Many people are interested in real estate investing, but face financial challenges breaking into it. One solution is investigating opportunities in smaller municipalities.
Smaller markets provide unique opportunities to start building a portfolio. With lower barriers to entry, strong demand in niche areas, and the potential for future appreciation, smaller markets can be excellent entry points. However, to navigate these markets successfully, it is essential to conduct thorough research and develop strategies tailored to their unique dynamics.
Affordable Entry Points
Smaller Canadian markets often feature significantly lower property prices than metropolitan areas, making them ideal for entry-level investors. These markets typically have median home prices well below those found in cities such as Toronto or Vancouver. For example, Manitoba and Saskatchewan have offered affordable housing with higher rental yields.
Lower prices mean you can start with smaller down payments and reduced mortgage obligations. Investors can consider different housing types to further fit their budget and strategy.
Single-family homes can be more affordable in these smaller markets, and appeal to a wide range of renters. Condos or townhouses provide low upfront costs and simplified property management with properties conveniently in close proximity.
Smaller markets often have lower property taxes and operating expenses, which further improves the return on investment for multi-unit properties.
Population Growth and Economic Trends
Some smaller Canadian markets are experiencing a growth trajectory due to affordability and migration trends, especially ones that are within commuting distance of a larger municipality. These shifts can also be accompanied by economic growth in specific industries such as technology, manufacturing, or healthcare.
As an investor, targeting properties in areas with strong job growth and planned infrastructure investments is key. Real estate near new commercial hubs, universities, or transportation projects tends to appreciate faster. Emerging neighbourhoods often provide affordable properties and significant future potential.
Carefully assessing local demographics and employment sectors ensures that the area’s economic health and demand for housing are suitable.
BRRRR Strategy
A popular strategy for new investors is the BRRRR (Buy, Rehab, Rent, Refinance, Repeat) method, which can be highly effective in smaller markets. The approach involves purchasing undervalued properties, renovating them to add value, and then renting them out to generate cash flow. By refinancing the improved property, you can recover your initial investment and use the capital to expand your portfolio.
Smaller markets can be a good source of undervalued or distressed properties. However, be sure to conduct thorough due diligence on renovation costs and timelines, to ensure your investment does not end up outside of your budget.
In addition to finding properties that are cost-effective to upgrade, focus on areas with low vacancy rates to ensure stable rental income post-renovation. By finding easily improved properties in high-demand areas, investors can build equity and establish a cash flow quickly.
The next stage of this strategy is to aggressively pay down the loan as soon as possible, then use the equity in it to finance another investment property.
Invest in Multi-Unit Properties for Steady Income
For those ready to scale their efforts, multi-unit properties can be a strong choice in smaller markets. Duplexes, triplexes, and small apartment buildings often come with lower price tags compared to similar properties in urban areas, making them more accessible to new investors.
Multi-unit investments provide a diversified income stream to reduce overall risk if one unit remains vacant, as well as better cash flow potential compared to single-family homes. Furthermore, shared maintenance costs improve profitability.
Mitigate Risks
Understanding the local nuances is essential for success. Partnering with professionals such as real estate professionals, property managers, and contractors who are familiar with the region can provide insights into market trends, desirable neighbourhoods, and competitive pricing.
Smaller markets have distinct risks, including limited tenant pools and slower property appreciation. To mitigate this, conduct comprehensive market comparisons. Look at vacancy rates, average rents, and historical appreciation rates to ensure a market meets your goals. Avoid concentrating investments in one area to reduce the impact of market-specific fluctuations. Also, smaller markets may have unique bylaws regarding rentals or land use, so understanding these is essential for compliance.
Market Momentum
Emerging markets often attract new businesses, developments, and government investments that can significantly impact housing demand. Keeping an eye on announcements related to industries relocating to smaller cities or infrastructure improvements can help investors stay ahead of the curve.
Many regions across Canada are still considered undervalued and may offer opportunities for greater appreciation over the long term. Investing in these smaller markets provides the added benefit of getting into these markets before prices climb closer to those in larger centers.