Podcast Episode 70:
“Small Town Advantage.”
Smaller municipalities can be an ideal place to invest in real estate. This is particularly true if you focus on an area where there might be many opportunities and little competition. Prices are often lower in small towns, and even medium-sized cities can provide an advantage over big metropolises if you specialize in one neighbourhood or region. The key is that you need to become a local expert. Leverage your small town advantage to become a big asset for you as a real estate investor!
Real Estate Investment:
Small Town Advantage
When I first met one of my clients in 1995, he and his wife had just moved to a small town about 125 km out of Edmonton, a commute of about an hour and a half. Both of them had lived in the city but originally came from small towns. They were happy to find jobs in their areas of expertise and soon settled into small-town life.
Over the years they bought numerous properties, working their way up to a portfolio of approximately 20 doors. When I told them they were going to be featured in Tales from the Trenches because of the interesting Tale created when they acted as their own lawyer, they wanted to make sure I also recounted in Tales their success as investors. “Absolutely” I replied, because I always want to talk about successes as well as those piles of do-do that any active real estate investor risks stepping in.
When we talked about their very successful portfolio, they remarked that their best success had come by acquiring properties in the small town that they lived in. The first thing they noticed when they moved there was that real estate prices were way, way lower than in Edmonton. There wasn’t that much rental housing available. But, there seemed to be lots of renters. The town was small, but it served an active, agricultural community. It also had an agricultural college, the local county government offices, and some energy industry service companies along with a fair bit of tourism drawn to the nearby Provincial Park.
The next thing they noticed was that rents were not that much lower than in Edmonton, maybe $200 a month less for a three-bedroom bungalow. But, that same three-bedroom bungalow was only half the price it was in Edmonton. So, they dipped a toe in the water and bought two properties, both in reasonably good shape. A little bit of paint and carpet, and very quickly both of these properties were rented to great tenants and the positive cash flow was about $500 per door.
They sold their Edmonton properties and used the cash to buy more properties in their small town, all of them easy to rent with great positive cash flow. Then they came across what looked like a disaster, two fourplexes that were run down with only six of eight suites rented. The absentee owner was a terrible manager, alienated tenants, didn’t fix anything, and had decided landlording wasn’t his game. He was a classic motivated vendor: ready to sell and say goodbye.
Our clients didn’t rush it. They made sure to get proper inspections which revealed some sewer line blockages, roofs that desperately needed re-shingling along with furnaces and water tanks that were on their last legs with a couple of furnaces already kaput. Armed with their inspector’s report, they negotiated hard with the seller for price reductions, and ended up buying those fourplexes for $140,000 each.
Financing was with the local Alberta Treasury Branch (ATB) who already had the existing mortgage. This local ATB branch knew our clients well as they had already provided them with a number of other mortgages on their local portfolio.
When they went in to make their mortgage application, they presented their plans for renovations, a list of tenants who had already made applications at very good rental rates, and asked for a mortgage based on the after repaired value, which, at the time, would have been $200,000 per fourplex. The mortgage application was granted, the deal closed, and the renovations were completed using our clients’ own cash. Then ATB did another appraisal and funded the second portion of the mortgage based on the now established after repair value.
Since our clients bought these fourplexes about eight years ago, they have never had a vacancy and values have just gone straight up. When they sold they enjoyed a very nice rise in equity, and, of course, had great positive cash flow during their time of ownership for those properties. When we were discussing this particular deal, our clients told me that they couldn’t ever have done this well in Edmonton, not only on the fourplexes, but on the other parts of their portfolio as well.
“Once we knew the town and the surrounding area, we were the only actual real estate investors around. Sure, a couple of other people owned a couple of doors and there were actually some apartments, but, overall, we were the only ones with any expertise who were running our real estate portfolio like a business.”
Many clients have repeated this same story to me and it is almost the same story no matter what small town or even small city that they live in. Andrea Warkentin lives in Red Deer, and I consider her an expert in the surrounding area. Many other clients have done the same thing in their small town. I think small towns or cities, not always but often, give you an edge in the deal; lower priced real estate, competitive rents, and a non-competitive investing environment.
If you are not in a small town you can get many of the benefits if you specialize in an area. The classic example is Russell Westcott who specializes in condominium townhouses located in NE Edmonton. There isn’t much that goes on around townhouses in NE Edmonton that Russell and his long-time realtor don’t know about.
So, if you don’t live in a big city, utilize your small-town advantage; it’s way bigger than you think! If you live in a big town or small to medium city, make sure you are a specialist in a strategy tailored to your area.
- Lower prices and competitive rents mean small towns and cities can be gold mines.
- Wherever you are, be a local expert.
Contact Barry McGuire now. Alberta real estate needs an Alberta lawyer.