When you invest in multifamily real estate syndications, you’re leveraging the power and expertise of the general partners, sponsors, and other seasoned experts who may even be on the ground in various commercial real estate markets across the U.S. Because of this, the commercial real estate markets you can participate in are endless, which might be both exciting and overwhelming at the same time.
To conduct your own due diligence, you might be tempted to go Google-crazy, cross-referencing “best real estate market” lists to try to make sense of current population trends, and even research local news in areas where you’d be interested in investing in commercial real estate. But, to be honest, this will not help you draw any conclusions, and you’ll waste a lot of time and effort.
Instead, start by determining your personal real estate investing goals. Maybe you’d want to invest in a fast-growing commercial real estate market with good cash flow. Using that basic framework as a guide, this research checklist can assist you in narrowing down the possibilities:
- Job Growth
- Population Growth
- Job Diversity
- Landlord/Tenant Laws
- Geographical Features
- Cost of Living
- Local News
- Local Government
- Whether You Have a Competitive Advantage
Understanding Job Growth Metrics
Since steady career opportunity is indicative of a healthy local economy that’s likely to attract new businesses, developers, and residents to the area, this is the most important metric to evaluate in each commercial real estate market. So, this is where your due diligence journey begins.
The potential for career development 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 a place, the demand for housing increases, which drives up rent and real estate prices.
Start by identifying areas that have seen long-term, steady increases in business opportunities from the financial, industrial, retail, technology, and construction industries. Then, look up the national analysis and use those numbers as a benchmark to help you decide whether a particular commercial real estate market has excellent or just okay job creation trends.
How Population Growth Affects Real Estate Markets
The second factor in your commercial real estate market due diligence journey is the metric that reflects whether people are moving in, staying, or moving out of an area.
Since the population in a specific location may be influenced by natural calamities, migration trends, and other factors, it’s critical to study it after researching the potential for career development in the area.
If there are few people in the region compared to many vacant homes or available real estate, it’s best to find another market. This leads back to essential jobs; more residents mean greater demand for affordable rentals or starter homes.
Finding a location with a long-term positive population trend (not a one-time increase) is important, and corporate investment and job prospects in the region are critical contributors to that development.
The total health and future of a market may be assessed by looking at these two measures.
Your Due Diligence In Job Diversity
When the workforce in a given market is diverse, there are plenty of opportunities available to many different types of people, which attracts them and retains them.
This can give you an idea about how much potential there is for growth within the market since more businesses will likely be interested in investing in the area: the more job opportunities, the better.
You’re looking for a region with a wide range of businesses supporting the local economy. If you find out that most of the work in an area is, say, in the tourism business, it’s much less appealing than if there are many different industries to choose from.
A recession or a negative news story may significantly influence the number of tourists, which can lead to job scarcity and population decline. A diverse job market that includes a variety of economic opportunities, including industrial, retail, financial, and technology, is more appealing since a mishap in any one sector is unlikely to affect the region as a whole.
How Landlord/Tenant Laws May Affect Your Commercial Real Estate Investment
Beyond the top 3 factors – Job Growth, Population Growth, and Job Diversity, the next best factor to learn about has to do with the laws governing rental properties.
Wading through the best real estate investments usually requires an interpretation of state and local law. To avoid mistakes, you must understand how laws are created and applied in each region.
You want to learn about any future changes that might significantly influence commercial real estate investment property values or rental rates. So, keep an eye out for new zoning ordinances, environmental laws, tax reform proposals, and legislation of all kinds. As a rule of thumb: if something is likely to affect the supply and demand equation in an area, it’s worth looking into further.
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.
Taxes’ Impact On Investor’s Returns
Taxes, while usually the last concern on investors’ minds, can significantly impact earnings.
In terms of commercial real estate investments and the best places to invest in the commercial real estate market, it’s best to find areas where there are low overall rates for two types of tax:
- Property tax
- Transaction tax
There are two main types of taxes that individuals and businesses must pay. Property tax is a type of tax levied on the value of property owned by individuals or companies. Transaction (or transfer) tax is a levy charged by some counties/states for the transfer of certain kinds of ownership. These costs can either be fixed, meaning they don’t change over time, or variable, which means they get adjusted each year with inflation.
The best commercial real estate markets usually have lower taxes than others because investors want every dollar spent on their investment returns instead of going toward government coffers.
State income taxes and property taxes will both have an impact on your operational budget, therefore, your overall return. Each state has its own tax code, which is critical to understand, so you aren’t blindsided later.
Why Geographic Features Can Be Important
Use Google Maps to check out the actual physical landscape of the area near your desired commercial real estate investment. Look for physical barriers like a body of water, a mountain range, or any other geographical features that could inhibit the physical development of the area.
Coastal cities are restricted by the water, for example. Development can only go so close to the ocean before being forced to build upward or expand into the surrounding areas. This raises property values in downtown areas, especially when employment and population rise.
The best real estate markets will have few natural features that could prevent the population from growing or make it difficult for you to find tenants.
On the other hand, a prime location in a metropolitan area with great schools and low crime is best for future growth and can be a source of income if you decide to sell your property.
The Cost of Living Trends In Your Desired Real Estate Market
By looking for a location where the cost of living is low, especially compared to the area’s median income, you’re more likely to see development. You want a thriving market where people can afford to live, which should be reflected in the community-wide income levels.
On the one hand, you have places like San Francisco and Los Angeles, where living costs are marginally (or much) higher than median salaries for many population segments. On the other, you have communities like Jackson, Mississippi, and Odessa, Texas, with lower living expenses but similar or slightly lower average salaries.
These best commercial real estate markets usually support more affordable housing options that fit within any given area’s budget while also providing opportunities for renters/buyers who may not earn as much annually as residents elsewhere.
If people can live in the region comfortably, the cost of living (i.e., rent) will be able to rise as more jobs and people move in.
Local Real Estate News Stories
While the other previously listed factors are much more important, once you’re pretty “sold” on a specific area, you may want to track a few local news stories. Not only will these provide tips on how best to proceed with your investment, but they may also give you ideas for expansion or additional locations.
When it comes to commercial real estate investing, knowledge is power. You’ll go far more smoothly toward your investment goals if you know details about the commercial real estate market in any given region and how to keep an eye out for unusual circumstances that might raise property values if demand rises too fast.
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.
The Pros And Cons Of Local Government For Real Estate Investors
The local government is a significant indicator of the region’s future standings, much like the local news. Therefore, it’s wise to purchase commercial real estate in locations with active local leaders who back innovative projects, a growing local business sector, and a vision for making the market vibrant and welcoming.
Job creation will continue as long as the local government demonstrates strong leadership in attracting businesses.
Where Do You Have A Competitive Advantage?
There’s always the possibility that you have a deeper understanding of a specific topic than other investors. Perhaps you went to school there or grew up in the region. Maybe you have a friend or family member who works for one of the top companies in the best real estate markets.
Whatever your advantage may be, make sure to factor it into your decision-making as best you can. Then, capitalize on this rare opportunity and go forward with confidence that you know best how to adapt the area to future successes.
When a market has an advantage, weigh it more heavily. Your local connections or previous experience in the region may give you a significant leg up on your competitors.
Commercial Real Estate Market Research – Your Due Diligence
Even though you’re not actively selecting properties as a passive investor, you must still conduct your own due diligence on the markets you’re investing in. You can use that information to make sure those markets are stable and suitable for your needs.
The best way to do that is by getting feedback from a local expert who knows the area well. This will help you assess risk, understand local laws, and ensure that any property management issues are quickly resolved.
Despite all of these factors being important, it’s still best to have as much information about each market before making your final decision. This is because the best real estate markets are those that have a little bit of everything (i.e., good local government, low cost of living, vibrant communities, and good tax benefits).