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In this episode, Tom and Emil battle it out in the hotly debated question of whether to invest in a big city or in a small town.  --- Transcript   Michael: Hey everybody. Welcome to another episode of The Remote Real Estate Investor. I'm Michael Albaum and today I'm joined by my co hosts,   Tom: Tom Schneider   Emil: and Emil Shour   Michael: And today we're gonna be having another showdown episode, we're gonna be doing big city versus small town, which do we like better for our remote real estate investing. So let's get into it. Real quick before we get into it, I ate pizza for dinner last night, and it was really hot when I came out of the oven, and I just burned the roof of my mouth. Is that ever happened to you guys where it's just like so raw?   Tom: Definitely. I'm very risk averse. When it comes to heating food. I just played safe my microwave. I programmed it to not go for over 30 seconds and if it's something that takes five minutes, I just stand by plugging in 30 seconds and then it's just safer that way. Mouth pain is terrible, like teeth. tooth pain, anyways, yes, that sucks when you burn your mouth.   Michael: I'm just an adult baby like, you don't break your mouth.   So for those of you who don't know, or who have never listened to a showdown episode, what we're gonna do is we're gonna debate big city versus small town. And then we're going to swap sides. And so the person who took small town is going to have big city and vice versa. So we get to hear the CO hosts pro and con argument for both big city and small town so we get the full viewpoint and vantage point for how they think about these things. And I can see them both frivolously I don't know if that's the right word writing down notes. copiously taking notes.   Tom; I'm not doing it for those frivolously.   Michael: Frivolously!   Alright, so Emil, are you taking big city or small town first?   Emil: I am going to take big city. And when we talk about big city here, before we get into it, let's define that for audience. What are we defining as a big city? Are we talking a Los Angeles and New York, a Chicago? Are we talking secondary cities, tertiary cities?   Michael: I'd say secondary and tertiary cities.   Tom: I'd say big cities, let's say the 10 biggest cities in the United States. So like, I'd say, Atlanta, Orlando, Houston, Dallas, New York, LA, those ones, what do you guys think? I mean, I'm just kind of shooting from the cuff here work. But the little cities got to be little, little cities. You know, I think the middle middle ground is off the table.   Michael: I don't want to have ever heard of the cities that you're talking about.   Tom: Indianapolis, you're not in this debate.   Emil: So we're not going to go into like which city in particular, but just in general, in general, like big population cities. So the top 10 are New York, Los Angeles, Chicago, Houston, Phoenix, Philadelphia, San Antonio, San Diego. That's interesting, Dallas and San Jose. So that's the top 10 markets. And then we'll cover the other end of the spectrum where you're just talking about like, you know, a small town in Michigan or something, for example, right?   Michael: Yeah, yeah, perfect.   Emil: So I'll take a large city to start perfect, Tom, you're on small town.   Tom: Beautiful.   Michael: And Emil I want to give you the floor first. So tell us why you are such a big fan of big cities.   Emil: I'm not a big fan of big cities, but I'm gonna pretend to be for this show.   Michael: So for the debate for the debate.   Emil: To me, there's three that really stand out. So those three are population, rent growth and appreciation potential. So in bigger cities, you have a lot of people, meaning you have a lot of tenants, which is good. As a residential real estate investor, I want to know my tenant pool is large, that's a good thing. For me, that means I have a lot of tenants. Good to know. The second one I mentioned is rent growth. So typically, in larger cities, you know, Los Angeles in New York, some of those top 10, we mentioned, you're just going to see much higher rents than you would in a small town.   And I don't know if we've covered it on the podcast before, but the lower your rent is on a monthly basis, the way I like to look at it is you have a smaller margin of error. So sometimes you will see like a 50 or $60,000, home that rents for five 600 bucks. And they're like, Oh my god, the cash flow. And the numbers look amazing. But what they don't realize is one big expense can really wipe you out in terms of cash flow for the year, because a roof costs what a roof costs, have it fixed. And so when your rent is low, yes, it could look good. If everything goes right all year, your yield will look great. But in reality, you'll have those big costs come up and they'll crush your cash flow.   So in larger markets, your rent is higher and your rent growth is typically higher as well, because populations big It's a place where there's a lot of demand, a lot of people live there. So rent growth, you typically can see go higher.   And the third one is appreciation potential. So those larger cities, that's a lot of times when there's a bull market, that's where you're seeing a lot of the appreciation happening like meaningful appreciation, right? You buy a property that's worth $500,000 in it goes up 10% now you just made 50 k in equity, let's just say same 10% on a $75,000 home, you only went up seven grand right?   So just your equity, growth potential through appreciation is just going to be much lower. So to me, those are the three things that really attract investors to big cities.   Michael: Does any of that thought process thesis change? Because of COVID?   Emil: I don't know. I mean, yes, it does, like I live in Los Angeles. And I know that rents have actually declined, especially in multifamily, because a lot of people have either left the city to go to the suburbs or moving out of state or whatever it is. So I know rent growth and multifamily has gone down population. I mean, that's what's affecting it right. There's just less demand for housing gear. So that's driving rent wrote down, but on the flip side, right now, appreciation is skyrocketing in California, because rates are so low. And this isn't for multifamily, right multifamily is based on how the acid is performing. So if you have lower rents, the cap rate is going to be higher, which means you're gonna have a lower price when you want to sell it. But coupled with that low interest rates, so it hasn't really affect like even multifamily values have gone up as well, it's kind of been negated by low interest rates.   So on one end, it's hurt cash flow. But on the other end, you know, I've heard that a lot of La multifamily like their net worth is skyrocketed because of all this appreciation.   Michael: Good to know Tom, your rebuttal?   Tom: Three letters, two words, baby ROI, cash flow, when you go to that small town to buy, well, first of all, small town, just a great way to live, you know, slower paced living. But let's get back to the discussion, I digress. So your returns traditionally are going to be significantly higher on a cash flow basis. In this smaller towns, if you look at just the ratio of the rent to the price of the home, it's going to be higher, there's going to be higher returns.   Now true. There's some downside of typically, there are smaller economies. But if you're looking to get in and looking at these returns as a gross yield, as cap rate, smaller towns are gonna find higher returns. And the reason for that, I think a big reason for that is there's just less competition when you go into these big cities like the Phoenix is and the Dallas's there are these huge institutions that have these fancy calculators that are buying houses all the time, when you go to these small towns, there's not that competition. So you as an investor, being a hard working smart person that you are, you can go evaluate houses and not have old Wall Street breathing down your neck, make it offers right over your back. So in less competition, higher return. And the reason why I think this trend is only going to continue to be a better opportunity to invest in these smaller cities is this concept that we learned of working remotely?   Now, I think this was a terribly unfortunate pandemic, obviously, you know, what is it over 400,000 people passed away in working remotely that has this has caused, I think it has shed light on the ability of the workforce to manage working remotely. And in turn, what I think this is going to lead to is more people more permanently working remotely.   And what that means is, if I'm living here in the San Francisco Bay Area paying XYZ for rent or on a mortgage, why wouldn't I want to go move to a small town have that same whatever Silicon Valley job, but have the cost structure of living in this small town. So I think the demand within these smaller towns has a lot of opportunity with this growing remote workforce. So by buying in these smaller towns now, man, you're taking advantage of these lower prices that you have in these smaller towns with the potential influx of people moving in. So again, three letters, two words, ROI, cash flow, living remote.   Michael: So to sum that up, is that like being a small fish in a big pond going now to a big fish in a little pond?   Tom: Yatse yatse. I love the lake analogy. I love the lake analogy. That's right,   Michael: Perfect.   Tom: So yeah, generally speaking in these smaller towns, you're gonna find better returns, you're gonna find ratio of the rents to be pretty darn good relative to the price of the house compared to these big city slicker return numbers and the price versus the rent. So and I think a big reason for that is less competition,   Michael: So I asked Emil a challenging question with regard to COVID and big cities. Tom, you're in the hot seat, bring it with these remote workers leaving big cities.   Tom: It's a big city word you just used surmised.   Michael: One because their job was there require them to be there physically, but also because the amenities that big cities offer? Do you really think that the demand is going to continue for the folks that lived in the big city and like the big city amenities are truly going to move to the small towns?   Tom: You know, I think what really drives demand Michael is happiness. And I think the what makes people happy, I think is evolving. I don't think what makes me happy today, who knows what's gonna make me happy and five years from now, and just my personal experience in living through this,   Michael: don't tell your kid that   Tom: No, no, hold on, hold on. In my personal experience of this year of working from home, it should makes me happy to like take little breaks to go pick up little Charlie, give me a hug. And here I'm trying to talk a little bit mainly jibberish not there yet still working on it. And that's really happy You know, so if I can have a better working remotely, sure I don't have that cool wine bar or whatever they do in the big city. But I can have my you know, little restaurant that I go to. And I like that it's good. I know people have been to who are live in small towns or they're awesome. I'm super pro small town. I actually have a good friend who lived over in this area, who was area called Diablo had this big awesome house and he decided, yeah, I'm gonna move I don't need to live here. And he just up and uprooted and moved to a smaller town and it's happening be before our before eyes. ROI, cash-flow.   Michael: Okay, ROI. Cash Flow. All right.   Tom: And Happiness, that's the third argument. Happiness.   Michael: Happiness. Yeah. Cool. All right, Emil, what do you have to say to Tommy Boy over here,   Emil: You stole my thunder with the will that demand go down post COVID. And I think that's a big one. I mean, I think a lot of people can be misled to believe like, Oh, this place now we're just gonna have so much demand. And it's gonna have demand for years to come because people are moving. Now, I personally believe that people don't change that much. I think when we're in our post COVID world, things are gonna go back to normal more than people think they will. And so I see a lot of people returning back to cities, like there's a reason people have lived in cities and enjoy cities for a very, very long time.   That being said, I see more companies doing hybrid, right, you're in the office a couple times a week, meaning you're not gonna want to live an hour, hour and a half away from where your work still, even if you're only commuting couple times a week, I think demand will go down. So it's easy to be like, Oh, this new place is super hot right now. And it's just a small window of population change. And the other one ROI, again, it's super easy to fool yourself into returns in Excel, right? Doing a little percentage based on rent. When in reality again, when rent is low, the cost to repair a toilet the cost to repair a roof, same amount, whether you're investing in somewhere like Los Angeles or rural Missouri, maybe the labor is cheaper, but the parts are the same.   Michael: I think for me, it always comes back to kind of the chicken or the egg argument. I have the answer to that question. The chicken came first.   Emil: Yeah, you're you're done. Okay.   Tom: I mean, just think about it. The chicken came first.   Michael: It's a no brainer.   Tom: I was thinking about this the other day at dinner is definitely the chicken so     Michael: It's only the chicken that's on my plate right now. You know, are the cities cool because of the people and the amenities that are there? Or is it the jobs that bring the people that then bring the amenities?   Emil: I think it's both.   Michael: No it's an either or .   Emil: No, I will not play your black and white game theory here.   Michael: Option C.   Emil: No, I play by my own rules. Sorry.   Michael: Nice nice Allay-oop.   Michael: All right. Good rebuttal.   Tom: I like it. I totally agree with your you know, a middle road it's not you know, sprinting to one direction but…   Michael: It's a showdown Tom, we're not talking about all the roads.   Tom: Okay, right back to showdown. Good.   Michael; Come on. Don't give in so easily. All right. Tom, I want to give you first at bats here. You are now pro big city and Emil, you are going to be now pro small town. So fight!   Tom: Emil, You hillbilly. Just kidding. Okay.   All right. So big city. So a meal opened up with some great points about a larger, more dynamic economy. And with that larger economy and more people, you have more options. And I'm going to dig into this options theme a little bit for my my point here. So one of them is you have more contractors and vendors available. Specifically, the key one we talked about so much as a remote real estate investing podcast as your property manager, you're going to a small town, there's probably one, maybe two vendors out there who can service you and if you happen to be in a city where that property manager is not good. You are pretty much sol, right?   As a remote investor, you rely so much and within a big city. If you have a property manager that isn't up to snuff. Good news. There's probably five other property managers out there that you can talk to try out super important to having that optionality of property managers to not to be loop tied. hogtied tongue tied. What's that?   Michael: Hog tied   Tom: One of those right? Yeah, to just one property manager in the small city, which you are almost guaranteed is going to happen if you're in a very little town like that, very much related is the contractors to do the work. So if you're looking up on Yelp, plumbers, if you look in some little town in Atlanta, like Missouri versus St. Louis, there's going to be a ton more plumbers in St. Louis, and they're gonna be more competitive, you're gonna get better opportunities to find quality and value with more people. That's just a function of competition and volumes. And lastly, equally importantly, there's a lot more renters.   So you can expect and I'm kind of just talking from intuition. If you have a lot more renters, you're gonna have a lot less they can see just because there's more demand to move in versus a smaller town where, you know, there could be some seasonality there could be some a lot tied to very specific parts of the country. To me, perhaps it's an oil economy and oil industry is dipping. Like, does that mean your house is dipping? We invest in real estate to diversify our investments not to lock into specific economies. That's why you want that broad economy and lastly, is the volume of transaction. So, you know, one of the downsides of investing in real estate in general is this concept of liquidity. And liquidity is can be solved by high volume or it's helped by a high volume of transactions.   And in a small town where there's not that many transactions and the media not a lot of debate man for buying. You could get hogtied again, you're going to hog tight all over the place to get your foot staggered into by if you need to sell for whatever reason, in a larger city, you're much more likely if you have to sell quickly, you're much more likely to get it to what the market value is versus a small town where there's not that many buyers man you got to get lucky and time that out.   So big city short, the ROI I think on paper is definitely gonna be higher out the gates in a smaller city but for these reasons, I think you have some opportunities within the operational costs as well as the vacancy and you know, getting into the actual crunch in the numbers of executing, done!   Michael: Great points. Tom, I got to ask was that, you know, small town in Missouri a pop shot at me because you know that I've invested in a in a smaller town in Missouri.   Tom: I should have said a small town in Alaska.   Michael: No question. Yeah.   Tom: Or a small town in Alaska. Michael's got units all over the place. So easy for him to…   Michael: Easy pickins,   Tom: Easy. pickins now. Nice. Yeah, it came to me. Right?   Michael: Yeah. All right. All right. All right. Good points Emil? Small town.   Emil: I'm gonna try not to repeat too much of what Tom said. So I really just have two things here. I know, Tom mentioned competition. But that is a huge one. The fact that you're, you know, in certain places, you're not competing against people with endless money, right? Like, if you're going to a smaller town, like these big hedge funds that scooped up a lot of single family homes and stuff. They're not playing there.   You also just have a less sophisticated investors, right? So I think you can get better deals in general, if you're a savvy investor in smaller towns.   The other one, you know, there's appreciation that we talked about in bigger markets, but you also don't have that boom and bust like you do in bigger markets. So while California has these big swings and cycles where it goes up a bunch, you know, home, I like to think of Michael Zuber when I talk about this, because he invested in Fresno, California, he had a home that he bought for like $100,000, I think in like 2006 and 2008, it went up to like 220, he sold it, and then like a year or two later, it's gone back down to $75,000. Same home, right, just like losing tons of value, you have the potential to lose a lot of equity. And that, you know, makes it harder to sleep at night.   During recessions, obviously, places across the country get hit. But you don't have that as large of these swings and drops as you do in these big markets. So I mean, that's just another pro to talk about with with smaller cities. It's a little bit steadier growth, but it's also not boom and bust. And that's all I got to say about that.   Michael: Right on. Tom, what's your Tom sandwich? response to what I had to say for himself?   Tom: I'm going to end this on your reference about our guy, Michael Zuber, I think it's a good way to close out the debate is to know your market, whichever one you pick big or small. Let's see I'm supposed to be aggressive right now.   Emil: No, that's that's the right answer.   Tom: Okay. Okay, good.   Emil: We're playing sides here. But like, yeah, it's to the value of our audience. That is really what matters, right? Is that like, you pick a market you learn in you get good at you network there, like whether you go big city or small city? That's the real takeaway.   Tom: Yeah.   Michael: But there has to be a right answer. I mean,   Emil: Of course, there's there's got to be a right because there's, there's not people doing really well in big cities, and people also doing really well in small cities, you got to choose…   Michael: It depends is never a good answer.   Tom: Yes, yes.   Michael: Yes, no, but that's such a great point. I mean, you both made really, really great points for the pros and cons of the big city and the small town. And I think you hit the nail on the head by saying, you'd have to learn it, because there's all kinds of people under the sun and with different investment theses, and different goals and different starting points. So there's something out there for everyone. You just need to go learn and find what it is that suits your needs and meet your goals. And then go do that.   Tom: And be eyes wide open to the upside. And the downside. There isn't like a city called the money tree that like everyone just picks Moneyville. It's you know, you have to be strategic and eyes wide open on what like what your risks are with that and apply your strategy to that.   Emil: Let's repeat that. Again. There is no such thing as a perfect market. So a lot of people are like, Where do I invest, searching for that perfect, perfect market? Obviously think about what you're going for what are the pros and cons but honestly, there's no such thing as a perfect market.   Michael: I always joke with folks that the deal of a lifetime only comes around once a week. Similar things to markets, there will always be a better market that I'm willing to bet the farm on, so don't feel like you have to go find the absolute best tip top one, because that's a vicious cycle. And you'll always be able to convince yourself that there's a better market somewhere else. So find one that works for you and then go hammer away at it.   Tom: What size market? are you guys looking at for your next investment in your portfolio? Are you analyzing anything you notice a specific city names, but you can say?   Michael: Let me see, let me look up the population.   Emil: I think I've mentioned it. I invest primarily in St. Louis now. And what's interesting about St. Louis, St. Louis is weird where it has St. Louis city and St. Louis County are separate entities. So if you look up the population of St. Louis, it's like 300,000, which is like number 63, or something in the country. But if you look at the MSA of St. Louis, which includes the county and everything, it's like 2.1 million or something. So it's like top 20. So that's an interesting one.   Michael: So the market that I'm looking at investing in has about 220,000 people living so not big, but..   Tom: Is that the MSA or is that the broader MSA or when we say MSA, it's like a group of cities that kind of make metro area what is MSA stands for?   Emil: Its Metropolitan Statistical Area. It's usually a much larger area than just the actual like city of St. Louis or Birmingham or whatever, includes more of like counties, and then like potentially neighboring cities that just make up the larger MSA.   Michael: I think that's just the city. Just the city itself.   Tom: I’ve traditionally invested in big large cities, but I think they might go to like mid size might have ridden the big bull, now I'm gonna ride the medium sized calf. I think it's good. A stepbrothers reference.   Michael: Yeah, so good.   Tom: So I think that's what I'm evaluating right now. A couple of middle sized cities in Alabama, South Carolina, Southeast sunbelt. I did evaluations on.   Michael: I'll share just a couple of quick anecdotes with folks. So, Tom, you're mentioning that I invested in Alaska. So I and I own property in Ketchikan, Alaska, which a lot of people have probably never heard of, it's somewhere where all the Alaskan cruises stop. It's tourism driven. There's some other industry there, but it's definitely a tourism centric, area, city, town, borough, whatever you want to call it. Technically, it is a bureau. And that's been actually my best performing property that I owned to date. And part of that was understanding what drives that economy. I mean, I just googled the population of Ketchikan and it's like 8300 people. So I mean, that's like, tiny, that's a blip on the radar. But that swells in the summer with all of the workers that are coming in for the seasonal type stuff.   That, of course, hasn't happened this year. But it's interesting, I haven't had any kind of gap in vacancy, or intendancy, throughout the entire period of COVID. Knock on wood, this, I've been super lucky. So you have these kind of interesting dynamics and looking to really get a handle on and understand what's driving that local economy and that local market, and any seasonality to it is really, really important.   I've also invested in that small town in the Midwest in Missouri town, like you were mentioning. And I just go with a population that is like 6000. I think the reason is so low is because there's a huge military installation there a big military base, and that's not being counted here. I think military bases like 15 or 20,000 people that live there are near base, so…   Tom: and then you're also in Los Angeles as well. Right? So just like it's Mr. extremes.   Michael: That's right. That's right. So there's so many different ways to piece this together. no right or wrong just right and wrong for each individual.   That was a really gentlemanly, clean showdown, guys, thanks for keeping it all above the belt, good, clean punches, and great points made around by all.   That's our episode, everybody. So thanks so much for listening. If you liked the episode, even if you didn't like the episode, feel free to leave us a rating or review. Whatever it is, you listen to your podcast. We really appreciate them and they are a big help for us. If you want to hear about something in particular, feel free to leave us a comment and let us know what you'd like to learn more about for an episode. We look forward to seeing you on the next one and happy investing.   Tom: Happy Investing