In my paranormal romance novels, I tried to follow that advice by setting the stories in the small town of Corydon, Indiana.
I grew up in Southern Indiana and most of the cities there have that small town feel, but there is something different about Corydon. Corydon has a sense of history that New Albany, Georgetown, and Lanesville (although it comes close) can't match.
When you are using a small town in a paranormal romance, for me it makes it easier when the town is deliciously creepy and Corydon fits the bill perfectly. I love how close history feels, like even though it's in the past, it's still an important part of daily life.
How deliciously creepy is it? Creepy enough that every Halloween season there are walking tours through Corydon's Unsavory Past (Yes, I think the characters from my Spiritus Series deserve a featured spot) where visitors learn about the whipping post that used be in back of the Historic State Capitol and the story of the child murdering Mary Bouchet that hung for her crime. They also mention that her voice can be heard through the square from time to time even today.
Suddenly, a ghost haunting the reincarnation of his murderous wife doesn't seem like such a far stretch does it?
Anyway, whenever someone asks me how can stand to live in such a small town, I have to admit that I couldn't live anywhere else! Where else would I get all these ideas from?