One of the main goals for any long-term investor is to enjoy a financially secure retirement.
That being the case, it stands to reason their nest eggs should ideally generate above-market returns with below-market risk along the way.
But with today’s tough market environment, what’s the best way to do that?
One answer is commercial real estate, which offers a solution to those fed up with the volatility of the stock market. Unlike stocks, commercial real estate offers sustainable cash flow, tax benefits, an inflation hedge, the ability to leverage and when prices rise, one can refinance and deploy newfound equity into additional properties.
But when it comes to successfully investing in real estate, due diligence and proper research are strongly required. It is just part of the reason I created an investing checklist.
Prior to spending money to invest in property, I must understand the following:
No. 1 – Population Growth and Diverse Economic Activity
My goal is to invest in areas of strong growth.
We never want to invest in unstable or non-growth areas full of dilapidated buildings or high crime rates and with no chance of recovery.
Phoenix, Arizona, is the perfect example of smart investing in growth.
At one time, Phoenix was one of the most battered real estate regions in the country.
Almost a quarter of the approximated 80 million square feet of commercial real estate office space inventory sat empty, allowing investors to pick up quality assets, often below the cost of construction.
Population growth prospects for the Phoenix region gave us reason for excitement, too.
According to the Urban Land Institute’s “Emerging Trends in Real Estate 2014,” the Phoenix population was projected to grow 2.6 percent. With that growth comes the potential for 2.4 percent jobs growth, revving up the need for office space.
Nowadays, Phoenix has returned to being a high-growth market, according to the 2016 “Emerging Trends in Real Estate” report, as the population grows.
No. 2 – Stable, Above-Average Median-Paying Jobs
Another goal is to invest in more upscale areas of town, especially where we find stable, above-average paying jobs. This can add value to the properties we buy.
For example, in areas of high growth of well-paying jobs, we find more demand for office space. As I’m sure you’re aware, as job growth goes, so does the real estate market. Without growth in jobs, there’s little growth in commercial real estate, which means there’s little growth in an investment opportunity.
No. 3 – Quality of Lifestyle
Our third goal is to invest in areas that afford residents a good, healthy lifestyle.
If you’re looking at what you believe is a good investment located in a bad neighborhood with far too much to fix, or if the property has been sitting vacant for months, it may be more trouble than it’s worth. Look into why a specific property has been on sale for so long, and why.
This is part of the reason I often invest in Class-A trophy properties – properties that are built with top-line fixtures, systems and amenities in place or nearby. They sit in highly visible locations, such as business districts, demanding above-average rent and return for well-placed investors.
Class-C properties are less desirable. Located in less favorable, lower visibility locations, these are typically in need of renovations and improvements. Infrastructure may need to be brought up to date. Rents and cash flows are not desirable for investors. These often take the longest to lease, as well.
No. 4 – Appealing Location Close to Amenities and Transportation
Our fourth goal is to invest in properties with desirable locations and amenities.
For example, in major cities, the farther the property is from mass transit, the less valuable it may become. At the end of the day, the property’s distance from transportation, retailers and amenities is a key factor in determining fair value and price. We take the time to carefully analyze the property itself as well as the surrounding areas before investing.
No. 5 – High-Credit-Worthy Tenants and Staggered Leases
It’s important that building tenants have leases that expire or renew at different times of the year or different years rather than all at once.
We also want to understand operational risks.
For example, if a major percentage of leases come due at the same time, you could end up spending large sums for tenant improvements and leasing commissions.
No. 6 – Know Your Plan of Action
Before stepping into negotiations for commercial property, we must know how much we can and are willing to pay. How much rental space are we looking to fill? What are our objectives as far as return on investment? These are all essential questions I must answer.
It’s also vital that all the numbers add up.
When the numbers don’t add up, it’s not usually because of bad math. It’s because an involved party may be hiding something. Ask to see hard numbers in the form of tax forms, owner records, net income, cash flow, return on investment, etc. If the other parties are unwilling to share this data, it’s a red flag.
These are just some of the checklist necessities I must understand before making a multimillion-dollar investment.
Overall, when it comes to good investing, we’re looking for stable income flow, capital appreciation, security, diversification and the ability to leverage well. If you want to make money, detailed property checklists are a must. Without them, you’re flushing your money without any real hope of ROI.
Harmel S. Rayat is an author, serial entrepreneur and President and CEO of Talia Jevan Properties, Inc. www.taliajevan.com, a privately held commercial real estate investment firm specializing in the acquisition and long-term ownership of Class-A commercial real estate assets throughout North America.
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