Selecting locations for commercial real estate investments
Recently I realized that I mistakenly skipped posting part 2 of our commercial real estate series. My apologies and here it is…..
In part 2 of our commercial real estate series, we will outline how to analyze and select specific areas to invest and ways to actually find the best properties in any location. Although this is an article on commercial real estate, most of these principles apply to any type of real estate investments (including single family homes). Paying close attention to the old adage “location, location, location” is one of the best ways to protect your asset’s value, take advantage of market appreciation and maximize cash flow. Those investors who only feel comfortable buying in their own backyard may be missing some of the best opportunities to grow their wealth quickly. So let’s take a look at how to analyze where to invest.
There are five major factors that an investor should consider when selecting a particular area. They are: 1. population growth 2. employment growth 3. strong rent rates vs low purchase prices 4. business friendly environments (taxes, regulations, landlord laws) 5.high barrier to entry. As a note, 1-2% annual employment and job growth would indicate strong appreciation potential. Of course, it is difficult to meet all 5 of these criteria in any one location, so it makes sense to look at your resources, investment horizon and criteria in order to pick the best locations. Some areas will be better for cash flow (ie high rents vs lower price points), while others will be better for long-term appreciation (ie population and employment growth, high barrier to entry). We look for a balance between these factors, while being “opportunistic” in finding deals.
The internet provides a wealth of resources that will help you to analyze and compare any area on the criteria outlined above. Some of those resources are: www.census.gov, www.sitenet.com, www.areadevelopment.com, www.marcusmillichap.com, www.cbre.com, and www.city-data.com. A google search on any location will provide a great deal of information from a variety of resources. For commercial investors, www.loopnet.com is the closest thing you will find to the MLS, and by evaluating their listings it will be helpful in getting an idea about local cap rates, prices and other data (ie market rents, local expenses, etc). If your not sure where to start, consider areas that you may have a personal connection like family/friends or where you may want to visit and spend some time or just google “top real estate markets for appreciation and cash flow”. A little time invested on-line will be well worth it in the long run.
Once you have narrowed down specific cities to consider, you must now understand what areas to specifically be looking. The general rule is to buy in the “path of progress”. Every city has growth patterns that you should be aware of. Buy where the city is expanding, not contracting. How do you learn this information? Easy, pick up the phone and call the local economic development commitee and chamber of commerce. Then contact brokers on www.loopnet.com and www.showcase.com who have listings for your property types. Ask brokers for referrals to local property managers, who will offer you insights based on their preference to manage properties in the better areas. Other great resources for finding property managers are www.ccim.com and www.irem.com. And finally, the online newspaper for any city can be a wealth of local real estate knowledge. Keep in mind that talking to any of these people may seem daunting at first, but I assure you they are all motivated to help. Commercial brokers make their living on developing relationships with investors like you and me. After a few conversations, you will be talking like a pro.
We would also encourage you to join local meetups and organizations for commercial investors and landlords. There is no better way to learn the inside scoop about a particular area than to talk to people that are already “in the trenches”. Use google and www.meetup.com to find these resources. I have some in the right column of this newsletter. And finally, we are always here to discuss investment opportunities and answer questions you might have, so reach out to us if you want to learn more.