How To Invest Long-Distance In Commercial Real Estate

TruePoint Capital

Why is the online used-car site Carvana so popular? What explains its explosive growth since its launch in 2013?
The company sold 2,105 cars in 2014 and grew that figure an incredible 84 times to 177,549 cars last year. That’s an average annualized growth rate of 143% for five years.

Carvana is successful because consumers realized that the best-used car bargains are not necessarily in their backyards. If someone else is willing to put in the time to curate a selection of used cars at every budget and type – often at better prices than local offerings – consumers would be foolish not to at least explore their options.

With all of the upheaval created by the COVID-19 pandemic, THE major development that shifted society – perhaps for good – was the rise of doing everything remotely: working, learning, and shopping.

The irony of COVID-19 lockdowns and restrictions is that it untethered society from any fixed locations. Workers were no longer tied to a physical office. Students were no longer tied to a physical school.

It’s no wonder that RV sales hit record highs in 2020 with 2021 projected to be even better as people hit the road to see the country with little else available in the way of entertainment or travel.

Following the trend of working, learning, playing, and shopping remotely, investors are also increasingly investing remotely. Like Carvana, investors are discovering that the most promising opportunities are not necessarily in their backyards.

For instance, if you live in Silicon Valley, multifamily investments may not be appealing to you – what with contracted cap rates from institutional and foreign investors along with potential threats to future revenue like asinine laws prohibiting landlords from conducting background checks on potential tenants, which is likely to increase delinquencies from deadbeat renters.

It’s not just residents and businesses fleeing California for more tax-friendly and less regulatory states offering a better quality of life, investment capital is fleeing as well.

Investment capital is following residents and businesses. And where are they fleeing to?  Texas.

It’s no surprise that the trajectory of Texas population growth far exceeds national growth.

Compared to every single state in the country, the net migration between Texas and another state always favors Texas.

In other words, more people are moving to Texas from any other state than they are moving from Texas to that state.

When investing in commercial real estate, why be bound geographically? With advances in technology, investing long-distance in commercial real estate is like investing in your backyard.

Here are some tips for investing long distance in commercial real estate:

Follow The Trends.

What segments and geographic locations are seeing significant growth that will be sustainable over the next several years?

Invest Where The Workers Are Going.

Workers will need places to work and homes to reside.

Invest In Future Demand. 

Where are the trends pegging for future growth? What are the underlying economics and demographic data supporting this future demand?

Identify The Key Sectors Directly Impacted By Population And Business Shifts.  

  • What industries are moving into the hot markets?
  • What type of properties will be in demand?
  • How does supply compare to demand and what are the projections for future supply/demand balance?

Partner With Operators And Local Funds. 

By partnering with experienced operators and managers of local private CRE investment companies and real estate private equity funds with boots on the ground and sound financial projections and established infrastructure and personnel, investors ensure the highest likelihood of success from remote investing.

Screening potential partners of co-investing opportunities such as private CRE funds is vital to the success of long-distance investing.

Towards ensuring your best chances of success, consider asking the following questions of a potential co-partner as part of your interview and due diligence process:

  • What is your track record?
  • What is your background?
  • Why have you chosen this particular asset segment?
  • What is your experience and expertise in this segment?
  • Do you have financial projections you can provide?
  • What is your projected IRR?
  • What value-adds, if any, do you plan on implementing?
  • What are the major risks?
  • What measures will you take to mitigate these risks?
  • Why are you confident in this asset and location?
  • What are the demographics and economic metrics behind your confidence?
  • What is the exit plan?

Remote investing opens up a whole world of possibilities offering opportunities in a variety of sectors and geographic locations.

Many investors choosing to invest remotely will leverage the expertise, knowledge, and experience of local fund managers with boots on the ground to be able to invest in a market like Texas offering the possibility of better returns than the opportunities in their backyard.

Screening credible potential co-partners requires proper due diligence and asking the right questions. Doing so will mitigate risks and give you the best opportunity for success.