S.E.C. Real Estate Observer

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“As I left the two-lane road;
And pulled back on that super highway;
I thought of what I’d seen back in that town;
And it hit me like a freight train;
That a stone’s throw from the fast lane;
America is still safe and sound.”

*The ending lyrics to the song “Americana” by Country artist Moe Bandy

With cap rates at ridiculously low numbers and competition coming from all corners of the globe, finding good deals with adequate returns in the major metro areas is becoming increasingly more difficult by the day. Even secondary markets are overloaded with investors seeking deals that for the most part do not make economic sense to the estate builder. Couple this with the fact that even if you can make a deal work from an economic perspective, jumping through the hoops in time to actually get the deal done leaves no time to enjoy what we do, and you have a recipe that makes investing in these markets less and less attractive by the minute. However there is a solution for those willing to step outside of these metro areas of comfort. Investing in small towns across America is something that can really bring substantial profits and be truly enjoyed by the investor/estate builder.

While investing in small towns is rewarding both financially and otherwise, here are several keys to investing successfully in these markets.

1. Have Local Support

The first and foremost key to successfully investing in small towns is having local support or help. You do not necessarily have to have a partner in that market, but a local support person who understands the town and has significant contacts there is a must. A local broker, contractor, attorney, etc who is willing to be a support to your project for whatever reason can not only save you money, time, and headaches, but can sometimes bring additional opportunities to the table that someone from outside that marketplace would not have been able to see or know about.

Ideally when we invest, we look for someone with “roots” in that community. These are generally the folks who know everyone, and have for their entire lives. Since we are in a relationship business, it is a definite plus to have someone making your case that the community knows and trusts, based on that person’s standing in the community. Additionally, someone who has always, and will always, live in a community is going to be that much more motivated to see your project succeed rather than being linked to its failure.

2. Meet and Use a Local Banker

When investing in small towns, one is well advised to not only meet the local banker, but to use their services as well. There are numerous ways that the local banker that can add value to the transaction. Their ability to creatively structure a transaction or to move quickly can be invaluable.

Quite frankly, the majority of small town bankers still believe in customer service, and are not bound by ridiculous rules and restrictions that the mega banks impose upon their employees. For example, when was the last time you received loan approval from a mega bank on the day when you applied? Or when have you received a release of lien on an owner financed note pledged as collateral from a mega bank before you paid off the note? Both of these have been done by small town bankers for either clients or me this year. The majority of these small town bankers believe in relationships and understand theirs is a relationship business as well.

3. Understand the Nuances of the Market

Small town markets generally have a couple of economic forces that drive the market. Some of these are obvious like Sonora, Texas population 2,930. The oil and gas prices have driven an explosion of drilling activity in this county and the entire operations center out of this town. This is quite obvious when driving through town or eating at a restaurant. This in turn has created a housing shortage which should last through the entire drilling cycle which for this market is predicted to be 5-7 years.

Others are not as obvious unless you study what is happening in the marketplace. For instance, consider Hereford, TX. Just driving through this sleepy little town west of Amarillo, one would not notice anything spectacular. However, if you talk to people who know the town, they will tell you that the growth here should be significant over the next several years due to two new ethanol plants soon to be constructed there. In Hereford there is also projected growth from cattle feed lots and dairy operations moving in because they are not faced with growing community resentment as they are in other locales in California, Wisconsin, etc.

Again, this is something that the local support person or banker should be able to help you with. This knowledge is critical in helping you to maximize your opportunity in small towns.

4. Risk versus Reward

One must always calculate the risk versus reward in every deal, but especially so in small towns. Because there is generally less competition in these markets, one should expect a higher return going in. However, this lack of competition sometimes also means a lack of buyers upon exit. While examining the financial aspects of the deal, this must be taken into account and the projected exit strategy must be realistic.

Another aspect to be considered in the analysis of these deals is the slower growth most small towns see. While some take off, most are pretty stable and sometimes stagnant or even shrinking. While that is a negative, it can also be a positive in that because of this factor, competition normally can not afford to add new product to the market and get the prices necessary to make it feasible.

5. Take a Break From the Fast Lane

The final key thing to understand about investing in small town America is to enjoy it. Enjoy the slower pace of life and the small town atmosphere.

For example, my Dad and I have a little game we play when we travel to these small towns. It seems every one of these little towns has at least one café where the locals gather to drink their coffee in the mornings. We try to go to these and pick out which of the locals compare to the folks at the coffee shop in our town. It’s amazing how each little group has people with the matching personalities from town to town. This is just one way we have of enjoying this type of investing.

The key is taking the time to enjoy a part of America that still exists, but is overlooked far too often.

There are definitely opportunities in small towns. Financial rewards can be great here, but so can the rewards of taking a break from the “fast lane.” Enjoy and good luck.