The Best Method For Performing Due-Diligence On Commercial Real Estate Markets
The process of finding and vetting commercial real estate property is vastly different than that of single-family or residential rental property. Talk a walk down memory lane to the time(s) you purchased your residence.
You found a great neighborhood or two, requested your agent keep an eye out for a home with an adequate number of bedrooms, bathrooms, and a few other must-have amenities, and then toured properties until the “right” one came along. Soon to follow was the offer process, financing, and an exciting closing date. It’s likely the entire process took up hours of your time and months off your calendar.
In contrast, multifamily syndication investing allows you to leverage the experience of professional teams who are already established and on the ground in various markets. You don’t have to know the area, scrutinize the location, or tour the property. You hold power to leverage this existing expertise, thus creating limitless investment opportunities.
In a cloud of exhilaration and overwhelm, you might begin an attempt to cross-reference “best real estate market” lists, make sense of current population trends, and even look up news local to areas in which you’d be interested in investing. But, honestly, none of this will help you draw any conclusions, plus you’ll waste a ton of time and energy.
Real estate syndications are supposed to take up less of your time and energy, remember?
So, take a step back from your immediate analytical tendencies - I have them too, so I completely understand - and, instead, begin by assessing your personal investing goals. Maybe you want to invest in a growing market that also provides decent cash flow. Using that basic framework, this research checklist will help narrow things down:
- Job Growth
- Population Growth
- Job Diversity
- Landlord/Tenant Laws
- Geographical Features
- Cost of Living
- Local News
- Local Government
- Whether You Have a Competitive Advantage
Since steady job growth is indicative of a healthy local economy that’s likely attractive to new businesses, developers, and residents of the area, this is the most important metric to evaluate in each market.
Job growth is a leading indicator of population growth. The more jobs, the more residents, the more likely the area will maintain a solid tenant base. When more people are attracted to an area, the demand for housing increases, which drives up rent and real estate prices.
Since the population in a particular area could be affected by natural disasters, migration patterns, and more, you always want to research it after job growth.
Finding an area with long-term upward population growth trends (not a temporary bump) is critical, and a significant factor supporting that trend is job growth in the area.
These two metrics provide a complete picture of the health and future of a given commercial real estate market.
You want to find an area with a variety of industries supporting the local economy. Strong job growth is much less enticing if you discover that most of the jobs in the area are, say, in the tourism industry.
A recession or a negative news story could broadly impact the number of tourists, job growth, and population trends. On the other hand, a diversified job market is much more attractive since a hiccup in any single industry likely wouldn’t affect the area as a whole.
Beyond the top 3 factors - Job Growth, Population Growth, and Job Diversity, the next best factor to learn about is the local law governing rental properties.
Rent control, for example, is excellent for tenants but makes it incredibly challenging for landlords to make a return on an investment in an area where costs for contractors, pest control, and property management are skyrocketing.
As an investor, you want some insight from local property managers who are intimately familiar with these laws so that you can find landlord-friendly areas.
While usually the last thing on investors’ minds, taxes can cause a significant difference in the bottom line.
State income taxes and property taxes will both impact your operating budget, thus, your overall return. Each state has a different tax structure, and it’s good to understand what you’d potentially be getting into so you won’t be surprised later.
Use Google Maps to check out the actual physical landscape of the area. Look for geographic barriers like a body of water, a mountain range, or any other features that could inhibit the physical development of the area.
As an example, coastal cities are limited by the ocean. Development can only get so close to the water, which forces them to build upward or expand into the suburbs. This drives up the value of centralized real estate, especially in a time of job and population growth.
Cost of Living
By seeking out an area where the cost of living is low, especially in comparison to the median income in the area, you’re more likely to experience growth. If people can afford to live in the area easily, there is room for the cost of living (i.e., rent) to rise as more jobs and people move into the area.
While the other, previously listed factors are much more important, once you’re pretty “sold” on a particular area, you may want to track a few local news stories.
It would be great to have some heads-up about new companies moving to (or away from) the area, local announcements, community developments, and anything else that would allow a sense of understanding of the local economy and potential future of that market.
Just as with the local news, the local government is indicative of the area’s future standings. Therefore, it’s a good idea to invest in areas with strong local leaders who support new initiatives, an expanding local economy, and whose vision includes making the market vibrant and welcoming.
Strong leadership from the local government is attractive to corporations, which means that job growth will continue.
Whether You Have A Competitive Advantage
There’s always the chance that you have greater insight into a specific area, more so than other investors. So, for example, maybe you have a close cousin or best friend who lives there, perhaps you went to college there or grew up there.
Any time you possess a competitive advantage, more weight should be given to that market. Local connections or a little history with a particular area can put you leaps and bounds ahead of other investors.
How To Find And Vet The Best Commercial Real Estate Markets
While the process of selecting commercial real estate markets that support your investing goals is likely different from any experience you’ve had with residential property, this guidance should save you from getting lost in overwhelm.
First, begin with identifying what you desire out of your real estate investing strategy. Of course, you’re after a passive income stream that allows you time freedom, but, more specifically, are you after cash flow or appreciation or a hybrid of both?
With that answer, you can begin to research the indicators of a real estate market’s health mentioned herein, starting with job and population growth.
As a passive investor, even though you’re not doing the work of choosing individual properties, you must still do your own due diligence on the markets in which you plan to invest. That way, you can ensure that those markets are solid markets that meet your investing goals.
There are numerous risks with owning physical real estate via private placements including weather and natural disaster risks, interest rate risk, operator and business risks, and overall real estate market volatility which can effect the performance of the investments. Investing in private placement securities entails a high degree of risk, including illiquidity of the investment and loss of principal. Please read the offering document before investing.
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