where to invest in real estate

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.

It was a Saturday night. We were at a local pizza place with a handful of our real estate investing coaching clients after a long day in the field looking at properties, discussing office systems and evaluating neighbourhoods. We were laughing, telling stories and bonding. It was a good time, but one of our clients was missing.

He invests in the area and a tenant had called about a leaky shower. After the tour, he rushed over to the property, skipping dinner, to fix the leak.

In his mind, he was saving the cost of calling a handyman and since he was in town for the training anyway, he thought it was the perfect opportunity to get the job done.

All he saw was the money he was saving. But there were a lot of costs to his decision. He missed out on a lot of fun and informative conversation. He didn’t get a chance to bond with all of us in a relaxed setting. He also had to eat the few pieces of cold pizza that were left when he finally arrived.

It’s probably not surprising to find out that he feels a lot of stress from his real estate portfolio. I’m not judging this guy – not at all. I can identify what is happening because I’ve been doing things like this for decades. We still do. But here’s the thing – I am now very conscious of the choice to spend time to save money and what it really costs to do that.

I’ve realized something kind of shocking recently:

I can’t think of a decision I have made driven by money that has brought me much happiness or created better relationships.

As real estate investors, most of us are highly driven by money. Real estate education is totally financially focused. Success is measured by profit.

It’s not that money is a bad thing. Listen, we all need cash. The problem is the power we give to money and the price we pay for doing that. And this price is one that very few investors ever think about.

When you take the power away from money, every decision in your business gets easier. You’ll gain confidence. You’ll choose better deals for you, you’ll find partners that are a great fit and even fun, you’ll work with tenants that take care of the home and stay for a long time, and you’ll find money comes to you for your deals instead of you chasing it! It all happens when money is no longer in charge of your choices.

Very few investors stop and look at their real estate business from the point of view of what will take the least amount of time, create the least amount of stress, or what will be the most fun to do. Most investors analyze the numbers, chase money from city to city, and focus solely on profit to drive investment decisions. The result? Investors get stuck or stressed or both!

Let’s look at five areas of real estate investing costs you’ve likely not considered:

1. Who to Invest With:

It’s so easy to get hung up on needing money for your deals that you don’t think about the emotional costs that you could pay when you invest with the wrong person.

We have one partner who asked dozens of nit picky questions in the beginning when he was evaluating the investment. We had a feeling he would be challenging but chose to ignore that feeling because he had the financial capacity to do multiple deals with us and he was friends with a group of successful business owners with cash for investments as well. Today, the mere mention of his name in our office fills us with stress. Even after several years of earning him a double digit return on his investment, he questions everything we do, right down the model of dishwasher we selected when the old one needed replacing. He’s never grateful for the work we do and it always feels like he is disappointed. It feels horrible. If he was our only partner we’d have zero confidence and damaged self esteem.

Ignoring potential issues gets even worse when it’s with a close friend or a family member. It also changes the relationship (Read More on That: The High Cost of Raising Money from Friends and Family). Friends and family are the most expensive place to raise money – it’s just that it’s an emotional price you’ll pay – not a financial one.

Today, we turn friends and family away and instead ask them for referrals. We also look for a fit. If someone isn’t going to be fun to work with, appreciate our value and be interested in a long term hold, then we’re moving on to a new conversation. Interestingly, ever since we started turning people away we’ve had people coming to us. Finding money has never been so easy.

2. What deals to invest in:

When you don’t have much money to invest, the choice of what deals you’ll do tends to be based on the resources you have. My husband Dave and I have done this many times in our twelve years of investing together. We’ve bought properties in areas where I felt unsafe parking my car, because we could do a deal with no money down. We’ve bought properties that didn’t have a foundation and were barely standing on their own just because a seller would give us a VTB. The reality is that those deals may not cost money at the start but they usually cost you cash before too long – sometimes a lot of cash. But, again, the price is far greater than just dollars and cents. Owning properties in rough neighbourhoods does not offer you much peace of mind. It also means you’ll get the most unsettling of calls (drug deals, tenant fights, and noise issues to name a few). You also could find yourself with a property in such a state of disrepair the fire department ends up being called in resulting in a long list of fire code violations that are very costly to repair (or you could end up in court pleading guilty to fire code violations as happened to us).

Instead of worrying about how you can do a deal without any money or banks, find deals you’re happy owning and raise the money you need to make it happen. Or, don’t invest while you save up. Either way you’ll be much happier than if you just do the only deals you think you can do when you’re lacking the resources to start.

3. Where to Invest:

Everyone talks about investing in a city with great economic fundamentals. It sounds great, but do you really want to travel to find properties, set up a team, oversee your business, and grow your portfolio? Are you REALLY excited about hanging out in Edmonton, Hamilton, St. John’s or wherever that newest hot spot is? (Watch the video on this: How to Choose Your Investment Market – Two Things Nobody Considers)

I’m not suggesting you invest in a town that is shrinking or where everyone is unemployed, but when you choose your market, realize economic fundamentals aren’t as important as making sure it’s a fit with your life.

4. Why You’re Investing:

Are you trying to create a full time job or are you creating a business to build wealth and give you freedom?

We wanted freedom yet we were so focused on making money that we bought properties in bad areas, that attracted hard to deal with tenants, and were spread out all over Ontario and BC.

Being driven by the numbers not only led us to do the wrong deals, it also led us to take the wrong tenants. When you’re driven by an ROI (return on investment) you will feel a tremendous amount of anxiety over a vacant property. One time we were about to have a vacancy and we were so worried about cash that we took the only tenant that applied even though there were a few red flags. Within a month she had pulled a knife on her roommate and had stopped paying rent. It took us three months to evict her – we lost out on three months rent, court filing fees and unit clean up costs all because we rushed to avoid a month of vacancy.

Today, our business is set up to support us, NOT the other way around. We focus on what our ideal day looks like and weigh each investment decision against whether it supports us or not. That means we do fewer deals than we have the capacity to do, we stick to a proven model, and we are very picky about our tenants even if it means losing a month of income. Ultimately, it’s a business and it has to be profitable but the most important thing to us is whether it’s supporting the life we want to live.

5. When to Spend Your Time or Spend Your Money:

You can save time or you can save money. Usually you can’t save both. You can hire a property manager and save time, but it costs you money. They won’t love your property like you will. You have to pay them to oversee it, and they will charge you for handling issues like renovation and tenant placement. You can find an investor to fund your deal so you can grow your portfolio but you will have to spend a lot of time finding them, building a relationship and overseeing the deal. Another person adds complexity. You can potentially make some cash by buying, renovating and flipping a property but you can also expect to spend a ton of time and energy to make that happen. You have to choose what is important to you and be ok with it. In order to do that, you need to be aware that the costs extend far beyond a spreadsheet.

Our client chose spending time over money but he was also feeling frazzled and frustrated. He made a choice but didn’t realize the price he still paid. You need to take a hard look at what you really are willing to spend and be comfortable with it, or try a different investment strategy. Real estate investing isn’t for everyone!

Doing high quality deals with great people makes real estate investing fun. But it’s really easy to get side tracked from that, thinking you have to do more deals to make more money. If you’re too hung up on money then you’ll lose site of what real estate investing can do for your life and the importance of your relationships in your life – not the deals.

And the funny part is that when you change your focus – your business changes.

The Questions to Ask Yourself Before Investing in Small Towns