City or Suburbs: Where to Invest
October 16th, 2013 by Tatyana Levin
Determining what type of commercial property to invest in can be one of the hardest parts of the investment process. There are so many different types of properties to choose from that narrowing down from so many choices to just one can be practically impossible, especially if this is your first time investing in commercial real estate.
The only way to make a good decision is to be informed about all possible options. Once you’ve narrowed it down and picked the type of property you’d most likely consider buying, you’ve got to determine your ideal location.
But this early in the process you can’t get too specific because the type of property you might want might not be available in that area. Instead of getting to specific, you might want to consider general areas and start thinking about the pros and cons of each.
Remember that with any type of real estate, commercial or residential, one of the most important factors for the success of an investment is location.
However the importance of location does strong depend on what type of commercial property you own, so think about both location and type of property when you are making your final decision.
On a basic level, you have to make the decision between the city and the suburbs. Each have their own advantages and disadvantages to weigh and consider.
City: Buying land and developing something on that land can be great, but it can be very expensive and sometimes even difficult to find.
Cities, especially Los Angeles city proper, have already been developed which means that free land is hardly ever available, and if it is, it is usually very expensive because of the prime location. And keep in mind that an empty plot of land isn’t very profitable, so you’d have to build something on top of it which will also cost quite a bit of money.
Codes and ordinances can also be a hassle because cities are usually so heavily populated that the height of your development or the hours of construction can be limited, just to name a few.
Suburbs: The great thing about suburbs is that they are always expanding and land is usually more available than it is in a city proper. But because there is so much space available, there are fewer people in a designated area and population is spread out.
So if you are thinking of buying land and building a retail property, you should keep this in mind when determining a location.
But not all suburbs are created equal. Property value, cost of living, and population vary from suburb to suburb, so do your research before you choose.
City: The biggest concern with retail centers in cities is size. Often space is limited so size will be limited too. You will be paying more for a smaller space, so profits can be limited by that.
However, because cities are so densely populated, it’s possible that these retail centers will get more traffic because of their locations. But factors like parking should also be considered. If there isn’t any parking available at the center or there isn’t any parking around the property, it might deter potential visitors from visiting.
Suburbs: Similar to land developments, chances are that more retail space is available to buy, but fewer people will visit it. Unlike with cities where people often do much of their shopping in the neighborhoods close to where they live, in the suburbs people have more room to move around and worry about things like traffic and parking.
Because of this mobility, people can choose any retail center then want instead of being forced to go to what’s close.
City: Cities usually develop because of business. Business is conducted somewhere so more housing needs to be built and then jobs are created and more office buildings and retail spaces are built and so on. The city is usually prime for business. Once the city gets too crowded, people start moving into the suburbs and when space runs out for office buildings or property gets too expensive, offices move into the suburbs too.
Ultimately renting out office space can be easier in the city than in the suburbs because of the tradition of doing business in the city and living in the suburbs.
Suburbs: The main benefit to owning an office building or multiple office buildings in the suburbs is price. Generally speaking buildings are less expensive in the suburbs than they are in the city.
But for your investment to be profitable there are certain things you need to have like parking and restaurants close by. Also, the easier your building is to get to i.e. proximity to the freeway, the better for you (but this is also reflected in property prices.
Suburbs tend to have wider office spaces more in the form of office parks which cities tend to have high rises. Certain types of businesses are more suitable for certain types of properties.
Apartment buildings are special cases in the city vs. suburb debate because housing is necessary everywhere.
City: Apartment buildings in the city tend to be high rises because horizontal space isn’t readily available, so developers build up rather than out. Depending on the location and the neighborhood of a specific apartment building, the amount of rent you can charge will vary, but well developed parts of the city are very much in demand and are very desirable to the upwardly mobile which means that rent can be quite high.
Once again, remember that the specific location is important here, as is the condition of the building as well as amenities in the surrounding area. The area has to be livable and this especially means grocery stores. The closer your building is to a grocery store, the better.
Parking is another huge issue for renters, especially renters in the city where space is generally limited. You might consider leaning toward apartment buildings that have underground parking or a lot attached to the building. This will make a huge difference when renting units out.
Suburbs: Apartment buildings in the suburbs tend to be wider and shorter than apartment buildings in the city. And suburban renters are interested in different things than city renters.
For example, parking in the suburbs is much easier than in the city because of all the space available. So although parking is a benefit anywhere, it won’t bump rent up as much as it would in the city.
Newer buildings with many amenities tend to be favored over older ones in the suburbs as opposed to in the city where remodeled historical buildings are highly valued.
When it comes to narrowing down your search and figuring out what kind of commercial properties you would want to invest in, you have about a million factors to weigh in. From money to financing to the affect owning a property will have on your taxes, even deciding that you want to look into buying a commercial property is a huge decision.
But there are ways to go about the process that make the most sense and will bring you to the best conclusion.
First, determine what kind of property you might want. Look into the pros and cons of each of the four categories and figure out what kind you’d like to buy most, least, and in between. Don’t set yourself up for one specific type of property because it might not be available. Keep your mind open.
After you’ve done your research, look at different properties and compare the benefits and disadvantages of each.
Unfortunately there is no hard and fast rule for choosing the right commercial real estate property. Things like financing, timing, interest rates, surroundings, etc. all weigh in heavily and can all change at any given time. This is where the element of risk in commercial real estate investment comes in. But there is risk with any type of investment.
Ultimately, each property should be evaluated individually. Each property has pros and cons that are unique to the property.