If you could peek into the boardroom at Wal-Mart as the leaders were deciding where to put their newest stores, do you think they'd be throwing darts at a map of cities and neighborhoods? No, of course not. Those Wal-Mart leaders are going to examine demographic and market indicators to know what's going on before making an investment to add a store in another location.
The study of demographics allows you, as a commercial real estate investor, to pick the areas of the country that are most likely to have the conditions that make commercial property a successful investment. Demographics include the following:
i Finding out about the population trends and knowing how likely it is that those trends will continue i Determining who's moving where and when, and then figuring out why i Discovering how many people are moving into an area i Figuring out what factors attract people to an area and understanding how stable these factors are
It's true that when talking about what makes a good real estate location, good economic times and prosperity are a big piece of the puzzle. So, when you're looking for the market in which to buy your commercial property, find markets where jobs are increasing, where median income is rising, and where companies are relocating and hiring people.
As an area develops, you'll see that some of the businesses that come in will look at what's going on there and they'll find a bigger business that depends on similar demographics as their own. Then they'll wait until the bigger business does the research and casts in the same waters, only tagging along after that business is successful. As you get to know these patterns, you can hit on an area where the demographics are right for development.
With commercial real estate, it's all about being in the path of progress or going into a marketplace that's really at the point of taking off because of the people moving in and businesses growing to support them. If you have a strip mall in this area and suddenly a lot of new apartment buildings go up and people come into the area, your rents in the strip mall will likely increase.
And with higher rents from a commercial property, you get increased property values and, of course, a boost in cash flow.
Here are a couple of tips to keep in mind:
i Large retail chain stores, also known as big box retailers, spend millions of dollars every year on demographic studies on where to build their next stores. Wal-Mart and Home Depot are a couple of typical examples. So why not save your time and money and start investing where you see those folks break ground for new stores? They've already done their research and have decided to invest tens of millions of dollars in that location. We suggest that you find out what's in demand there and follow right behind them.
i Another way to recognize growth that's right around the corner is to watch the Department of Transportation. When you see freeways being built and on and off ramps being constructed, you better believe that it's happening for a reason. The government is planning for and expects growth in that area. Hop on the bandwagon by asking the city's chamber of commerce or the city's department of economic development what their master plan is. These are the best places to get specific demographic information quickly. You may want to buy up land nearby and wait for developers to approach you. Or you may want to start buying commercial property nearby before anyone else discovers what's going on.
Locking Down Deals: Don't Leave Home without These Tools
As a commercial real estate investor, you should never leave home without the tools you need to buy commercial properties. You never know when you might stumble upon an excellent deal that you need to quickly analyze and get under contract. Here's a list of the essentials:
i A good cellphone that allows you to talk, send and receive e-mail, and take pictures of properties: Also, look for the voice memo feature so that you can record notes about properties or ideas when you're out and about.
i An addendum template that you can attach to any commercial real estate contract: This addendum should include the escape clauses and other language that allows you to lock up a property under contract while still retaining the ability to get out of the deal if you don't like it.
i An outside third party or mentor: You need a mentor that you can talk to or run a deal by to make sure that you aren't getting caught up in the emotions of the deal. Mentors are also great for reassuring you that you're making good decisions.
We also feel that you need to understand the three Rs of commercial real estate investing. Knowing these Rs can help you avoid wasting time on marginal commercial deals:
^ Risk: How much of my money would be at risk? Would I be personally liable for debt that's used to fund the deal? How could this deal negatively affect my life's goals and relationships? How much time will it take?
^ Reward: How much profit is in the deal? When would I see that money (cash at closing from a refinance, cash flow over time, or long-term equity I'd tap into in a few years, for example)? How certain am I of realizing that profit? In other words, what has to happen for me to end up with cash in hand?
We also look for any "deal sweeteners" we can easily use to bump up the cash flow or value from the property. And we look for ways to structure the financing to increase cash flow or cash-on-cash return.
^ Roll out: Is this a one-shot deal or can I replicate it with another property? Can I use my learning and effort from this deal as a template for later deals? What contacts and relationships will this deal bring me that will be valuable for me to do more deals in future? Can I expand and leverage this deal into a much larger opportunity?
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