7 Key Factors to Help You Find the Best Places to Invest in Commercial Real Estate
Once you decide to invest in commercial real estate outside of your local area, and you are able to identify the best assets in the best real estate markets to invest in the United States, then you’re well on your way to becoming a property owner.
This can be a little overwhelming to a real estate investor, especially to new investors.
So, you may be thinking; where do I start? Should you consider investing in an up-and-coming small town or a thriving metropolitan area for your initial investment? Or should you consider a Joint Venture (JV) partnership in buying a smaller commercial property with say a group of individuals? Or should you become a Limited Partner (LP) – a passive investor where you own a portion of the commercial real estate through a syndication?
The Operators or Sponsors of a syndication are responsible for managing the day-to-day operations of the commercial asset while you simply collect the monthly or quarterly cash flow as a passive investor. Also, there can be extraordinary tax benefits with being a passive investor in a commercial real estate syndication.
Alternatively, there are REITs (real estate investment trusts ) that an investor can invest in that have fewer tax advantages than investing as an LP in a syndication, and you have no control over what you are investing in, but your minimum investment can be substantially less.
Let’s Deep Dive Into Metrics
You could spend a lot of time cross-referencing “the best of” lists that outline the best cities in the U.S. to invest in. Or you could start analyzing a particular metro area or a particular MSA (Metropolitan Statistical Area) and the surrounding area to see which submarkets are good markets to invest in. Or you could even try to make sense of current population trends, job growth and housing trends, and correlating data. But honestly, this would be a lot of work and would take too much time, and would most likely not really help you draw any definitive conclusions that would help you reach your investment goals.
The good news is there is an easy way.
First, you want to start by determining your personal real estate investing goals. Maybe you simply want a good investment in a growing market that also provides good steady cash flow. Let’s start there, and by using that basic framework, this outline will help you research some key metrics to explore before investing in a market:
- Job Growth
- Population Growth
- Job Diversity
- Landlord/Tenant Laws
- Cost of Living
- Local Government
Since steady job growth is indicative of a healthy, diverse economy that is likely going to attract new businesses, new development, and more people moving to the area, this is going to be the single most important metric to adequately assess a market because job growth triggers additional metrics such as population growth, unemployment rates, and job diversity. Diverse and extensive job opportunities are a very good sign that the new jobs being created in a particular area are going to boost the economy significantly.
Job growth is a leading indicator of population growth. The more jobs, the more residents, the more likely the area will maintain a strong tenant base. When more people are attracted to an area, the demand for housing increases, which not only drives up property values but also drives up rental prices.
A good place to start is also with the unemployment rate for the area you are looking to invest in. A good unemployment rate is estimated to be at or below 5%, but you always want to have a city’s unemployment rate to be at or below the national average as a rule of thumb.
Where there is job growth, there is usually a low unemployment rate and with those particular factors, there is usually a growing population. All three of these trends generally affect each other.
Population growth is a key indicator as to where you want to start exploring a particular area if you are looking to invest in a commercial property.
A great place to research population growth is the U.S. census bureau – this should be the first source you explore.
Make sure the population growth trend is not a short term trend. Be sure to research recent years as well as the past year to make sure there is an upward trend in growth. You want to be able to see long term population growth, not just a very recent increase, and you want to understand what is driving the population growth to make sure it will continue for the coming years.
Usually, as the population increases so too does the cost of single-family homes in the area. So, when looking at a potential investment property, you’ll want to see what home values are doing. If home prices are increasing, then you’ll want to see what effects those increases are having on investment properties. It is important to be able to identify what is happening with the housing market in that local market.
These important factors provide a better picture of the sustainability and future growth of a given market.
You want to find an area that provides for a good variety of industries supporting that local economy. Strong job growth is not as compelling if you find that the jobs being created are not providing for mid to high-level job opportunities that can bring a better salary and therefore a better quality tenant base. If, for example, the high job growth is in one or two industries like retail and tourism, that job growth may not be sustainable in an economic downturn. So, you really want to have a fundamental understanding of where the jobs are coming from – not just job growth per se.
We have seen during the Great Recession of 2008 and the CoVid pandemic that the tourism industry was hit very hard. So, if “all of your eggs are all in one basket”, so to speak, and you are in a market with limited or vulnerable job industries, then your investment can be at risk. A healthy, diversified job market is a much more attractive proposition when deciding where you want to invest in commercial real estate.
Beyond these top 3 metrics – job growth, population growth, and job diversity, the next metric you want to be researching is the landlord/tenant laws in the area you want to invest, and how those laws and regulations will govern your investment into the future. Strong landlord/tenant laws that are equitable and fair in an area that you want to invest are ideal.
For example, rent control sounds good on paper but in most cases is only good for the tenants. It makes it incredibly challenging for landlords to make a return on a rental property investment if they have excessive maintenance costs or if they mortgage payments that need to be satisfied by the rental income from their tenants. If landlord/tenant laws favor only the tenant without considering the extensive responsibilities being put upon the landlords, then the residential real estate industry that provides this housing suffers as a whole.
It will come as no surprise that taxes can make a big difference to your bottom line as a real estate investor. You’ll want to find an area to invest in that has lower taxes. I know that sounds simplistic, but it’s amazing how many investors are investing in high tax areas of the country.
You will want to know what the state income taxes are and what the property taxes run for a commercial property investment. Also, you will want to check to see if they have special districting taxes as well. All of these taxes can impact your returns overall, so it’s important to have a Sponsor/Operator who fully understands the local and state taxes. Each state has different tax structures, so it’s important to understand that before you purchase an asset.
Cost of Living
By seeking out an area to invest in that has a lower cost of living, especially in comparison to the median household income in the area, you will likely have more upside in the investment; more room to grow with the valuation of your property. If housing is at an affordable price (i.e, rent), then people can afford to live in the area more easily. Additionally, they will likely move there if other considerations like job growth and job diversity are also compelling enough for them to move.
Local governments and local laws can be indicative of how well an area grows and prospers as a city or township. A good choice is to invest in areas with strong local leaders who support expanding the local economy. Local leaders who embrace initiatives and vision that can create a vibrant place to live with thriving commerce, recreation, arts, and amenities such as dining and shopping will be a much more desirable place for your future tenants to live.
What We Look for When We Invest
When we are purchasing commercial properties such as an apartment building, we of course look at all of the factors we mentioned above, but we also look at the capitalization rates (cap rates). Our investment strategy is such that we acquire properties that have less risk, usually Class B or A- multifamily apartment communities of anywhere from 100 to 500 units in very fast-growing areas of the country.
We also invest in multifamily apartment communities only in areas of the country that are climate-resilient, meaning they have less risk of being affected by severe climatic events such as flooding, hurricanes, tornadoes, drought, and the like.
Additionally, we analyze whether the property (and the area) have high vacancy rates and why. Sometimes it can be as simple as poor property management of that particular asset that is causing a drop in occupancy rate so we determine the best strategy for increasing efficiencies and implement various ways that breathe new life into the asset. When we improve the asset, we also improve the neighborhood.
We, of course, develop a stringent business plan to streamline the operations by lowering operating expenses in every way possible while still maintaining or improving the tenant’s lifestyle in our communities. We also look at the rental income and make sure that it is at or near market rate and that the monthly rent a tenant pays is in line with market rents.
What we do not purchase at this time are office buildings or retail spaces, but we do look to acquire other assets in addition to multifamily apartment buildings such as mobile home parks and storage facilities.
What About Investing Passively In a Real Estate Syndication?
One of the best ways to own commercial real estate is by being a passive investor. As a passive investor, you can focus on finding a strong sponsor team that does all of the work for you while you collect income passively. It’s the best of all worlds; owning real estate, having the tax benefits, and not having to be a landlord.
And the best part is that with the right sponsorship team and operators utilizing their research and expertise to invest in commercial assets all over the country in the best markets in the country, you can capitalize on their knowledge and expertise while growing your wealth. Once you are presented with potential commercial investment opportunities, you can utilize these seven factors, in combination with your own personal goals and criteria, to make the best decisions for your financial future.
We hope this has helped you learn a bit more about passive real estate investing in real estate syndications.
Until next time…Earn Passively & Live Abundantly!
Ready to Learn More?
The best way for you to learn more about passive investment opportunities in commercial real estate syndications is to join the PCRP Passive Investor Club.
Through the PCRP Passive Investor Club, you’ll get a priority review of all the deals we offer. We’ll work with you to determine your investing goals and then present you with the best deals to meet those goals. We’ll then guide you every step of the way as you invest in those deals.
So if you’re ready to start investing passively in institutional-grade, commercial real estate in fast-growing, climate-resilient markets in the U.S., join the PCRP Passive Investor Club – IT’S FREE! – and get started on your path to EARN PASSIVELY and LIVE ABUNDANTLY!
If you would like to know more about what we do and how it may be of value to you, please reach out to us anytime. We’re always happy to help!