Commercial real estate investing is an amazing way to make passive income. The markets available for investment are endless. When you choose to invest in syndications you have access to the expertise of professional teams with boots on the ground.
But before you get too excited, it’s important to do your due diligence when deciding where to invest your money, time and energy.
Starting research from scratch is time-consuming and daunting, to say the least. It’s easy to get sucked into cross-referencing real estate market lists and pouring over current population trends in the area. While this type of research can feel necessary and beneficial, it doesn’t help you draw any real conclusions. In the end, you’re not any closer to making an informed decision.
Instead, try my proven method to conducting commercial real estate market research. First, you’ve got to start by analyzing your personal investing goals. For instance, maybe your primary goal is to invest in a growing market that will provide you with steady cashflow.
With that goal in mind, you need a framework for your research that outlines how to determine the right area for you to invest in commercial real estate.
Consider the following area attributes prior to investing in commercial real estate:
- Job Opportunities
- Steady Population
- Job Variety
- Rental Laws
- Tax Structure
- Physical Land Features
- Cost of Living
- Local Information
- Local Government
- A Competitive Edge
Job opportunities and job growth is typically indicative of a healthy local economy. Areas with increased opportunities and a healthy local economy attract new businesses, developers, and residents to the area. This is the top metric to assess when researching an area for commercial real estate investing.
An area with job opportunities will likely experience steady population growth. The more available jobs, the more people are attracted to an area. When the number of people in an area increases, the need for housing increases. The stronger the tenant base, the higher the rent and the real estate prices.
Research the area population after researching the job opportunities and growth. Population can fluctuate in certain areas due to the effects of natural disasters, migration patterns, and seasonal opportunities.
Some areas have a short-lived increase in population due to the factors mentioned above, among others. Make sure to find an area with a long-term upward population growth trend and not just a spike. Steady population growth is key in supporting job opportunities and growth in the area.
When investing in real estate, find an area with diverse industries that are supporting the local economy. Job opportunities and growth are much more attractive to potential residents when the job market is diversified. If most of the jobs in the local area are, for example, in the factory production industry, it’s less enticing to potential employees who are outside that industry.
Make sure to research if the job market is diversified. Job opportunities are less impactful and more limited when they’re restricted to a certain industry.
The above-mentioned research categories, Job Opportunities, Steady Population, and Job Variety, are the top three ways to get valuable information about a local area prior to investing in real estate. The next best topic to educate yourself on is the area’s law governing rental properties.
Rent control, for example, is a great protection for tenants. For landlords, on the other hand, it can be extremely challenging. High costs for contractors and property management teams make it difficult for landlords to make a return on their investment.
Local property managers are a great resource in determining which areas are landlord-friendly. Most times, property managers in the area are highly knowledgeable regarding rental laws and practices.
Taxes affect your overall investment more than you might think. Although not pleasant, it’s best to keep taxes in the forefront of your mind.
Your overall return is greatly impacted by your operating budget which is in part determined by your state income taxes and property taxes. Do your due diligence and research the various tax structures for each state where you’re considering investing in real estate. A little research upfront can protect you from unpleasant surprises later.
Physical Land Features
Check out the physical landscape of any areas you’re considering for real estate investment. Visit the area in person or use Google Maps to look for bodies of water, mountains, or other physical barriers that could impact land development.
Think of the challenges coastal cities face, for instance. The ocean water limits development, pushing builders to move upward or into the suburbs. The value of real estate near the ocean then increases, especially during times of job and population growth.
Cost of Living
Look for investment opportunities in areas where the cost of living is low. These areas will likely experience growth. People are attracted to areas where they can easily afford to live. As an investor, when you seek out an area with a low cost of living, there’s potential for the cost of living and rental rates to rise as more jobs and people move into the area.
Educate yourself on a particular local area by diving into what makes it special. Talk to local residents and check out news stories and blogs.
Good information to uncover includes new companies moving to or away from the area, local announcements, community developments, and local business groups. Uncovering further details allows you to have a deeper understanding of the local economy and the potential future of that market.
Local government can be indicative of the area’s future trajectory. When investing in real estate, consider investing in areas with strong local leaders who support new initiatives. Local governments that support business development and expanding the local economy are a great fit for commercial real estate investors. Be sure to spend your time and money in an area where the market is vibrant and welcoming.
In addition, a strong local government that supports business development is attractive to corporations. This is a positive indicator that job growth will continue.
A Competitive Edge
Investment markets that allow you to have a competitive edge should be given priority. A competitive edge can exist for many reasons. If you have ties to that area, no matter how small, or a personal history you are already one step ahead of other investors.
Greater insight into a particular area or market can positively impact your ability to connect with local government and businesses.
The Best Way(s) To Find And Vet Profitable Real Estate Markets
When investing in commercial real estate as a passive investor, you need to put in the work to conduct market research in advance of selecting an investment opportunity. Even though you’re not responsible for choosing individual properties, you still need to be aware and educated on the markets you’re investing in.
Performing your due diligence in areas of job growth, population growth, job diversity and more ensures that the properties you select and invest in are aligned with your overall investment goals.
Here at Great Venture Capital, we thoroughly vet each of the sponsors and the markets on any and all of the real estate syndication opportunities we offer. However, we’ll always encourage you to do a little research on any opportunity upfront so that you can weed out any investments that may not fit your exact expectations. We focus on growth-oriented, value-add multifamily opportunities, but we’d love to hear about your investment interests and desires!