IA on the Mississippi), I knew a lot about flipping single-family homes and small apartments. I knew what the good product looked like and the market was small enough to where I could figure out the most attractive areas very quickly.

The average price per square foot is a lot lower across all asset classes. The rents do not lag as much as the prices. For example, in my market, I can be totally invested in a property for $60,000-70,000 and rent it for $1000/month. That makes for a very nice cash on cash return.

In addition, I quickly figured out most people in the market were not very sophisticated in terms of running their investments like a business. Having recently graduated with an accounting and finance degree, I felt as if I had an edge on quite a few people who have been in business for several years (including my first boss who flipped A LOT of houses every month). Many of them knew investing was smart, but seemed to buy properties randomly that didn't necessarily make a lot of sense. Today, I am buying many of these people's portfolios because they are tired landlords who did not fully understand how to buy correctly.

3. You can achieve higher returns

Because the cost is generally lower to buy a property relative to the rental rates, you have the ability to achieve higher returns if you understand how to buy correctly. I recently bought a 4-flat for $180,000. After some improvements, I am in to the property for $210,000. I am now grossing $3,600 per month on that deal which makes for very nice returns. Not to mention, the property itself is worth around $260,000 so I created about $50,000 in equity. I did this all by sticking to my investment criteria, waiting for the right opportunity and buying right.