Smalltown rental property

[schmidtjas]

I'm looking into a fourplex located in the small town that I work in. I live in another small town 10 minutes away by car. The biggest city in the province is 25 minutes away by car. The town with the property has less than 500 residents. I contacted some people in the town and the town admin and it seems like there is a good amount of demand for rentals there. The plant I work at (150ish employees) is the main business in town, although after speaking with a few people around town it seems most of the renters don't work here, so the town's rental market isn't completely tied to it.

I still have to do some more due diligence on the property, but I had a question for those who've owned rental property in small towns. Are there any pitfalls that I should know about ahead of time for small town properties? How do you normally advertise for tenants?

 

[Martha]

Put up a "for rent" sign and post an ad at the grocery store.

 

[kumquat]

The plant I work at (150ish employees) is the main business in town, although after speaking with a few people around town it seems most of the renters don't work here, so the town's rental market isn't completely tied to it.

Sounds like you are either on the prairies or in the maritimes. 25 minutes is a long prairie commute.

If the plant closes would your tenants have a lot more options within the town? Might scare me.

 

[schmidtjas]

The city's rent is almost double what it is here, so that helps the town's rental market.

 

[Kroeran]

I'm looking into a fourplex located in the small town that I work in. I live in another small town 10 minutes away by car. The biggest city in the province is 25 minutes away by car. The town with the property has less than 500 residents. I contacted some people in the town and the town admin and it seems like there is a good amount of demand for rentals there. The plant I work at (150ish employees) is the main business in town, although after speaking with a few people around town it seems most of the renters don't work here, so the town's rental market isn't completely tied to it.

I still have to do some more due diligence on the property, but I had a question for those who've owned rental property in small towns. Are there any pitfalls that I should know about ahead of time for small town properties? How do you normally advertise for tenants?

when I looked into this in the past, there seemed to be higher margins on small town rentals than in the city. I assumed because the big smart money was in the cities and couldn't be bothered driving out of town, and rural locals weren't entrepreneurially inclined or capitalised, at least in not this direction.

my rough index for comparative evaluation was to assume 25% down, then take the gross potential rent less the interest cost of the 75%mortgage and less all the expenses, then put that net potential income over the down payment to get a rough annual return before capital gains.

You could then assume 5% capital gains, depending on trends in your area, which is .05 * value of property, and divide this into the down payment to get your potention rate of return from capital gains.

once you have due diligenced this to death, its likely the smartest move you will make, especially if you are going to live there. Make sure you do it before getting the girlfriend, who will want you to overleverage yourself into a big house in the burbs with 5% down.

what are the chances of the plant closing?

 

[schmidtjas]

what are the chances of the plant closing?

I'd say the chances of it closing are slim over the next 3 years (foreseeable future), and I'd be surprised if the work force shrank more than 20%, more likely we'll see 5-10% growth per year, depending on various outside factors. I know a good deal about the plants inner workings as I'm part of the planning meetings and I see most of what is going on here and the parent company's main plant.

 

[Meadbh]

I'd be cautious about buying a rental property in a town primarily dependent on one company, particularly as your own income depends on the same company. Maybe it's a great company with a recession proof market, but you know that better than we do. What would happen if the firm shut down and your tenants moved away? Personally I would want to diversify more than that.

Check out Brian Ripley's Real Estate Valuator calculator. A good $5 investment.

Rate of Return Evaluator ~ Canadian Housing Price Charts and Real Estate Evaluator Blog www.chpc.biz

 

[schmidtjas]

I'm definitely looking to be cautious on this deal. I'm in the process of surveying other landlords in the town to see how many of their tenants work at the plant. I know the current tenants of this particular property don't work there, but I would expect to turnover tenants once a year, so I'm trying to get a reasonable idea of how tied the rental economy in the town is to the plant. Having the city close by definitely helps, plus there's a school that employs I'm guessing 20ish people.

Right now I'm playing with the numbers and looking deeper into the local rental market and I need to get a good estimate from my insurance broker what property insurance will run me.

One thing I'm a little stuck on is what to assume for repairs, I was using 3% of the purchase price per year but this seems kind of excessive. I guess it doesn't hurt to be conservative. I've heard 1.5% thrown around

I'm using an 8% vacancy rate which is 4 times higher than the city's average, and 2 times higher than the city's worst area (slum type area).

 

[Kroeran]

maybe spend some time identifying a really good building inspector who can give you a heads up on repairs coming up...never take the inspector either real estate agent suggests or a guy who is beholden to the local agents.

 

[msbearkeley]

Other things to consider when evaluating small town risks:

* Is there a demand for the same type of property and price range you plan to offer? Small town needs tend to be for low rent properties, either for one bedroom apartments or a 3 bedroom SFH rather than luxury properties (unless retirement / waterfront)

* What is the income / housing ratio? With large expenses going to travel (25 miles to town?), can they consistently afford rent, or is turnover high in the area due to evictions / relocation?

* What is your current and future competition? If a newer rental complex is built, for example, what will that do to your pool of tenants?

 

[thefed]

I'm definitely looking to be cautious on this deal. I'm in the process of surveying other landlords in the town to see how many of their tenants work at the plant. I know the current tenants of this particular property don't work there, but I would expect to turnover tenants once a year, so I'm trying to get a reasonable idea of how tied the rental economy in the town is to the plant. Having the city close by definitely helps, plus there's a school that employs I'm guessing 20ish people.

Right now I'm playing with the numbers and looking deeper into the local rental market and I need to get a good estimate from my insurance broker what property insurance will run me.

One thing I'm a little stuck on is what to assume for repairs, I was using 3% of the purchase price per year but this seems kind of excessive. I guess it doesn't hurt to be conservative. I've heard 1.5% thrown around

I'm using an 8% vacancy rate which is 4 times higher than the city's average, and 2 times higher than the city's worst area (slum type area).

Figuring repairs like that is nearly impossible. First off, you have deferred maintenance. Is the roof 20+ yrs old? How old are the furnaces/boiler? Etc etc.

Then you have the type of structure...is it (4) 1-level units? Or are they stacked? Stacked means less roof to repair when the time comes, for example. Each property will have different variables. HVAC setup, driveway/parking/common areas etc.

I'd look closely at the major items and project a replacement of anything that does or will need it, and go from there

 

[Kroeran]

if you have snow, do yourself a favour and keep it cleared - and if the roof is iffy, get it replaced or robustly patched in the fall

there a few things worse than having to call a roofer in the middle of a winter rain, with 5 inches of ice on the roof covered with 2 feet of snow, and having to write big checks every few days.

 

[Meadbh]

if you have snow, do yourself a favour and keep it cleared - and if the roof is iffy, get it replaced or robustly patched in the fall

there a few things worse than having to call a roofer in the middle of a winter rain, with 5 inches of ice on the roof covered with 2 feet of snow, and having to write big checks every few days.

Amen to that! (The OP lives in Canada)

 

[Kroeran]

I hope we are not scaring you off

I can't think of a better move a young man can make, than to buy a small rental property, especially if the owner is in the store

like with anything, do that worthwhile thing, but be the most cautious person doing it