Big Cities vs. Small Towns: Where Should You Invest in Real Estate?

Investing in real estate is all about making tough decisions. One of the first ones you’ll make when searching for a new property is choosing what type of area to look in. Big cities vs. small towns is a debate that often comes up between real estate investors. Both large urban areas and smaller rural towns have their own appeal to different investors.

There are five main factors to consider: your investment goals, risk tolerance, personal preference, market conditions, and future growth potential. In this article, we’re comparing these two markets against each other to help you find the best option for your next real estate investment. At Privy, our comprehensive data gives you the real-time insights you need to explore any real estate market like a local. 

Big Cities vs. Small Towns in Real Estate

Comparing big cities vs. small towns can quickly get technical. The U.S. Census Bureau defines small towns as areas with 5,000 residents or less. However, many of the small towns in U.S. have less than 500 residents. 

While the phrase “small towns” is statistically used for smaller populations, it also encapsulates the concept of a slower lifestyle with a larger focus on community and small neighborhoods. These areas typically have a lower cost of living and while they have slower growth, they have potential for future development and may be attracting newcomers as population density changes. 

By comparison, what’s classed as “big cities” is even more subjective. The U.S. Census Bureau considers a “big” urban area to be one with 250,000+ residents, designating these as a “principal city”. 

These areas are characterized as having a dense population with continuous high demand for property and a strong economic hub. Examples of big cities in the U.S. include Chicago, Philadelphia, New York City, and Los Angeles. 

Big cities vs. small towns will align with different investing goals. Diversifying your portfolio with properties in both these areas is an ideal way to balance risk and reward.

Advantages of Investing in Big Cities

Big cities will always have high demand, making them appealing to investors at every stage in their journey. The larger population base means that there’s always higher demand for rental properties, compared to potential homebuyers, with limited housing options leading to higher rental prices. 

Investors can make consistently higher rental income with properties in big cities vs. small towns. They also benefit from the market’s higher liquidity, making it easier and faster to sell or lease properties due to the fast-paced nature of the local market.

Big cities typically have a stronger job market, attracting people to move into the area with economic diversification that provides stability, even during economic downturns. By attracting new businesses and professionals, properties in big cities have a better chance of having higher appreciation over time, giving you a greater return on your investment (ROI). 

Different neighborhoods within big cities have their own amenities and infrastructure that make them attractive to different types of renters and homeowners, enabling investors to curate their strategy. A property’s proximity to amenities like schools and healthcare facilities will increase its demand and value, along with access to public transport and popular attractions. 

Properties in these areas deliver steady rental income and are less likely to become vacant due to high demand. As a result, big cities are also attractive because of their predictability, making them an ideal way to diversify your portfolio if you’ve previously focused on rural properties.

Disadvantages of Investing in Big Cities

Big cities aren’t without their complications and drawbacks. The increased demand and competition in these areas means that properties have a higher purchase price. 

You’ll need to be prepared to make a greater upfront investment, whether you’re focusing on residential or commercial properties. The same property type in a big city vs. small town can be significantly more expensive.

Furthermore, while big cities provide a high rental income, you’ll typically have a lower rental yield due to this upfront investment. Big cities also typically have higher property taxes than small towns, with almost everything being more expensive – including operating costs and maintenance, which need to be considered in your cash flow strategy. It’s possible to have negative cash flow if maintenance costs are excessive for a specific month, especially if you have higher mortgage payments. 

Many investors choose to outsource these activities to a property management company to ensure faster maintenance and better communication with the tenant, especially if they don’t live in the local area. 

Regulatory challenges are common within big cities due to building codes and strict zoning laws. Some big cities, such as New York, have rent control policies, limiting the profitability of certain properties. Due to the population size, you’re also likely to face a longer approval process for renovation works or new developments. 

Although you can expect to rent out your property fairly quickly in a big city, these markets are crowded and saturated, making it harder to find undervalued properties. Vacancies are still possible in big cities, especially if you have a higher-value property. 

Advantages of Investing in Small Towns

By comparison, small towns can be attractive to investors of all sizes. If you’re a first-time investor, small towns can be a great gateway to building your portfolio. For more established investors, small towns can offer a chance for diversification and reinvesting your profiles on properties with high future growth potential. 

Small towns are more affordable across the board with lower acquisition costs and reduced maintenance costs compared to big cities. By comparison, these towns will also have less competition as there are fewer investors in the area, making it easier to find undervalued properties. Local governments in these areas often provide tax incentives in a bid to attract investors and promote growth.

If you’re seeking to become a full-time investor, small towns provide investors with more buying power and higher yields due to the lower purchase price, especially in areas with high demand for a specific property type, such as condos and townhouses. 

Privy’s investor-focused data helps to identify these properties and determine their profitability by comparing insights like absorption rates. Typically, small towns are buyer’s markets, giving investors greater negotiating power. You’re less likely to enter a bidding war with another investor or buyer. These areas also provide more opportunities for off-market deals that can be extremely lucrative for the right investor.

It’s important to note that rural areas and small towns are seeing a population shift as the rise of remote working has led to significant lifestyle changes that make these areas more appealing. We’re seeing increased demand for single-family homes and long-term rentals in towns close to urban towns with these areas being considered up-and-coming with higher appreciation rates.

One of the main attractions of small towns is their stability and predictability. Big cities can have major market swings in specific neighborhoods due to gentrification and economic changes. While property values won’t skyrocket the way they do in big cities, they offer steady growth and a stable tenant base with low vacancy rates that are best suited for long-term investment strategies.

Disadvantages of Investing in Small Towns

Just like big cities, small towns have their own drawbacks. In general, you can expect lower liquidity with a slower-paced real estate market that makes selling and renting slower as there’s a smaller pool of buyers and renters. 

As a result, you’ll have limited exit strategies as an investor in smaller towns, especially during an economic downturn. There is typically lower rental demand with the risk of less consistent cash flow and longer vacancy periods between tenants. 

It’s important to consider the economic circumstances of a small town. If it relies heavily on a small number of businesses or industries to keep its local population employed, it may make the area more at-risk of economic fluctuations. It’s not uncommon for small towns to rely almost exclusively on agriculture, tourism, or manufacturing, which can also translate into population decline as younger demographics move to other areas.

Small towns have less infrastructure than big cities with limited transport options, public services, and amenities, which can limit the appreciation of your property if the local market becomes stagnant. Fewer amenities make properties less desirable, limiting growth potential and posing challenges for tenant retention as some may choose to move to larger towns for a better lifestyle. 

Although they offer stable growth, small towns typically have limited opportunities for fix and flip strategies, making them better suited to investors with a buy-and-hold strategy with a focus on long-term investing. Privy’s Multiple Listing Service (MLS) and investor-focused data can help you identify small towns with positive economic indicators, including ongoing infrastructure developments.

How to Choose Between Big Cities and Small Towns for Real Estate Investment

Now you’ve seen a balanced view of what it’s like to invest in big cities vs. small towns. With nationwide coverage, Privy gives you the tools you’ll need to explore any real estate market with local insights. You can turn top investor strategies into profitable opportunities instantly with our real-time data and instant investment analysis using predictive tools.

There are 5 factors to consider when choosing between big cities vs. small towns as a real estate investor:

• Investor Goals and Strategy

The deciding factor for many investors when deciding between big cities and small towns is their overall goals and strategies. Are you prioritizing cash flow or long-term appreciation? 

Large cities will give you a steady cash flow with a lower vacancy risk due to high demand, but you’ll face a higher investment cost due to increased competition. By comparison, small towns are great for their high appreciation potential, especially if you’re able to spot a hidden gem or up-and-coming area before other investors.

Diversification is also important to consider. If you’ve already got a strong presence in big cities, switching your investing strategy to focus on small towns can be part of your risk management. Just like choosing different property types, investing in different markets helps balance risk and reward for a balanced portfolio and stronger cash flow. 

• Personal Preference

If you want to start investing in real estate with little money, small towns may be your own viable option. Personal preference may play a major role in your decisions as an investor. If you want to be hands-on and oversee property maintenance yourself, you’ll likely be limited to markets within easy driving distance of your main residence. As a result, you might not have access to small towns or big cities.

On the flip side, if you’re comfortable or prefer to outsource maintenance and client communication to a property management company, it may be easier to invest in different markets. Investors who prefer a hands-off approach and who are using real estate to generate passive income may choose to invest in these services to suit their investing style. 

It’s important to remember you’ll need strong cash flow to offset the cost of hiring a property management company and they may not be able in some small towns. 

• Risk Tolerance

As an investor, it’s always best practice to determine your portfolio’s risk tolerance when choosing your next property. Every market has its own risk profile with big cities typically having a more stable market but with higher property costs. By comparison, small towns may provide a better long-term appreciation but have higher risks. 

• Market Conditions

No two cities have identical market conditions – and the same is true for small towns. Privy makes it easy to compare real estate trends in different markets using predictive analytics, including demand forecasts, potential rental yields, and expected property appreciation. 

Researching market conditions is part of your due diligence as an investor, enabling you to make more informed decisions when choosing where to purchase property. 

• Future Growth Potential

It’s easy to assume that big cities offer the best growth potential, but this isn’t always true. Small towns provide opportunities to purchase properties at a more attractive price with the potential for higher long-term appreciation. 

If you strike gold and enter the rental market of a small town before it undergoes population growth, you could have a higher ROI than you’d earn in a big city. Growth in big cities can also be neighborhood-dependent, especially if rent control is applicable.