HOW ARE PROPERTIES SELECTED?
Every day there are about 300-400 new commercial properties for sale between $1M to $30M in all 50 states, listed by various companies. Out of these hundreds of listings, only the top 5-10 properties make it to the list that you see a few examples on this blog. By focusing on the short list of best properties, you will save time and are more likely to be successful with your investments. Below are some of the selection criteria:
- Price range: most investors look for properties between $1M and $30M.
- Property types: most if not all investors of Transmercial want to invest in retail properties and office buildings where tenants sign long term low-risk NNN leases, i.e. tenants pay for property taxes, insurance and maintenance expenses, in favor of landlords. Once in awhile, there is a multifamily.
- Cap rate: the return of investment must be “reasonable”, e.g. generally higher than the interest rate. The cap rate is typically lower in CA and higher in other states. However cap rate is not everything.
- Property condition: investors prefer properties with little deferred maintenance.
- Demographics: the selected properties tend to be in growing, high income and bigger cities/metros as they have better chance to appreciate and easier to find tenants. Besides they are easier to sell if needed. You won’t see properties in an area where people are moving out, e.g. Detroit downtown. These properties are easy to buy but hard to sell. In addition, it’s hard to get attractive financing, if at all, for these properties. Properties in a middle of nowhere won’t make it to the lists. These are also easy to buy but hard to sell. Properties in cities where the average household income is way below the national average, e.g. $28,000/year, also will be screened out as these are most likely high-crime areas.
- Occupancy: close to 100%.
- Good Visibility: properties tend to have most if not all units facing the road to show case the tenant businesses. Tenants love visibility. What’s good for tenants is also good for investors.
- Great locations: properties on a major artery with heavy traffic, near the freeway exit, on corner lot, near a mall, on an outparcel to a big shopping center.
- Land: if land is not included then it does matter how beautiful the property is, it will not be selected. This is the type of property that is easy to buy but hard to sell.
- Lease Type: most likely NNN leases.
- Parking spaces: at least 4 spaces per 1000 SF of leasable space. It’s hard to lease a retail property unless it has sufficient parking spaces.
- Age: not over 20 yrs old unless the property is well-maintained or recently renovated.
- Price per square foot: sometimes a property is selected because the price per SF is low, e.g. less than $200/SF for a retail property in California. The main reason for the selection is appreciation potential.
- Low rent: there is upside potential if the rent is below market. When the leases expire, the rent is adjusted to market rent which increases the value of the property.
- Financing: sometimes a property may be selected because it offers attractive financing. For example, the seller is willing to carry 80% LTV at low interest rate or buyer can assume a loan at 4.5% interest, fixed for 10 years. This in turn may increase the overall return or cash on cash. On the other hand, a property may be screened out because it is difficult to get reasonable financing. For example, in this tight credit market it is extremely difficult to get financing for a single-tenant mom-and-pop restaurant in a small town.
- Lease Guaranty: who is the person or entity that guarantees the lease and the financial strength of that person or entity.
- Misc: A property could be selected or screened out for other reasons:
- If a property has environmental issues, it will not be selected.
- A property in the affluent Santa Monica, CA could be selected simply because it’s rarely available.
- A vacant restaurant in front of a mall in San Francisco Bay Area could make the list because it may have lots of interests from investors in CA.
- A property with strong upside potential, e.g. rents are way below market, will be selected.
The daily list of best properties is emailed to members by 5PM PST, Monday-Friday. The email contains 2-3 line description and a 1-page flyer with picture, address for each property.