How to Start Investing in Retail Real Estate
Retail real estate investing can be a lucrative venture for the savvy investor or provide some great stability for the retail business owner looking to elevate themselves from tenant to property owner. The retail business offers opportunities in many different forms, such as coffee shops, clothing stores, and even the new trend of experiential retail. Whatever your reason is for wanting to invest in retail real estate, this guide will help you to avoid some of the biggest pitfalls that other investors fall into! We’ll break down the basics, getting started, how to build a team, some research and investment strategies, and how to manage the property. When you're ready to invest you'll be prepared.
Understanding Retail Real Estate
Putting the pieces of retail real estate together will help discover ways to invest.
Let’s start with the basics. There are several types of retail real estate:
Single Tenant Net Lease (STNL) - This involves only housing one tenant.
Gross Lease - The tenant pays a fixed amount periodically for renting the property.
Shopping Center - A collection of independent retail stores and services.
Flex Retail/Warehouse - Spaces offering flexible leasing options, allowing tenants to lease entire spaces or specific areas.
Mixed-Use - A combination of commercial, residential, retail, and office spaces.
Identifying the types of retail real estate and its purpose helps determine the best investment for your goals. Each form has its pros and cons, and as an investor, you must choose one that aligns with your comfort level and objectives.
Getting Started
Goals and objectives are going to help you stay focus and in line.
Jumping into commercial real estate without any prior knowledge or at least a mentor, is ill advised. With a basic understanding of retail real estate, start by creating your goals and objectives. These will provide a framework for your investment and highlight what you hope to achieve. Before diving in, assess your financial situation and budget. Ensure you have the means to invest without overextending yourself financially.
Building Your Team
If you plan to invest in retail real estate or any type of commercial real estate for that matter, you need to have a solid team who supports your goals. Not all of these team members have to be on your payroll, but instead may offer a service that you need to acquire or fix up the property such as a good lender or a good escrow officer. In 2024, when interest rates for conventional loans were 7%+, hard money or private loans were pushing 12%+. We even saw hard money companies charging 12% and an additional 3 points on top of that. Because we had a trusted hard money lender who we’ve built a relationship with overtime, we were able to get a loan of 10% with 1.5 points. We bought that retail property and within 3 months the property went from vacant to cash flowing. Were we required to pay 12% or more, we may not have cash flowed until refinancing the property 6 months to a year later. Having strong relationships and building a team can give you a competitive advantage over other retail investors! We talk more about financing and other important factors regarding retail real estate investing in the next section.
Research and Investment Strategy
You always want to make a thorough analysis before you make a big decision. Make sure to evaluate all your options.
Once your goals and budget are set it's time for research. Begin with market analysis, examining location, demographics, and economic indicators. Take it a step further and evaluate potential properties by considering physical condition, tenant mix, and lease terms. Next, identify and understand investment strategies. A few strategies are:
Financing retail - securing funds to acquire, develop, or renovate retail properties. This can include loans, mortgages, and other financial products
Cap Rate, Rate of Return - cap rate is calculated by dividing the property's net operating income (NOI) by its current market value or purchase price. While Rate of Return is the gain or loss on an investment over a specified period, expressed as a percentage of the investment's cost.
1031 Exchange - allows investors to defer paying capital gains taxes on the sale of an investment property by reinvesting the proceeds into a similar property.
Buy, Rehab, Rent, Refinance (BRRR) - is a real estate investment strategy that involves buying a property, rehabbing it, renting it out, and then refinancing it to pull out cash for future investments.
New Development - involves constructing new retail properties from the ground up, typically on undeveloped land.
Reposition Existing - involves renovating or repurposing an existing retail property to improve its marketability and financial performance.
Placemaking to Activate a Retail Space - designing and managing public spaces to create vibrant, attractive environments that encourage community interaction and boost retail activity.
Choose the strategy that best fits your goals and budget.
Managing Your Retail Property
Managing property is the way to gaining and keeping foot traffic.
Investing in retail real estate also involves property management. Key tasks include managing CAM fees, understanding different types of net leases, and recognizing the roles of anchor and shadow tenants.
CAM Fees - charges paid by tenants in a commercial property to cover the costs for maintaining and operating the common areas
Single Net Lease (N) - The tenant is responsible for paying the base rent plus property taxes, the landlord covers all other expenses
Double Net Lease (NN) - The tenant is responsible for paying the base rent, property taxes, and insurance, the landlord covers maintenance and utilities.
Triple Net Lease (NNN) - The tenant is responsible for paying the base rent, property taxes, insurance, and maintenance, the landlord has minimal responsibilities, typically only structural repairs.
Recognizing The Roles of Anchor Tenant and Shadow Anchor.
There are chances of other properties being near you so it is important to understand their roles and what you can possibly gain from them.
Anchor Tenant - a major retailer that generates foot traffic located within a shopping center
Shadow Anchor - a major retailer that generated foot traffic located nearby the shopping center.
You can manage the property yourself or hire a property manager. Companies like Realicore Real Estate Group specialize in property management, allowing you to focus on growing your investments. A good property management company will make you money by adding value to your real estate operations.
Investing in retail real estate property comes with many benefits. To achieve these benefits, it's key to understand the basics of retail real estate, create a plan with clear goals, build a reliable team, identify the best investment strategy, and determine the optimal way to manage your property. Now, you are another step closer to having a successful real estate investment.
If you are in need of commercial property management services for your shopping or retail center please reach out to Realicore, we are happy to step in and lend a hand. Contact us.
