Essentials: The Real Estate Investment Checklist…
One of the key essentials to becoming a successful investor is due diligence… Without it, you’re throwing caution to the wind, hoping for the very best.
But as we all know, hope won’t get you very far.
When it comes to my investments in commercial real estate, we’re talking about millions of dollars. If I dare fail to understand what I’m buying, I don’t belong investing… and quite honestly, neither do you.
Of the dozens of items on my personal checklist, the five most important items that make the biggest impact on my decision to invest, include the following:
Is there population growth and diverse economic activity?
We want to invest in properties in growth markets.
It’s part of the reason we’ve invested in the Phoenix market, for example.
At one time, Phoenix was one of the most battered real estate regions in the country. Almost a quarter of the approximated 80 million sq. ft. 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. In fact, according to the Urban Land Institute’s Emerging Trends in Real Estate 2014, the Phoenix population was projected to grow 2.6%. With that growth comes the potential for 2.4% jobs growth, driving an explosive need for office space.
“The recovery in Las Vegas and Phoenix will get a boost from strong population growth as these two markets will have the highest rate of growth in the survey,” according to the 2014 report. That tells us a larger number of investors could be looking to invest greater capital in the Phoenix market.
Nowadays, Phoenix has returned to being a high-growth market, according to the 2016 Emerging Trends in Real Estate report, as the population grows.
Does there exist growth in stable, above-average-median-paying jobs?
Wealthier residents – as I describe in Winning with Commercial Real Estate – make the area a bit more upscale, adding value to the properties we buy.
As I’m sure you’re aware, as job growth goes, so does the office market. Without growth in jobs, there’s little growth in commercial real estate, which means there’s little growth in an investment opportunity.
What is the quality of lifestyle? What is the racial, social and cultural diversity and geographical appeal?
We want to invest in properties where residents are afforded a good lifestyle. We don’t want to invest in areas of high crime or where we are finding dilapidated buildings…
Is the location and quality of the building in an appealing area close to amenities and transportation?
These factors will typically increase property desirability and appeal to investors.
The more desirable the location and the amenities, the property becomes even more attractive. 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. While I will often tell you timing is of utmost importance with commercial real estate, location is important, too.
And is there a mix of high-credit quality of tenants with staggering leases, meaning that building tenants have leases that expire or renew at different times of the year or different years rather than all at once.
This reduces operational risks and can make financing more attractive. 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.
Questions – such as these – are essential prior to making investing decisions…