For me if I'm keeping the city and don't intend to abandon it, it doesnt matter what level flat I use. Having a 10 flat is only useful if you think you may have to abandon it sometime in the future.

I like to find a place with lots of flats/NPCs for farming. No rule of thumb about the distance, although I don't like to build them closer than 20 miles to each other so they don't interfer with each others farming. With high level rally points it will be a breeze reinforcing each other if/when you need to.