Fewer Competitors in Rural Real Estate
I know what you’re thinking: “Kenny, by definition there are fewer people in rural areas, of course there will be fewer competitors in rural real estate. Not very profound.”
Fine then, let’s go a bit deeper.
What skills are necessary to be a good real estate investor?
Stereotypes aside, a good investor needs to be reasonably proficient in law, accounting, problem solving, and negotiation. How prevalent are these skills when it comes rural areas?
As luck would have it, the The Federal Reserve Bank of New York did an in depth analysis on just this topic. I find it interesting, but I’m wired a bit differently. If you’re not so wired, the report also doubles as a great sleep aid.
Either way, here’s the highlight table:
This table shows the relative number of each job type in a given area; a lower number means proportionally fewer people working in a job type. The report further explains that the skills we listed most snugly fit with Engineers, Executives, and Scientists. Clearly, the more rural we go the fewer of these jobs we see.
Not only are there fewer people in rural areas, there are proportionally fewer people with the skills necessary to compete as a rural real estate investor.
Local Knowledge Has An Even Bigger Impact
I started buying rural real estate in Kirksville, Missouri (population ~17,000). A good friend, and someone who helped me a bunch, was one of the biggest contractors in town, one of the biggest farmers in town, and president of the Cattlemen’s Association. Once, he was helping me buy a farm from a friend of his and he walked me through how the process would work:
I’ll introduce you two and you’ll chat about the weather for a while. When you make an offer, he’ll find a corn stalk to roll around with his feet while he thinks. You’ll talk about the weather a bit more and we all go home. After a week we’ll meet up again and he’ll find another corn stalk to roll while he tells you his counter. You’re then expected to roll your own corn stalk for a while before giving him your counter. When you finally come to an arrangement you shake hands and you’re done. Contract optional.
He’s been known to refer to negotiating as “rolling corn stalks.”
Some things really stuck out to me. If you aren’t in the circle of friends, you’re not in the deal. If you can’t talk about the weather with a farmer, you’re not getting far in the deal. If you don’t have a solid reputation, you’re not getting that hand shake.
The markets we focus on are a bit larger, but a lot of the takeaways still apply. If you get to know the locals, are patient, and build a solid reputation, some amazing deals materialize. If you haven’t built a solid foundation, you’re not getting anywhere in rural real estate.
I’m not saying having a strong reputation and large network isn’t important in a city; however, urban investors are a lot more comfortable with anonymous transactions and relying on legal proceedings to ensure deals. This just isn’t done in smaller towns. In all my rural real estate purchases, I’ve never had to use a lawyer.
The dividends for integrating into a small town swamp that of a larger city.
Less Price Volatility
Remember that price chart in the rentals blog post? Clearly there’s price volatility in home prices.
If you’re a data nut like me and have ever looked at real estate, you will know there are two main sources for aggregated home price data: the Case-Schiller Index and the FHFA Index.
The problem is these indices are pretty much just reporting urban price changes.
Which makes sense. It’s hard to reflect rural real estate prices in aggregate numbers. If you average all home prices, urban homes are more expensive so they’ll outweigh rural homes. If you line up all home prices and pick the middle one (some folk like to call this a median) the sheer number of urban home sales outweigh the rural homes.
Also, let’s not forget most people who look at these indices are living and buying in urban areas (reference the first section of this blog), so they’re not super concerned if rural real estate isn’t well represented.
So how do we tease out good prices for rural real estate? There’s not exactly a good rural Home Price Index. (Or at least not one I could find, comment below if you find one!)
We do have state data though. Let’s compare states with significant urban areas to states without.
This means…it’s time for a fancy chart!
See those two lines that didn’t have a massive bubble? Those are Indiana and Missouri (states we’re invested in). Those states don’t look nearly as “bubbly”.
As a rental investor, you really want low price volatility because you have better downside protection, the speculators are kept at bay (even fewer competitors), and your returns are steadier.
I’d even argue that the recent drop in rural real estate prices has more to do with lending practices than anything else, but that’ll have to wait for a future blog post.
Wrap Up – Invest in Rural Real Estate
If you invest in rural real estate, you’re competing with a lot fewer people, and building a solid relationship with these people really pays off. Not to mention anything you do buy will maintain a pretty steady price, and in turn steady returns.
Can you make money investing in cities? Sure, but it’s a lot harder. Personally, I’m a big fan of easy.
If you have enough time and a foot in the door, investing in rural real estate is what it’s all about. Well, that and the hokey pokey.
If you don’t, find someone who does and use them to the fullest.
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