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Differences Between Investing in Larger Cities and Small Towns

Differences Between Investing in Larger Cities and Small Towns

When you’re trying to decide where to invest in real estate, one thing you have to determine is this: where do your best tenants want to live? Do most renters prefer living in a large, metropolitan area, or are they happier in small, residential towns? 

To successfully rent out property, you need a supply of tenants. 

But, there are other factors to consider, too. You don’t have to be a real estate expert to understand the importance of location when we’re talking about investment properties. Location is everything. You hear it all the time: location, location, location. The thing is, location can be extremely nuanced. Even within a large city or a small town, the neighborhood you choose, or the building you buy will only be as desirable as the opinion prospective tenants have of it.

Should you invest in a larger city or a smaller town? There’s no single answer. It depends. The answer depends on your investment goals, your financial situation, and your ideal tenants. 

Ask yourself some questions. For example, what do you prefer - a city or a town? This will make a difference because someone who lives in Los Angeles and invests in a tiny town will run into a number of challenges, as will a small-town resident who might try to invest in New York City. You start from where you are and what you already know. 

Think about where you would like to invest. There are differences in buying a property in a larger city versus a smaller town. The location you choose will depend on your own very personal experience and investment goals.

We lease and manage properties in and around Norfolk, Portsmouth, and Hampton Roads. We also help investors make good decisions when they’re beginning their journey toward buying real estate. We’ve worked in many different markets; large and small. We understand the way things change from city to town. We can help you understand how to approach the location you’re targeting. 

Here are some of the main differences to be aware of when you’re thinking about big-city investments vs. small-town acquisitions. 

Prices and Rental Values 

One of the first differences you’ll notice is price point. 

This is perhaps the most obvious distinction between buying - and renting - in a large city versus a small town. When you’re investing in a city, you’ll spend more buying a property than you would if you were buying a similar property in a small town. The demand is different, the values are different, and there’s really no way to measure one investment home against another when we’re talking about different geographies and locations. 

When you’re looking at home values and prices in cities, you’ll have to remember that there’s a larger population in cities. Most cities will also have a stronger economy in general, with more jobs, and a constantly-growing pool of qualified tenants. Some of America’s cities have economies that are larger than the economies of other countries. So, if you want to invest in a larger city, there are a number of benefits to buying and holding those investments. But, you’ll have to expect to spend more money than you would in a small town. 

While the price of entry into a metropolitan market is higher, so are the rents you’ll receive. You can expect higher rental values. Whether you’re renting out your city property for the first time or negotiating a renewal, it’s going to be a comfortable rental amount, even if we’re talking about a studio rental or a small home. 

The average rent in a city like Seattle or San Diego will be higher than the average rent in a smaller and more suburban town. This is necessary to offset the cost of purchasing the property, and it also reflects that more people are looking to live in cities. They want to rent homes in these locations, so they’re willing to pay more. 

The more remote you get, the less likely you are to find residents quickly. The market simply moves faster in cities, and it’s also moving at a different price point. 

Note that things are shifting ever so slightly and may continue to do so. Cities like San Francisco are seeing a drop in renters. That’s due, in part, to remote work being such a huge part of our new culture post-pandemic. With more people not returning to the office but holding onto their high-paying jobs, they’re looking for new places to live that aren’t necessarily in large cities. This may disrupt the traditional thinking around where you’ll find the most tenants and the highest rents. Pay attention to the impact this is having on your own local market. 

Cities have Options. Towns Have People.

Do you like a lot of options, or do you become overwhelmed when there’s too much for you to choose from? This will make a difference in where you’re more comfortable investing. 

A larger city will have every possibility. When you decide that you want to invest in real estate in a major city, you’ll find that you can have any type of property you want. There will be apartment buildings, condos and co-ops, units within those buildings, spaces that serve both commercial and residential purposes, single-family homes, townhouses, vacation properties - the list goes on. 

The inventory in cities is typically larger, and you can be intentional and strategic, right down to the city block that you know you want to target. You will find a diverse selection of neighborhoods within a single city. 

A smaller town will have fewer options and a more protective feel. Some towns are coastal. Others are in the mountains. Some towns will identify as rural or suburban. If they’re close to a city but still maintain their own character, the neighborhoods you find will be different than those you find inside of the city that you’re near. 

Most real estate investors agree that there’s a more personal connection in a small town, too. The experience is less mechanical and more customized to the people involved. There might be a stronger sense of community, and you could find it easier to work with agents, property managers, lenders, and other professionals. They’ll possibly be more interested in you and your unique goals and needs. 

Tenants will also be different. 

They face similar choices when deciding where they want to live. If a well-qualified tenant wants to live in a big city because it’s close to their work and all of the culture and entertainment they want, they know that they’ll spend more money. But they’ll also be seeking a different experience than those tenants who want to rent a home in a small town. 

Think about your ideal tenant in addition to your own ideal investment property. Who do you want to rent to? Are you looking for a tenant who only plans to be in place for a year or two because you want to make frequent improvements or you plan to sell after a few years? Or, are you in search of a tenant who wants to settle in, do some yard work, and renew the lease agreement year after year after year?

Real Estate Investors and the Bottom Line

Make MoneyMaybe you’re wondering where you’ll make the most money on your real estate investments - in a city or in a town. Actually, it’s very hard to say, with certainty, whether it’s more profitable to invest in one or the other. There are too many variables, and too much depends on which city or which town. It also depends on the property and the size of your portfolio. It depends on how you finance your purchases and what your vacancy and occupancy rates are. There is enough to drive your success outside of whether you’re investing in a city or a town that it’s difficult to say one makes more money than the other. 

You could do very well with a rental property in a large city. You’ll earn high rents, allow your tenants to pay down your debt, and watch your property value increase year after year. And, you could do just as well with a rental property in a small town. You won’t be too far in debt to begin with, you’ll have a reliable tenant in place and low turnover and maintenance costs, and the entire process will be relatively stress-free. 

There are opportunities and challenges that come with each geography. 

Your investment success depends on preparation, budgeting, and working with a team of local experts. We can help you decide where to buy and what to buy. We’d love to discuss where you are currently with your investments, where you’d like to be, and how you can best get there. We’ll talk about where you should invest and how you should do it. Please contact us at Doud Realty Services. We provide expert property management in Norfolk, Portsmouth, and Hampton Roads, as well as surrounding areas such as Virginia Beach, Suffolk, Chesapeake, and Newport News.