There are many pros and cons to investing in a small town as opposed to a larger town. I have many properties in small towns and larger towns and personally, I think the small towns are overlooked based on the many advantages they have. Some of the major differences in small towns are the taxes, demand, building permits, and more.
Pros of investing in real estate in a small town:
There are many advantages to investing in smaller towns. I have found some great deals in them and there were many advantages I did not think of until I had bought and operated a property in those small towns.
- Lower property prices: Property prices in small towns are typically lower than in urban areas. This means that you can invest more property for your money. This is because fewer investors are looking at small towns. I have found multifamily and commercial to be much cheaper.
- Higher rental yields: Rental yields in small towns are often higher than in urban areas. This means that you can generate more income from your rental properties. This rental yield comes from the fact that rents might be a little lower but prices are even lower relative to those rents producing a higher ROI.
- Lower vacancy rates: Vacancy rates in small towns are typically lower than in urban areas. This means that you are more likely to find tenants for your properties. I have found this to be true as well because there are very few rentals, there are often people waiting for anything to pop up.
- Stronger appreciation potential: Small towns are often experiencing population growth and economic development. This can lead to stronger appreciation potential for your investment properties. If there is a shortage of homes in the area, you could see huge appreciation if those homes are cheaper than the cost to build.
- Lower taxes: In my area in Colorado the small towns often have lower property taxes and lower sales taxes. The property taxes can save thousands of dollars a year on larger properties.
- Less regulations: Some small towns are also much easier to build and remodel in. Each town has different building permit processes and requirements. Some towns could be stricter but some could be very easy to work with.
Cons of investing in real estate in a small town:
- Limited buyer pool: There is a smaller pool of potential buyers for properties in small towns. This can make it more difficult to sell your properties when you are ready to do so. If the town has a surplus of homes, prices could stay stagnant for many years.
- Less access to amenities: Small towns may have fewer amenities than urban areas, such as shopping malls, restaurants, and entertainment options. This can make it more difficult to attract tenants and buyers.
- More difficult to manage properties: It can be more difficult to manage properties in small towns, as there may be fewer qualified property managers available.
- Less liquidity: Properties in small towns are typically less liquid than properties in urban areas. This means that it may be more difficult to sell your properties quickly if you need to do so.
- Local politics: Some small towns may be difficult to work with or treat outsiders differently if you do not live there. This is not always the case but I have been told I can’t do certain things with a property and then had someone buy it from me in that small town and do exactly what I asked to do.
Is it worth investing in a small town?
I have had amazing luck investing in small towns. One of the properties I bought was a 4 plex for less than $200k in 2018. That property would have been at least $300k in the larger town 10 miles away. I have also had great luck with commercial property and single-family flips as well. There are challenges and just because there are advantages to investing in a small town, that does not mean it is easy.
Conclusion
Before you invest in any property, make sure to research the local market and economy. This will help you understand the local roadblocks, rental yields, and surplus or shortages in the area. Talk to the city government, especially the zoning and permit people (they might be one person). Try to see if the population is increasing or decreasing and make sure you have contractors or property managers that will work in the area if you need them!