Mini markets, mega returns

by Greg Eaton

Most real estate investing happens in the cities. But that doesn’t mean that the large centres offer higher or safer returns. In fact, the opposite can often be the case. 

Most people invest within an hour’s drive of their home for ease of management and familiarity, and I understand that logic. But a lot of the time, that kind of ideal situation just doesn’t make financial sense. If you’re priced out of your local market, is investing in real estate near your home really what’s best for you? Maybe it’s time to diversify your real estate portfolio by adding some high-cash-flow properties in smaller markets. 

Buying in larger cities with high appreciation is great – when they’re appreciating. But it also leaves you vulnerable to interest rate hikes, economic downturns and unforeseen expenses.  Buying high-cash-flowing properties in small markets provides more reliable income, makes it easier to qualify for your next mortgage and will allow you to better design your own lifestyle or retirement. 

Here are the main advantages of investing in small cities and towns over Canada’s large population centres. 

1. Cash flow 

Depending on your risk tolerance and where you’re looking to invest, it’s not hard to find small cities and towns with 8% cap rates sitting around on the MLS. While these towns might not have the same appreciation levels as the major cities, they will put a nice pay heque in your account every single month. You don’t have to worry about where the real estate market is going next when you’re in the long-term buy-and-hold game: The cheques just keep rolling in. Want to retire with an evergreen income? Then you should look into acquiring cash-flowing properties. 

2. Limited competition 

One of the best things about investing in small communities is that there aren’t many people doing it, which means there are good deals available, and opportunities and market gaps are everywhere, especially when you start looking at deals over $500,000. But be careful: Maybe there’s a reason why that particular building isn’t valuable. Local knowledge is indispensable. 

3. Lower cost of entry 

Properties are almost always cheaper in smaller centres. Why? It’s mostly to do with land values. The construction cost of a three-bedroom house in Burnaby or Toronto isn’t that different than in Cranbrook, BC, or Mont-Tremblant, Quebec. The land values make up most of the difference, and land values are typically much higher in cities. Three-bedroom houses in nice areas can be found for well under $300,000 across Canada. Multi-family buildings can regularly be purchased for $100,000 per door and rented out for close to $1,000 per unit in towns and small cities across Canada. 

Finding the right community 

Based on my experience, I encourage investors to stay away from anywhere with a population less than 5,000. Towns of that size are less likely to have a diverse economy or growing populations. You will have more trouble obtaining financing, and in most cases, everyone in towns of this size knows everyone else, so it’s tough as an outsider to come in and try to run a business. The sweet spot that I’ve found is between 10,000 and 50,000 people. 

When evaluating a town or small city, there are certain aspects that you’ll have to understand in order to choose the right property. Who lives in this town? Where do they work? How do they choose to live? You should understand all of this on both micro and macro scales. 

If you’re completely unversed in small-town life (and landlord-ship), you’ll have to remedy that.  If you have any friends or family living in small towns, call them and pick their brains; maybe they can be your boots on the ground. 

A great starting point to finding an ideal place to invest is to start Googling. Search terms like ‘fastest-growing towns in Ontario,’ ‘best towns to live in Manitoba, ‘best retirement towns in BC’ or ‘towns set to boom.’ You can also gather information from municipal websites, Statistics Canada (statcan.gc.ca), CMHC (cmhc-schl.gc.ca) or the Top 100 Projects report (top100projects.ca). 

There are so many important questions to answer, but the problem is that there is often little to no information out there when it comes to relevant statistics for towns. That’s why you must dig deep, talk to professionals in that area and maybe even make a few assumptions. If it were easy, everyone would be doing it. The dealbreakers for me are one-industry towns, declining populations or high vacancy rates. I won’t touch deals in towns with distressing fundamentals, no matter the price point. 

The ideal real estate portfolio would have a foundation based on cash-flowing properties in diversified and stable economies that will spit out cash no matter where the economy is in in its cycle. Once you’ve established that, you can safely play around with low-cash-flow, high-appreciation deals on good dirt in the cities.

 

Greg Eaton has been an active real estate investor since 2004. He specializes in finding and creating high-cash-flow buy-and-hold deals for himself and his investor colleagues in small markets.  Visit gregeatonrealestate.com for more information.

 

 

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