Can you make money investing in rural communities? Is it a good idea to purchase multi-family apartments in the heart of farmland? The answer is yes! This is an untapped market with little competition and armed with the right information you can wisely invest in rural commercial property with tremendous success. Discover how to navigate around the land mines and buy rural commercial property wisely:
The #1 Reason to Invest in Rural Commercial Real Estate: Lack of Competition
Commercial investors can create lots of opportunities in rural areas, like investing in apartment buildings, mobile home parks and storage units. The main reason rural commercial real estate investing is so attractive is lack of competition. Sellers aren’t getting bombarded by investors trying to buy their property which means you can easily create exceptional relationships. Since commercial real estate is a relationship-based business, this makes it a great opportunity. The deeper the relationship is, the better deal you can create because the seller is more open to creative financing. Nearly all our deals involving rural properties have some component of creative financing. This gives us a greater return, higher cash on cash and more cashflow.
Meet Ray the Farmer
I have a perfect example of how the lack of competition in rural areas allows you to develop good relationships and negotiate great deals. One of our student investors Ray is a farmer. He and his wife work a small farm, raising small animals and selling produce and eggs at the farmer’s market. After investing in residential real estate for a few years and realizing it was taking too long to achieve financial freedom, they took a look at commercial real estate. They decided that the goal of financial freedom was better achieved investing in commercial real estate. Not able to afford making mistakes at this time in their lives, they looked for a mentor with experience to help them avoid the pitfalls. They entered our Protégé Program and we helped them purchase a rural commercial property.
Commercial Real Estate is a Relationship Business
After following our instructions on how to locate properties, Ray and his wife received a response from a local owner. Ray called him up and they met over coffee. He started to build a relationship with the seller, finding out his motivations and what he wanted to get out of the deal. One of the things that Ray finds positive as an investor in rural areas is building relationships is easy. People are more open, personable, and easy to relate to.
Ray's Rural Commercial Deal:
Ray purchased a 12-unit multi-family apartment complex with an eight-unit apartment building and two duplex buildings, situated in a town of twenty-five thousand. It’s a little property tucked away in a nice established residential area; a little bit secluded but still close to everything. The asking price was $600,000. After looking at the numbers and consulting with Peter, Ray made him an offer for $500,000 which the seller accepted.
After looking at the property closer, Ray discovered that four upper level balconies needed replacing and the roof needed some work. So, he went back to the seller to find out how they could work it out. The seller wasn’t willing to reduce the price further, which forced Ray to come up with a creative solution.
Because Ray had established a relationship with the seller, he knew that the owner was a contractor and had built the properties. Ray knew he had a lot of pride in them so he asked him if he would be willing to be the contractor after they close the deal. The seller agreed and was able to give discounted rates on materials and provide his labor and his crew at a reduced price. Moving forward, Ray sees it continuing to be a good relationship that can be beneficial for them both.
For financing they approached their local lender who had financed their residential properties. The lender was willing to work with them, but Ray didn't have a lot of money to put as a down payment. After some negotiations, the lender agreed to credit the equity in the residential properties. He put down a small percentage of cash, and the remainder was secured as collateral by his property. However, they still needed to come up with more money, so they approached the seller and asked if he would be willing to carry a second mortgage for a time. He agreed.
For creative financing like this, you need deals that have a great story. Lenders love great stories, and it's easier to develop great stories when you have a lack of competition and have great relationships with the seller.
4 Elements of a Rural Commercial Deal
Ray did have concerns about investing in a rural commercial property and wanted to avoid the pitfalls. Here’s what we made sure he had in his deal to mitigate those concerns:
- Solid Property Management: Finding a property manager in a small town was a challenge, but Ray found a great one who has a wealth of market knowledge which they were having trouble accessing on their own.
- Strong Radial Population: They are in a small town supported by bigger cities which is perfect for rural investing. There is a city of 100,000 about a half hour away and another city of 120,000 45 minutes away.
- Strong Job Growth: There are several new employers moving into town and the employment stats in the area have been positive.
- Understand the Demographics: Ray knows who the potential renters are and where they work. Some renters will be commuting to the larger centers, while others are employed on farms or run small businesses in town.
Ray’s 4 Tips for Beginner Commercial Investors
Get a Mentor:
“I think the most important thing is to have a good mentor and be able to access that mentor and lean on their knowledge and experience."
“You need to be flexing as the deal grows… because it's not the way it looks when you first get an owner on the line. It will evolve. You need to be able to evolve your thought process with how the deal is flowing and as you learn the seller's viewpoint. Never give up. There's always a way to make it work.”
“One of Peter’s favorite sayings is this business is it's all about relationships. It's a people business. We have met a lot of people and we are building those relationships and people are welcoming us into the fold of commercial real estate."
“There will be times of discouragement. There's going to be times when your so close and the deal looks like it might just blow up. You need to keep going, adjusting and follow through. Investing in commercial real estate has been a positive experience for us, trying at moments, but very positive for us. So, keep on keeping on, make those contacts, pick up the phone and call somebody when you need to, and don't ever feel like you're alone.”
Plans for the Future:
Ray would like to grow their portfolio with more commercial properties. Having worked to get his first deal going and done, he is anxious to do more. He uses the analogy of pushing a snowball uphill, and finally it goes over the top and now things start rolling on their own. They have had several calls from owners they had written off, who are now interested in selling. Brokers are also calling and emailing about properties. Ray is now going back and reconnecting with people, building relationships and reiterating his interest in their property.
The #1 Pitfall of Rural Commercial Real Estate Investing: Lack of Data
There's lack of data in rural areas for two reasons. First because a lot of the data miners don't have a lot of information on rural communities. Another factor is because there are a lot of closed transactions. To make a wise and informed decision on which rural property to buy you need to know:
- Jobs Data
- Population Trends
We use the following websites as tools when we're determining what areas to invest in:
3 Things to Know in Your Submarket
Rural property is a submarket, as is a downtown or the suburbs. In Ray’s case, it's a farming community. To be successful you must know your submarket well and know the demographics of your submarket. Here are the key 3 key things you must know:
- Comparable Sales:
You need to know what things are selling for in and around the area. In Ray’s case we couldn't find immediate comparable sales in the area. That meant we had to go a little further outside the area to get sales data to make sure we were buying at the right level.
- Comparable Rents:
You need to know what the one bedrooms and in Ray's case the two bedrooms are renting for so you know where you stand in the marketplace. It also helps you guide when renovating, because you know how high you can raise the rents.
- Submarket Cap Rate:
You need to understand the submarket cap rate so you can place a proper value on the property. Knowing the submarket cap rate and comparable sales enables you know if you're overpaying or if you're getting a good deal.
Key to Success: Build a Team!
Ray and his wife make a great team. However, to be successful they needed to build a team. They have us mentoring them with each step and they have an awesome property manager and maintenance crew.