14 Advantages and Disadvantages of Investing in Small Centers
By John Peacock
As a general rule, real estate investors do not invest in centers with a population of 5,000 and many say the minimum population should be 10,000. For the past 15 years, we have been doing the opposite, instead choosing to invest heavily in our small town of Rimbey, Alberta, which has a population of about 2,500. We have done about 50 transactions over that time, with about 75% of them in our town. We currently hold about 20 properties here.
I remember talking with another investor about my town. He looked at me incredulously and asked Why would you invest there? Whats there? In response to those questions, Id like to share some of the lessons I have learned about the advantages and disadvantages of investing in small centers as well as some factors to consider. Consider each and make your own decision if there is anything there for you.
Advantages of Investing in Small Centers
1. One of my personal advantages was the nature of my day job – that as plumbers, my son and I had worked in many of the houses that we eventually purchased. We were very familiar with the housing available. You can call it unintentional home inspections.
2. There is far less competition from other investors. For a number of years we had none. When a good investment opportunity presented itself, we had the luxury of taking all the time we needed to make our decision.
3. Small centers will often give a much better Return on Investment (ROI) than larger centers. When there is little or no competition, this is not surprising. As an example, a three bedroom bungalow in larger cities may cost twice as much as one in my town but my rent is about 2/3 of the rent in the city. This works out to a rental ROI of 50% more than a similar house in the big city.
4. Advertising in a small center can be a joke compared to big cities. Word of mouth is far more effective in smaller towns where everyone knows what others are doing. There are very few secrets. We are regularly contacted if we have a place for rent because the Realtors® always tell new arrivals to town to phone Peacocks. We are also well known in town by locals as the landlords. The power of word of mouth is a double edged sword. It can also be a serious disadvantage if a person is not very careful. As an example, I know of an individual from a city who purchased a business in town. He refused to pay his bill for services from a local plumber; a fact that has now spread all through town. The owner now has to pay at least two hours of travel time to bring in trades from other centers, although the trades he wants are often literally across the street. We are very conscious of this trait of small towns and work very hard at providing as great of accommodations as we are able sometimes perhaps with too much concession to the tenant. In the long run, this has worked to our advantage.
5. Because people are so familiar with each other, it is often easier to find out who will be a good tenant and who is suspect. When younger people apply to rent a property, we will often talk to our children and ask What do you know about _____? Often we are told about their history, their friends and what their reputation is around town. Our worst example of the tenant from hell came when we ignored our sons warnings. Again, with local young people, we are often able to talk to their parents before renting. It can be a major hammer to hold over someone if he knows that you are in contact with his mother. Although there are laws regarding privacy of information, they can be meaningless when talking with other landlords over a cup of coffee.
6. There is a more significant sense of the importance of my contribution to my community in a small center. We are very conscious of our involvement in the lives of our tenants and know how we have helped their needs for shelter. We see and greet many of them every day. This is also a disadvantage as it can difficult to not to let ones heart lead when that is not prudent. We have made these kinds of errors because we know the people personally. This is often the reason why some city landlords will not rent to relatives or people they know well. That is not however often practical in a small center.
7. Although there are less desirable areas in town, a small center has no bad sections of town that need to be avoided.
8. Because we have had extensive experience working with other construction trades in our town, we have firsthand knowledge of who does great work and who does not. We are well known and have no problem getting the good trades whenever we need them. This can also be a disadvantage in a small center. Tradespeople can be reluctant to work for people from out of town or may charge a premium to work for people who are unknown. This is not necessarily gouging (although it may be). It can be a real hassle to chase down an out-of-towner who is not prompt in paying his bill.
Disadvantages to Investing in Small Centers
1. It can be difficult or even impossible to find a good property manager for a small center. This means an investor needs to be close enough and have time enough to self-manage the properties or have a joint venture with someone who will.
2. Typically there is less economic diversity in small centers. This leaves them more susceptible to the vagaries of economic highs and lows. This is one reason why a landlord needs to have the higher ROIs mentioned in Advantage # 3.
3. Financing is more difficult. The major banks often refuse to loan for purchase of properties more than 25 kilometers from a larger city. We have gotten around this by extensively using credit unions or banks with local branches in our town an advantage of the relationship one builds with local banking officials. We have also used seller financing. We have financed some significant mortgages with sellers because we know each other well, allowing us to work out terms that they would never have offered to strangers.
4. There is a smaller pool of renters than in a large city particularly of non-local renters. In our small town, this is much less of a problem than for many, as it generally has an extremely low vacancy rate.
5. There is a very small pool of investors available when one wishes to sell. Sellers must be prepared to give terms to buyers to make the purchase advantageous. Generally, one plans to exit by selling to personal home buyers.
6. The ripple effect from higher real estate prices in larger centers lessens the further away the town is. House prices (and rental rates) do not rise as high and at a slower rate. This is good for buyers and not so good for sellers.
Tip for Investing in Small Communities
It was totally serendipitous that we began to invest in a town with positive investment influences working for it. If you are considering investing in a smaller center, you need to consider a few factors:
Although it is less than an hour from a major Alberta city, our town is far enough away to be something of a center in its right. As stated before, the population is only 2,500, but the trading area population is about 10,000 give or take (depending who one talks to). I recommend asking local merchants or a local Chamber of Commerce official for this kind of information.
Its good to also find out what kind of employment is available. My town has a relatively stable economic base with a number of retailers, a significant hospital, and health care center. It also has an established energy industry as well as an agricultural one. It has a surprising number and variety of jobs for such a small town. There are other towns like this, especially as more people want to get away from larger centers. For example, we have rented to web designers who service international clients. They moved from Ottawa and then Edmonton, preferring a smaller town with excellent internet.
Attractiveness for Residents Safety, Healthcare, Education
My town has an RCMP detachment and about 20 years ago I asked the local sergeant for a tour with my son of the detachment building. During the tour the sergeant informed us that the detachment was rated the second quietest in the province. This is always a plus as people want to live in safe communities. Talk to local RCMP detachments and ask about the crime rate or incivilities.
Our town has excellent amenities including very good schools both public and alternative – and there is also a very good community center. People will often move into a small center because of work, but they will simply not stay if the town does not offer the amenities they want. Of course realistically a small town cannot offer all that a city can.
Our town does offer the health services of a hospital, clinic and extended senior care. I have been told that it ranks as one of the most desirable towns in the province to which seniors retire.
As with any kind of real estate investing, there are both significant advantages and disadvantages to investing in small centers. A person can do very well investing in small centers if the above factors are taken into consideration first.
Simply put, people want JOBS, SAFETY and AMENITIES. Is a small center the place for you?
John and Marlene Peacock have been investing in real estate since 2000 and REIN members since 2001. Our children have been an important part of our team from the beginning. We can be contacted at firstname.lastname@example.org.