Retail property has many key advantages over residential property. You rarely have to deal with tenant issues. Businesses tend to pay on time. Retail property values fluctuate less and tend to just go up. Retail buildings are also simpler than residential buildings. A clothing store is just space you’re renting out, instead of an entire house whose condition you’re responsible for.
With retail property, the challenge is in the search. How do you find the diamonds in the rough that’ll pay dividends for years to come? These three tips will help.
Tip #1: Keep Your Distance and Stay Objective
With residential property, the decision is often made with the heart. Homeowners “fall in love” with their dream home. With retail property, since the goal is profit, the search process needs to be a lot more objective.
• Decide if you plan on using property managers or if you plan on actively managing the property. Hiring property managers means more expenses and fewer profits. On the other hand, active management can mean spending more of your own time on the property. Avoid properties that don’t meet the criteria you set out (e.g. properties too small to warrant hiring property managers, or properties that would take too much time to manage.)
• Know what cash on cash return you’re looking for. If you find a good deal that doesn’t quite match your goals, keep looking. You can always come back. On the other hand, if you find a property that far exceeds your cash on cash goal, you might want to jump on it.
• Real estate agents will often try to pressure you to buy right away. If they see that you’re excited about a property, they’ll push for the close. Don’t go for it right away. Instead, make sure you see all your options before making your final choice.
• Don’t get emotionally attached to the property. Instead, the deal and the property must be examined hand in hand. A mediocre property can be a great investment at the right price. Great property can be a poor investment at a high price, or with poor deal terms.
• Start talking to banks early about financing terms. Financing can often take longer than you expect, so it’s a good idea to start preparing early.
vacant by Russell Heiman, on Flickr. This work is licensed under a Creative Commons Attribution-NoDerivatives 4.0 International License.
Tip #2: Learn the Area
Get to know the area that you’re considering investing in. Dig below the surface.
What kind of traffic generally frequents the area? For example, let’s say you’re considering buying space next to a conference center. You might expect enormous foot traffic during conferences, with far less business on off days. This is important to know upfront.
Look into crime statistics. Don’t just go off of gut feelings or what real estate agents tell you. If you’re seriously considering a property, physically go to the police station and pull up the crime statistics for the area. How does it compare to other neighborhoods in your city?
Check with the county clerk to see what kind of future developments the city might be planning. Are there major roads, highways, railways or other projects planned nearby? These could seriously diminish – or occasionally enhance – your property values.
Finally, look at real estate trends in your area. How long do rental listings tend to stay on the market? This can give you an indicator of how hard it will be to rent out your property. Was there a sudden influx of properties for sale? That might indicate an overall decline in the area.
Tip #3: Organize Your Search With a Spreadsheet
If you’re looking at a lot of property, keeping track of everything can get very difficult. Tracking everything in a spreadsheet will make your life a lot easier.
Your spreadsheet should include:
• Name and address of the location.
• Primary contact for the location.
• Usable square footage.
• Asking price for the property.
• Expected lease rate per square foot. Use other properties in the area to establish comparables.
• Expected cashflow. Calculate this by multiplying your expected lease rate, then subtracting your mortgage and other expenses.
• Down payment and financing terms, if the owner is offering financing terms.
• Any other notes or impressions you have about the property. Also make notes about where you are in the process.
Searching for good retail property requires a good process. Generally you’ll want to have several balls in the air. Even if it seems like everything’s going well with one property, you still want to have other balls in the air. If for nothing else, having options gives you more negotiating power with sellers. Keeping a detailed spreadsheet will help you keep track of your best options, and where you stand in the process with each.
If you follow these three tips, you’ll drastically cut down the time and energy you need to find a great retail property investment. You may also want to visit NAI Maestas Real Estate, Albuquerque, NM to help you make your retail property search easier.
