If you are looking for stability more than big bang profits, investing in small town commercial properties will likely appeal to you. Not all small towns remain vibrant so, you'll need to do your research and pick carefully.
Commercial real estate is a mixed bag these days. Big gateway cities like NYC, Washington D.C., and San Francisco have seen significant price increases for trophy properties. Today, these metropolises have fallen out of favor for big time investors because of the huge price runups. On the other hand, places like Detroit, Las Vegas, and Phoenix have seen decent investment interest and price increases. What keeps these places on the investment radar is these still have not been priced back up to their pre-recession values.
What falls in the middle is Middle America. Towns with populations under 50,000. Typically, the backbone of America saw a much smaller run up in commercial property values leading to the peak in 2007. As a result, the drop in values has been much less as well. While these areas are affected by the slow recession recovery, they are more stable than huge population centers.
Primarily, you want to find a vibrant small downtown area where locals and the surrounding rural population gather to shop, dine, and be entertained. Often one of the best areas is near local government offices in towns that house the county seat. These are magnets for business owners doing business with local authorities. In rural settings, these people know how to live on a budget and always have some cash in their pockets. The combination of foot traffic and spendable income benefits local businesses.
Not every small town is a good candidate for commercial investing. Just like the big cities, some have been harder hit than others. Many have a single major employer. If that employer has gone out of business or had significant lay-offs, you can expect the local economy to shrink. Now is not a time to invest in these types of small towns.
What you should be looking for is a town with a high commercial property occupancy rate. Preferably north of 90% rented or owner occupied. If you find a place with the occupancy rate above 95%, you have probably found a highly stable local economy. This is about deriving income from leases rather than appreciation in property value.
Because the values of these properties didn't soar to unreasonable heights during the run up to the recession, they are more affordable today. A 2,500 square foot restaurant in Fort Wayne Indiana can cost $116 per square foot. One hundred miles away in Chesterton, Indiana the same type of commercial property is going for less than $55 per square foot. Unless you are a deep pocket investor, you will find it much easier to obtain financing for a 2,500 square foot property costing $132,500 than the same sized property costing $290,000.
Small town centers tend to have stable tenants. Once a business owner is established, he or she often remains at the same location for life. If you find such a property and the cash flow is adequate, it could pay you for decades to come.
You may even find an additional bonanza in small town USA. Some commercial buildings in these towns have been designated historical landmarks. That designation can mean tax credits or even grant money to help with repairs or restoration.
While I firmly believe you make money in commercial real estate buying at the bottom of the market and we are still near the bottom of the market, investors that are risk adverse are better off seeking stable properties in select small towns.
Author bio: Brian Kline has been investing in real estate for more than 30 years and writing about real estate investing for seven years. He also draws upon 25 plus years of business experience including 12 years as a manager at Boeing Aircraft Company. Brian currently lives at Lake Cushman, Washington. A vacation destination, a few short miles from a national forest in the Olympic Mountains with the Pacific Ocean a couple of miles in the opposite direction.