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Are small cities of 30-40k of population safe to invest in?

Villamaria

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I've always wondered if smaller cities can sustain growth and become a good spot to invest in. Any ideas?
 

Tina Myrvang

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Does the small city have good GDP or have a potential for that?

REIN examines the following criteria:
  • GDP
  • Job creation
  • Population growth
  • Access to post-secondary education
  • Accessibility: the movement of goods and people to attract jobs and residents
    • Airports
    • Ports
    • Highways
    • Bridges
  • Infrastructure that supports the community:
    • Hospitals and emergency services
    • Water and sewers
    • Schools

Methodology
To come up with our ranking we assign grades to each city in one of four categories: value, momentum, rental income potential and the local economy. Each category consists of several different variables.

Value

To measure value we turn to the Canada Housing & Mortgage Corp. (CMHC), which supplies us with data on the average rental price and the average home price for each of the 35 cities we studied. We use these figures to calculate the rent-to-house price ratio, which divides the average rent by the average home price. This ratio shows us whether rental rates are keeping up with home prices. The higher the rent-to-house price ratio, the less likely it is you are buying into a bubble. Weighting: 10%
Next we calculate how long it would take the average household to buy an average home in each city. For the time to buy calculation we rely on data from Environics Analytics and the CMHC. This calculation simply takes the average home price and divides it by the average household income. While no household can put their full income against their mortgage, this calculation provides us with an effective way to determine how affordable a market is. Weighting: 10%

Momentum
The momentum category is composed of four separate variables: home sales to new listings as well as the price appreciation of an average home over the past one, five and 10 year periods.
The home sales-to-new listings ratio effectively tells us whether demand is keeping up with supply. A high figure denotes a sellers’ market due to limited supply and/or high demand whereas a low sales-to-new listing ratio denotes oversupply and/or low demand signaling a buyers’ market. Weighting: 15%
Momentum is broadly understood to mean something that picking up speed over time. In housing terms, we want to see communities where the housing price appreciation is accelerating. To track this we measure the one-, five- and 10-year price change in housing prices, giving more weight to the more recent price gains than the longer-term price change.
Weighting: 1-year price appreciation: 10%, 5-year price appreciation: 10%, 10-year price appreciation: 5%

Rental income potential

We recognize not everyone is looking to this report to by their next home; some might use these figures to help decide where to buy an income property. Then there are still others who are looking to rent out a portion of their homes to subsidize their mortgage in an expensive city. Understanding the health of the rental market is key in that regard. To measure this aspect of the market we collect CMHC’s figures on the five-year change in rent prices and the current rental vacancy rates for each city. For this category we’re looking for cities with a high rent increases and low vacancy rates. Rising rental rates signal a market where demand is strong enough to absorb the increased prices, while low vacancy rates suggest there is enough pent up demand, which should make it easy to attract renters.
Weightings: Rent increase over five-years 5%, rental vacancy: 5%

Local economy

Buying into a city with a flagging economy is akin to buying a boat with a small hole in its hull: Eventually your investment is going to sink. Buying into a market with a healthy economy is essential, which is why a third of our score is devoted to the health of the local economy. We track a number of different statistics to complete this portion of our ranking: average GDP growth 2010 to 2014, projected GDP growth and unemployment data for each of the past two years and discretionary income.
Gross Domestic Product is a broad measure of economy activity in a given region. Using data from Statistics Canada we examine the average GDP growth between 2010 and 2014 for each province. Higher GDP growth signals a strong, robust economy. All cities within a province receive the same GDP score. The CMHC also offers a projected GDP growth for each of the top 35 cities in Canada, but since no prediction is 100% reliable we give this variable a slightly lower weighting. Weightings: GDP growth (2010 to 2014) 5%, projected GDP growth 2.5%
The unemployment rate is perhaps the easiest economic indicator to understand. It’s hard to imagine a community with a robust housing market if people can’t find work. As a result we give extra credence to the current unemployment rate, as reported by CMHC, in each of the 35 cities we track in our report. We also look at where unemployment was 12-months earlier to spot any change in the employment opportunities within a city. Weighting: current unemployment 15%; previous year’s unemployment 2.5%
Lastly, we factor in the discretionary income levels within each city. Discretionary income is simply the amount of a household’s income that’s leftover for saving or spending after taxes and things like housing have been paid for. The higher this figure, the more of a cushion exists to absorb higher home prices. Weighting: 5%

Canada’s top neighbourhoods
A recent report on the Canadian housing market noted that the average detached home in Toronto now tops $1 million. It’s a daunting figure, especially for those dreaming of owning a home in the city one day. But that’s not to say all homes go for that much. That figure hides the fact that there are plenty of properties on the market selling for far less. Even if you are shopping for a home in one of those million dollar areas MoneySense recognizes that there are deals to be had. But buying a home simply because it’s cheap isn’t always a smart investment either. With those challenges in mind MoneySense set out to develop a system to measure where the best deals in real estate are at the neighbourhood level.

Value – 30% of overall score

One effective way to ensure you don’t lose money on an investment is to not overpay for it in the first place. It sounds easier said than done, but truth be told you can find pockets of value—in desirable neighbourhoods—in every city. To identify value we compare the average home price at the neighbourhood level to the average price of the surrounding area, the metro area and the greater city area.
The average neighbourhood price compares to the average home price for the surrounding area, or the average price of the neighbourhoods immediately around it, is a key measure in this regard. Neighbourhoods selling at a discount to other nearby neighbourhoods get the top marks. Weighting: 70% of value score
While comparing one neighbourhood to the ones around it is important, it doesn’t really tell you whether it’s well priced relative to the city. For that we compare the average neighbourhood price to the metro area it’s situated in (egg. Toronto, the Island of Montreal, Burnaby, B.C., etc.) Weighting: 20% of value score
Finally, we also look at how the average price of each neighbourhood compares to the broader city area (the Greater Toronto Area, the Greater Vancouver Area, etc.) to identify the neighbourhoods offering the best value. The neighbourhoods with the lowest price earn the top marks. Weighting: 10% of value score
Note: Neighbourhood level data for Edmonton and Regina, SK was unavailable. As a result for these cities we were only able to compare areas versus the metro district and versus the greater city area.

Momentum – 30% of overall score
Finding a cheap home is one thing, finding one that has the potential to appreciate over time is another. We want to see neighbourhoods that are already showing some signs of price increases, since like the momentum strategy in stocks, we believe that the price is more likely to continue to move in the same direction (e.g. up) than it is to change directions. To track this measure we examine how much each neighbourhood has appreciated over the past one and five-year years. The higher the change, the better the grade. Weighting: 1-year 50% of momentum score, 5-years 50% of momentum score

Realtor grades – 40% of final score
When looking for the best deals in real estate the numbers don’t always tell the full story. Just because an area is cheap doesn’t make it a good value. Similarly, just because an area is enjoying price increases doesn’t mean it’s going to be the best property for you and your family. There are many intangibles to consider, such as access to parks, good schools and safety that simply can’t be quantified. For that reason we asked hundreds of realtors from across the country complete an online survey to grade each neighbourhood within the areas they work in.
The survey submitted to realtors was based on the neighbourhoods with the highest combined value and momentum scores. Realtors graded each neighbourhood on a score of 1 to 10. To avoid erroneous responses, realtors were asked to only to grade neighbourhoods they are familiar with. Each neighbourhood had to be graded by a minimum of five spate realtors to be counted in the final ranking.
 

Villamaria

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Thanks Tina for the answers. So basically to answer my question, I need to look at:
  • GDP
  • Job creation
  • Population growth
  • Access to post-secondary education
  • Accessibility: the movement of goods and people to attract jobs and residents
    • Airports
    • Ports
    • Highways
    • Bridges
  • Infrastructure that supports the community:
    • Hospitals and emergency services
    • Water and sewers
    • Schools
However i don't understand how this is related to the Methodology part of the answer. I add the methodology criteria to the ones above?

Thanks for doing this :)
Carl
 

Villamaria

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Also, i'm an investor in multi family homes. Do these criteria apply to me or are they for people looking to buy a house only?
 

Cory Sperle

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Adjust your risk accordingly. Smaller centers will always demand a higher CAP rate to compensate your risk of a downturn. Look no further than centers like Grand Prairie, or Fort McMurray for example. If your buying at a 5.5 CAP in Edmonton expect a 6.25 in Red Deer, maybe 7 in GP, etc. Also expect to hold longer as selling can take a long time as well, but cash flows can be better.
 

Thomas Beyer

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Adjust your risk accordingly. Smaller centers will always demand a higher CAP rate to compensate your risk of a downturn. Look no further than centers like Grand Prairie, or Fort McMurray for example. If your buying at a 5.5 CAP in Edmonton expect a 6.25 in Red Deer, maybe 7 in GP, etc. Also expect to hold longer as selling can take a long time as well, but cash flows can be better.

If long term hold is the plan and selling liquidity less relevant then certainly consider smaller towns.

Keep in mind though that fixing a roof, a leaky bathtub or hallway carpets will be as expensive as in big cities but rents do not correspondingly go up as much.

However you can do very well if town is not too volatile as lower purchase price can produce far better cash flow.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
 

Cory Sperle

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As noted it is also MUCH more difficult to find decent and/or reliable trades or property management and costs can often exceed what you can get in a larger center. You can do extremely well if you time correctly, I just saw a premium building in Fort McMurray sell for 70K a door, 5 years ago that project would have been 200+, but you can also lose your shirt too! The minimum threshold I am willing to consider is 100,000+ population centers.
 

Villamaria

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Adjust your risk accordingly. Smaller centers will always demand a higher CAP rate to compensate your risk of a downturn. Look no further than centers like Grand Prairie, or Fort McMurray for example. If your buying at a 5.5 CAP in Edmonton expect a 6.25 in Red Deer, maybe 7 in GP, etc. Also expect to hold longer as selling can take a long time as well, but cash flows can be better.
Thanks for your answers Cory
 

Villamaria

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Registered
Joined
Dec 29, 2018
Messages
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If long term hold is the plan and selling liquidity less relevant then certainly consider smaller towns.

Keep in mind though that fixing a roof, a leaky bathtub or hallway carpets will be as expensive as in big cities but rents do not correspondingly go up as much.

However you can do very well if town is not too volatile as lower purchase price can produce far better cash flow.


Thomas Beyer, Asset Manager, Investor, Community Improver, Author, Father, Mentor www.prestprop.com
Thanks for your help Thomas
 
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