Tracy Ma | revnyou.com

The Good, the Bad, and the questions you need to ask yourself before pulling the trigger investing in small towns.

Let’s start with the ‘Good’ about Investing in Small Towns:

Low entry price. Properties can be significantly cheaper than in larger cities, which makes it very enticing to any investor. This can mean greater cash flow and return on investment, a win-win situation from a financial perspective.

Less competition. With a small town, you might not have a lot of competition with other real estate investors in town. For example, you could be one of very few rental properties that provide rental units to executives and transient workers. Additionally, you could benefit during the purchase of the property by not having to worry about multiple bids and losing deals!

High rental rates. Sometimes rental rates can be much greater than the average rents in bigger cities. In a booming small town, transient workers are given a lot of incentives to work there, including generous allowances for housing costs supported with high paying salaries. This drives the rental market, with incredible rents and generous cash flow in your pocket!

Rental property incentives. If the housing market is hot and there is a shortage of rental units, the City may be more flexible in their regulations or building permits and possibly offer tax incentives for real estate investors. For example, in some cities, property taxes are waived for five years if you commit to holding the unit for that time frame.

Sounds great, right? Be careful. Small towns can be a pain, too. So, let’s continue on with the ‘Bad’ about investing in Small Towns:

Slower appreciation. Property values typically don’t grow as fast in small towns as they do in larger cities, so you need to really think long term when investing in small towns, at least five years if not more!

Smaller employment market. When the employment sector is hot, rental demand is high; but when the employment sector is a bust, rental demand goes. All of the transient workers leave and the town becomes stagnant, which equates to higher vacancy rates and longer hold times between tenancies. This is coupled with a decrease in property resale demand, meaning you could be stuck holding a vacant and illiquid asset. This really hurts if you need your money back and that is your only exit strategy.

It’s a boom and bust town. Small town real estate can be quite volatile. Oil and energy rich cities are affected significantly by the volatility in commodity prices in the financial markets. Things can go south quickly with any economic change, as shown in the drop in the oil price over the last six months.

Limited services. There is a general lack of services in small towns. Property managers, home inspectors, lawyers, handymen, and realtors may be sparse or non-existent. If you need an appraisal to finance a property, the bank may require someone from a nearby City (that maybe a couple of hours away) because the one person in town is on vacation. This happened to me! Same goes for property insurance, home inspection and property management firms. These conditions can make upfront purchasing costs significantly higher.

Now that the Good and the Bad are out of the way, I encourage you to use your common sense filter and simply ask yourself these questions before considering investing in a small town:

Can this area grow in the future – adding jobs and creating demand for housing – or will it go down in value due to declining population, economic changes, and/or loss of jobs?

How long can these high rental rates last? Will it last for the time frame that you are looking to hold this unit?

What are the main employers in this area and what is the likelihood that they will increase in size or decrease in size in the future?

Do you have a big enough real estate portfolio to absorb any shortfalls when the market goes bust and/or do you have a generous contingency fund for this property?

Do you have multiple exit strategies if the market turns sour and you have trouble renting the unit out? Can you lower the rent, provide incentives like shorter term leases, furnished options, or rent-to-own options to give you an edge in a slow rental market?

If you are an out-of-town investor, do you have a team backing you up to make sure that your property is managed well and you can trust to do whatever they can to market your property in a downturn?

For an investor just starting out, ask yourself these questions. In fact, to make it easier for you, avoid small town investments and only buy ones that follow Rev N You’s Properties with a Cause Model.

If you are an experienced investor, it is important that you go into any investment with your eyes wide open. Investing in small towns can be attractive for cash flow, but as quick as that comes, it can go! Just be ready, and have your contingency plans in place.
Tracy Ma is a mother of twins, mentor, engineer, and real estate investor in Ottawa, Ontario. Connect with her at her website www.financialnirvanamama.com where she shares free tools, videos and articles on managing your real estate portfolio. Her mission is to empower women on investing to reach their financial nirvana.

Bad tenants, large maintenance bills, and insurance claims all piled up to over $90k in damages on my first investment property. It was not what I had planned.

When I started real estate investing, I went straight for the deals where the numbers crunched out perfectly. But, I soon learned numbers weren’t the only consideration.

Picking your first investment property can be a daunting task. I felt exactly like this when I bought my first investment property eight years ago. However, if you start by taking the time to build a solid foundation of knowledge, you’ll be ahead of many people who dive into real estate investing, including me.

After eight years in the trenches, I’ve learned a few things about choosing the right real estate investment. So, to help you, here’s five awesome tips on how to pick your first investment property.

1. Discover Your Motivation

No matter how knowledgeable or prepared you are, you will face challenging situations in your path through real estate investing. So, you need to understand why you are acquiring brick and mortar assets filled with tenants. Really knowing why you’re doing it will propel you through any sticky challenges and motivate you to continue investing. Also, knowing why you’re investing in real estate will guide your decisions, including what you are looking for in your first property.

Ask yourself “what is my motivation for becoming a real estate investor?” and “what do I want to achieve by investing in real estate?” Typically, I hear people say they are investing in real estate to achieve “financial freedom”, to retire early and comfortably, or to gain financial flexibility (i.e. a contingency plan). However, these are pretty broad responses without a clear reason why. To help refine this this response, I like to use a method known as The 5 Whys: simply ask yourself “why?” after each response, at least five times, or until you reach clarity. For example:

Whatever your reasons may be, once they have been clarified in your mind you can ask yourself at each decision point if that decision will bring you closer or further away from that envisioned goal.

Bottom line — clarify your motivation and goals before you begin investing in real estate.

2. What Financial Resources Do You Have?

Many novice investors jump straight into deals because it looks cheap and the potential rental income looks great, but they only worry about finding money after the property is conditionally sold. If financing falls through, not only do you risk losing an awesome deal, but also your credibility as an investor. I encourage you to sort out your finances beforehand and come up with a budget for your investment property. Ask yourself:

• How much can I afford?
• Am I pre-qualified for financing and are the terms in my favor?
• Do I have investment capital or do I need to seek joint venture partners?
• Are my personal finances in order so that I have access to contingency funds to cover unexpected expenses?

Work with a professional like a mortgage broker who caters to real estate investors to find out the best financial options for you. You should also read how to finance you real estate investments.

Bottom line — clarify your finances. What financing terms can you get and what can you afford?

3. What Kind of Property Should You Invest In?

When I bought my first investment property, I jumped into a triplex because the numbers look great and it was in a nice location. However, the triplex was high maintenance and I grossly under estimated the amount of time need to manage and renovate the property. I quickly realized that small multi-family units were not an ideal investment strategy for me.

How do you figure out what you should invest in? Here’s some questions to ask yourself:

How much time can I dedicate to real estate investing now and in the next couple of years? Even with a property manager, some properties require more frequent care and attention than others.
Can I handle renovating the investment property? You can find hidden opportunities by looking for a property that needs work. But if that’s not your thing, look for something turnkey (the work is already done), or budget for contractors to do the renovation.
What kind of tenants do I want to attract? Students, young couples, subsidized income, high income, … Each home and location will attract a particular type of tenant. Which can you most easily deal with?
Do I want freehold or condominium? There are benefits to both. However, if you want full control to modify your property and maximize its benefit, freehold is the preferred choice.

There are hundreds of ways to invest in real estate, so find the property that best fits your time availability and lifestyle. And, you may not get it right with the first one, but you have a better chance of finding the right strategy for you if you think about this first.

Bottom line — identify the lifestyle you want to live and the type of people you want to deal with while holding these investments. With this in mind, you can narrow down your ideal investment strategy. And, if you’re struggling, you should also check out this article on the 7 Ways to be a Mediocre Real Estate Investor.

4. Research Your Market and Define Your Target Areas:

Despite any reading or training you take prior to purchasing your first investment property, it will be a learning experience. And, for that reason, I recommend keeping your first investment close to home, i.e. either in your city, or a neighboring one that you know well. By keeping it close to home, you will be familiar with the area, and you will be able to easily take charge should anything not go according to plan.

To maximize your investment, I encourage looking for these factors in a particular neighborhood in your city:
• Population growth greater than the surrounding area average;
• Investments in infrastructure and transportation;
• Sustainable and diverse job growth;
• Low vacancy rates (<3%); and,
• Strong housing demand.

Julie and Dave have their Properties with a Cause Model which is similar. All of these factors in a neighbourhood encourages housing demand, giving you the largest probability of a nice return on investment.

Bottom line — research your market and define your target areas that will give you the greatest probability of success and a nice return. Remember to align this with your motivation and investment strategy.

5. What are Your Investment Rules?

Create rules to eliminate second-guessing and help you focus on finding your ideal first investment property. Rules may include features that a property must or must not have that could positively, or negatively, impact rental income and your lifestyle. Ask yourself:

What is the minimum cash flow I need to feel comfortable with the property?
How long do I want to hold the property?
How far am I willing to drive to the property?
What features in a property do I want to avoid (e.g., electric heat, low ceilings, condo fees, oil tanks)?

The previous four tips will help you define these questions. As you gain experience, you’ll have more and more investment rules.

Bottom line — develop your own rules to keep you focused when screening through deals and to help you gain confidence in your decision making when you pick your first investment property.

Take the time to build the right foundation rather than jumping into deals or only focusing on returns. If you follow all of these steps diligently, you will be ahead of most new real estate investors out there, you will fast track your process, and you will gain confidence in picking your first investment property!

Tracy Ma is a mother of twins, mentor, engineer, and real estate investor in Ottawa, Ontario. Connect with her at her website www.financialnirvanamama.com where she shares free tools, videos and articles on managing your real estate portfolio. Her mission is to empower women on investing to reach their financial nirvana.