Nice properties in nice areas with good cash flow were getting harder and harder to find in my home town of Ottawa. Frustrated with the lack of inventory, I decided to look deeper into my native province, Saskatchewan, thousands of kilometers away.
At the time, a particular small town in Saskatchewan was hopping with work and had the highest average rent in the province. That really got my attention.
I realized years later that booming small towns can be a good place for investment, but you really need to know your market and what you are getting into.
It was 2011. I decided to invest in the small town of Estevan, Saskatchewan, two hours outside of Regina. It had a population of 11,000 people and the average house price was in the low 200,000’s. There was so much work in Estevan that housing couldn’t keep up and people were literally turning down jobs because there was no place to rent in Estevan. I was mesmerized by the inexpensive prices and the prosperity and growth of Saskatchewan. It reminded me of how Alberta started out a decade ago.
Estevan real estate was attractive because of its low vacancy and high rental rates, supported by various energy employment sectors. At that time, a two-bedroom apartment in the low $200K range could easily fetch $1800+ per month with no property taxes for five years.
The numbers were perfect and I knew the town well enough as it was close to where I grew up. Plus I really needed a turnkey investment considering I had other properties to manage, one year old twins and a career to juggle. I decided to pull the trigger and buy a brand new two-bedroom condo. It rented out immediately.
For two years, things were great. The market value of the unit increased almost immediately after I purchased it and the cash flow was excellent. The peak rent was $2400 per month and it was property tax free for five years. Even with the cost of an occasional $600 trip to visit the town, it was worth it. It still netted close to $1000 dollars in cash flow per month after all expenses.
Then things changed.
First, crude oil dropped. At first it was slow, then it fell 50% in just six months.
All other energy sectors followed and so did the housing market in Estevan.
The party had officially ended in Estevan.
The morning after a big party the last person you want to be is the one left holding the garbage bag in charge of clean up. But, that was who I was.
If you find a booming town is catching your eye like Estevan caught mine, make sure you do it with eyes WIDE open. During the oil crash, my tenants left due to changes in employment and the unit wasn’t attracting much interest in the rental market. I managed to come out losing only two two months rent to vacancy because I changed property managers and dropped rents substantially. Thankfully even dropping the rents, it still cash flowed.
It was a tough situation and not what I thought it would be, so here’s what you need to know before you invest in a small town.
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.