Investing in small towns and rural areas

General Real Estate Investing
1

Hello all. I have been reading on this forum, books and other real estate articles for about 6 mo to a year. A friend of mine and I are going to start a real estate investment company. We really want to stay focused in our backyard to start, but we feel we might be limited because we live in a very small town (pop approx. 6,600). We do have a few towns within about 30 mi that have populations of 17,000 and 25,000. But from reading on here it seem like most people have been starting out in very large metropolitan areas (pop +100k) where real estate prices are much higher. We would prefer to flip, wholesale or contract for deed starting off to build cash reserves, but with the home prices as low as they are here (approx 40k for 1300 sq ft older home) there’s not much margin left if any work needs to be done to the home.

So after that long rant, here’s the question…Have any of you invested in small markets like this one? Do you think we would be able to wholesale/flip/contract for deed in a market like ours or is buy and hold the way to go? What strategy would you recommend?

The reason we don’t like buy and hold is our day jobs are pretty demanding and we would be doing this on the side (nights/weekends). Thus, being a landlord would be pretty tough to fit in our schedules.

A little about us just for FYI…

  • I’m a licensed professional engineer and am very familiar with construction (including municipal ordinances, water and sewer design, home construction etc)
  • My friend is a practicing real estate attorney and is familiar with landlord/tenant laws, various methods of land transfers, etc.

Thanks in advance to all who reply. This forum has been a great learning tool for me. Thanks again!

engineer

2

hello,

Good to hear that you have been reading books, a great way to get yourself educated. You can never read too many books or ontain too much knowledge. I can appreciate you wanting to start in your backyard. If the next towns are slightly bigger, and only 30 miles away, that seems fine. You know your area well, so that is always the best area to start if possible.

Location, location, location can be very important, but it is not always everything in my opinion. If you can purchase the property for 10-20 cents onthe dollar, It shouldn’t matter where it is, you can make a profit on that property. You make a good point about the homes in your area…if they are already so cheap, how can you make a profit?..that is a great question.

You will just have to purchase them for even less (wholesale), and then sell low. Buy really low, and then sell low if this is possible. Between the different knowledge that you and your partner have you should do just fine, a lot of education there that will be put to good use.

Not sure what you know about the tax deed business, but if you live in the right state, you may be able to attend an auction/sale, where properties will be auctioned off for just the unpaid taxes. This could be a solution for you?..If you could go to a sale, purchase properties for 10-20-30 cents on the dollar, do little work, then you could sell for 50-60 cents on the dollar and make a profit.

The selling process would be the easier part. Once you do buy one, you can take out a simple “thumbprint AD” in the local paper or or bigger paper. Just put in the bed/bathrooms and a reall good price, and phone number. theyw ill call you, give them the date of the 1 or 2 day open house, get a lot of buyers there, and sell the property over the weekend…make whatever profit you can and go on to the next deal. The checking of the list and researching the titles to the property, and going to visit “every property” will be the more tedious aspect.

I know I put it real simple, there are other things to consider, but I didnt wantto complicate the p[rocess.

Anyways, Good Luck with whatever venture it is that you choose. And do like most of the experinced memebrs of this site recommend, just pick 1 area, become the expert at it, and then you can brance out if you like.

By the way…what atate are you in? Maybe I can help you get in touch with the right county office to find out if they have tax deed sales, and when the next one is:)

3

Thank you so much for the reply! We have been looking to do almost exactly what you mentioned in your response. We live in Illinois so we have been looking at tax liens. Liens are great! Not much risk as long as you know your property. Great return in our state (18% max penalty)! However, if we do actually obtain the property it will take 2 years. That is why we are looking at creative ways to obtain property for 10-20% on the dollar.

I have purchased some couses about tax lien investing and they have been very informative. We are just trying to find ways to advance our cash flow. Just a little apprehensive of the low margins in our area.

4

We invest in a small town in IL too. We’re doing long term buy & hold. You’re right as far as the margins for rehabbing or flipping. You’re probably not going to find something you can buy for 15k and have it worth 100k after you do a little work to it. At least in this area you’ll be able to find people who can afford these houses. Neither area we invest in is a large metro area so don’t think you have to be in NYC to make things work. Welcome to the forum!

5

Hey thanks Justin! I really like the buy and hold strategy but I don’t know how I could make that work without cutting back my hours or hire someone to do the work for me (not sure how much this would cost me). How do you handle maintenance and tenant issues? Also, what part of IL are you from? I’m in deep Southern IL.

6

I’m from central IL a little south of Springfield. We have very very few tenant issues from our building there. Most of the problems we’ve had were related to plumbing so I have a trusted plumber there who handles that for me. I try to go back there about once a year and usually swing by there. My parents live in the area so my dad occasionally goes over there to check on things if there is ever any problem. Overall the building has been really great to us. Three of the tenants are long term tenants and we’ve been fortunate to put pretty good people in there too.

7

Well, maybe we’ll have to re-evaluate buy and hold. If there aren’t that many issues with the house or tenants, that would definitely be the way to go in our market. I’m confident I can pick up houses under 15K that are pretty much rent ready off the mls. I’m familiar with the 50% rule and it makes sense, but is there a dollar figure I should stay above? For example, if I were to pick up a house at 15k using 10 yr amortization with interest rate at 7% that would put my payment at about $175/mo. If gross rents are $450/mo (pretty reasonable for a house in the area I would be investing), 50% of that is $225. Subtract the $175 and it should cash flow at $50/mo. Pretty small number but I understand this calculation to be pretty conservative. Is this too small of cash flow to work? What type of cash flows do you typically like to see? Thanks again!

8

Lots of advantages investing in small town markets. Although I live in a major metropolitan area, I’ve been investing regularly and still do in rural areas. I’ve made more money in mobile homes in these areas than anything else combined. There are several strategies that I would recommend you consider:

  1. Small Mobile Home Park development. Sell the mobile homes with owner financing, then sell the notes to investors at a high yield, use proceeds to payoff the park ‘dirt’ and improvements. That will leave you with unencumbered income on the dirt.
  2. Buy mobile homes on rental pads, resell owner finance, sell notes for profit to investors at a high yield secured by title and insurance.
  3. Mobile home and land packages. Buying the components, putting them together, the product will be worth much more that the components. Resell with owner finance until you have completed 3 transactions that are recorded with private money. 4 th deal should be OK for FHA appraisals and financing as you have set the comps (like builders do).

Remember that there are $7 Trillion in IRAs and Pensions , all of which are earning low interest. 12% 1st mortgage money and 15-18% secured notes on mobile homes can be easily sold if you understand these deals and how to present them to investors.

Hope this helps.

Mr. Robb

9

Your numbers are very typical of most of our deals now. We’re getting most of our places for around 20-23k (after repairs). They are on 10 yr amort and we generally get around $500-550/mo in rent.
Most of the times things are analyzed on here for the 50% rule you see it listed for 7% interest over 30 yrs. If you look at your numbers like that, you would see your payments would only be $100/mo. So you’d have a lot more cash flow when equating it like that. You are using more real world numbers. Our bank doesn’t want to go out 30 yrs on our loans (and neither do we).
If you start acquiring several properties using the numbers you listed, you’ll find that you can have a couple vacancies and still make your payments just fine. Usually we only have vacancies due to not being able to keep our rehab rate up with our acquisition rate. Like right now we’re working on a house that will probably take about 4-6 weeks of work on weekends and some evenings here and there. We’re supposed to be closing on two more houses in two more weeks and there’s no way I’ll be done w/ the current one by then so something is just going to have to sit for a little while. One of the houses under contract is move in ready as-is so that will help.
In IL, you have the advantage of using the judici case search for free to screen applicants. It’s great because it doesn’t require special access and you can weed out the trash almost instantly.

10

Hi engineer,

You are getting a lot of good ideas from the other members, his is a great site isn’t it.

One thing, just double check the interest that tax certificates will pay in IL…As far as I know, the certificate will pay a maximum of either 24% or 36% on an annual basis…not 18% )although some counties can differ…you may no better than ke being that you live there)

I havew spent much time researchong all the states, and I have found that tax cert. in IL pay 2% every month on farmland, and 3% every month on all other lands…also be advised that IL counties will have scavenger sales in the odd years if enough properties are not redeemed in a county. This may be a great way for you to pick up some properties for wholesale price.

Everybody knows about high int on IL tax liens…but I think you will find minimal competition at the scavenegr sale…god luck

11

Hey thanks guys for all the great replies. This forum is fantastic! I still have a couple of questions in response to some of your comments.

Rob:
When you resell the note to an investor (especially retirement funds), do they want the note to be rated (ie - AA rated security, etc). I would think that with all the CDS and mortgage problems lately that it might be a tough sell to some of the investment managers since they are more cautious now than ever. Or are you selling to individual investors who manage their own IRA?

Justin:
Awesome! Thank you so so so much! We have actually used the case search a few times just for practice. Very helpful. If you’re ever back in So. IL sometime let me know.

TaxLien:
Your are correct. The annualized rate is 36%. IL calls it a penalty and 18% is the max penalty you can bid, but that is based on 6 mos. I had heard about the scavenger sales, but I really don’t know much about them yet (working on it though). I’ll have to check with the treasurers office to see if and when they hold those and how they are done.

Thanks again all for responding. You guys are fantastic! If anyone has any more suggestions/ideas please don’t hesitate to post. I have really enjoyed reading and learning from each of your posts!