How to Invest in Commercial Real Estate outside Your Area
It is conventional wisdom that it is better to invest in apartment buildings that are within driving distance. This is especially true if you plan on managing the building yourself. It stands to reason that the closer you are to your buildings, the easier it will be for you manage them.
You also want your partners and other essential people such as your attorney, brokers, and property managers to be relatively close to the property as well. Your investors are also more likely to prefer to invest locally also.
However, you may find that you have no other options than to look outside your area for new deals. Maybe you live in a city with unappealing cap rates, or you might be endlessly frustrated with the dismal potential for viable commercial real estate investments.
Unless you are finished with commercial real estate investing, you need to consider other markets. It will cost you more time and money than investing locally, but it can be done, and if done correctly, it can pay off. Here are six steps to investing in apartment building outside your area.
Step 1: Pick the Right Area
This first step all depends on what it is you are looking for. What kind of returns are you expecting? Is there a particular city or area of the country that you like?
The Marcus & Millichap Regional Apartment Reports is a great overview of apartment building markets in major U.S. regional markets. Check the report for any areas where you would consider investing.
Look for a combination of growing employment (this includes population) and high cap rates. This is the ideal combination for investing. The Marcus & Millichap reports will help you to single out these areas.
You want to narrow it down to your top three area choices. Once you have your locations picked, you can contact their local economic development offices and request the relevant annual reports and outlooks. You want to look for a growing local economy with new jobs and new investments.
Step 2: Look for Commercial Real Estate Brokers
Now it is time to begin calling commercial real estate brokers. You can easily find them by contacting the local Marcus & Millichap, CBRE, and Sperry Van Ness offices.
When you first speak with a broker, you will, of course, want to introduce yourself and get a bit of a feel for the quality of the broker. Find out what kind of deals are available in the area. Ask your broker about prevailing cap rates, cash on cash returns, price per unit, and other relevant information about the market in your new are. Remember, you are trying to get an idea of what kind of returns to expect in the area.
Once you have decided on a broker, have them put you on their buyer’s list. Call them each week and go over the deals they send you making sure to give them any feedback you may have.
Step 3: Get Referrals to Other Professionals
Now that you have your new area to invest in and you have decided on a broker, it is time to start building the rest of your team. You will want to start searching for local property managers, attorneys, and commercial loan officers/lenders. Get referrals from your broker as well as anyone else you are introduced to along the way. Everyone is a potential contact. Keep track of your contact network keeping detailed notes on any new referrals.
Step 4: Get As Much Done As You Can Over the Phone
There is no reason to waste your time and money by physically inspecting every potential new investment area. Travel is expensive and unnecessary in the age of cell phones and Skype. Rather than buying a plane ticket, you can just as easily interview people over the phone. You can accomplish a good deal remotely, like checking references, analyzing deals, and following up on referrals.
Step 5: Get the Contract before Visiting the Area
It is usually best to hold off on visiting the area until your first deal is safely under contract. This should serve as more motivation to discuss details with potential team members. Be sure to have a detailed itinerary planned out before you plan your first visit to the new area.
You can ask your potential brokers show you around the area and take note of the locations that are improving and those that should be avoided. You will, of course, want to see the property that you have under contract and any other deals you might want to examine while you are there. You can also use this opportunity to meet with your candidates for attorney, property manager, or any other inspectors, lenders and appraisers. Remember, the ultimate goal of your trip is to get a solid feel for this market and finally secure your team members.
Step 6: Make the Deal!
Now that you have your team in place, it is time to make your first deal. This may take longer than you at first anticipated so be patient. Be sure to stay in regular contact with your team members and keep them focused, motivated, and engaged.
After you have done your first deal, you may need to spend some extra time at the property to ensure that everything is in place and going smoothly. It is up to you to determine how often or how long you should maintain a physical presence while holding everyone involved accountable, especially the property manager.
In conclusion, it is always preferable to invest locally. However, if you find that, not to be a viable option you will want to consider investing outside your local commercial market. If and when you do decide to take this route, use the tips in the six steps and be thorough and diligent. It is no secret that it will take some extra time and money, but you most certainly can make it happen