After identifying which type of commercial property you should invest in, you probably wonder where you should consider investing. To answer this question you need to ask yourself what your investment objectives are. They could be to:
- Maximize leverage: you want to be able to borrow as much money as possible. If this is the case then most if not all properties in California will not meet your objective. Properties in California often offer 4 to 6 percents cap rate. This would require 40-65% down payment. So to maximize leverage you will need to invest outside of California where the cap rates are in the 7-9% ranges.
- Receive strong positive cash flow: most if not all of commercial properties that offer high cash flow are outside of California. These properties in turn allow you to maximize leverage, i.e. borrow up to 75% of the purchase price.
- Realize strong appreciation potential: if you invest in a right property at a good location (refer to the article “What location Means in Commercial Real Estate”) and right time, the biggest return often comes from appreciation. It’s hard to predict the potential for appreciation for a certain area. The fact the area has strong or weak appreciation in the past does not necessarily mean it will have similar appreciation in the future. However, if you choose to invest in a newer NNN-leased property on a main road in a growing or stable area with strict zoning, i.e. limited supplies of properties then your property has a better chance to appreciate in value. CISM Training Course in Dubai
- More well-known metro areas that most people have an idea where these cities are.
- Growing cities.
These 2 factors will ensure your commercial property is in high demand so it’s easy to sell later and has low vacancy rate. You definitely don’t want to invest in a tiny little city located in a middle of nowhere or declining areas where it is easy to buy but hard to sell.
This article is not intended to list all the areas in the country where you should consider investing. Rather it is meant to high light a few major metro areas that you should consider; However if you have ruled out or have not considered these two metro areas, you probably don’t know what you are missing!
- Atlanta Metro Area, GA: This is a clean and modern area which has taken off since the Summer Olympics in 1996. Atlanta metro is one of the fastest growing markets in the country where the cost of doing business is 97% of the national market. It has well-developed transportation network. The Hartfield-Jackson Atlanta airport is the world busiest airport. It’s not an accident that UPS chose Atlanta as the main sorting center for all of its domestic next day air packages. All of UPS air packages have to be flown here for sorting before flying to their final destinations. The Atlanta Hartfield-Jackson airport is rarely shut down due to bad weather so UPS planes can fly in and depart day or night 365 days a year. Atlanta has been able to attract various companies due to well-developed infrastructure and low business costs: Home Depot, Coca Cola, CNN, Delta Airlines, UPS, Walmart, Bell South, AT&T, IBM, and Kroger. This is the place where Center of Disease Control (CDC) and the world largest Georgia Aquarium are located. The median cost of a home is around $180K in Atlanta compared to about $770K in Santa Clara. As a result, the population in this area has experienced tremendous growth. The North East suburbs, e.g. Duluth, Lawrenceville are more prosperous where population has increased 20-30% from 2000 to 2005. The current cap rate for Atlanta metro is around 7-8.5% which offers high cash flow and maximizes leverage while offers strong potential for appreciation. The leases in this area are also very favorable to landlord: NNN leases with tenants also paying for property management fees.
- Dallas/Fort Worth Metropolitan Area, TX: this is the fourth largest metro and one of the fastest growing markets in the US. It is home of 19 Fortune 500 companies: Southwest Airlines, Texas instruments, EDS, JCPenney, Kimberly Clark, ExxonMobil to name a few. The area offers an excellent transportation network, affordable housing (median cost of a home is around $150K range), and unparalleled lifestyle at reasonable cost (Cost of Living Index is 89 compared with about 170 for San Francisco which means earning 89 cents there is equivalent to $1.70 in San Francisco). Dallas Fort Worth International Airport handled 57 million passengers in 2004 and ranked the world’s third busiest airport. The rise of telecommunications and hi-tech industry in 1990s led to unprecedented growth for this area. It is forecasted this region will add another 500,000 jobs by 2010. Dallas Northern suburb is a high income, fast growing and new area. This consists of small cities such as Coppell, Keller, Denton, Flower Mound, and Colleyville with very high median household income, e.g. $80-110K/year. This area has strict zoning so there are limited supplies of commercial properties available. Commercial properties available for sale in the Dallas metro are in general fairly new and good quality. The cap rate for this region is around 7-7.5% which is very decent compared to California.
It’s important to invest in the right property and the right area to meet your investment objectives. You should work with a company who specializes in commercial real estate who can advise you on where to invest. When investing outside California, you will need to hire a property manager to take care of the tenants and the property for you. In the coming issue, you will learn about issues you should know about property management.
Disclaimer: information in this article is deemed reliable but not guaranteed to be correct. There is no implied or expressed guarantee regarding results of your investment should you take the advice from this article.