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Retail Real Estate Investments

What is Retail Real Estate Investments?

Retail, like industrial real estate, falls under the category of commercial real estate. Simply put, retail real estate is property with the intended use of selling and marketing goods, products, and/or services. Retail properties are subject to commercial zoning and leasing options.

Retail tenants typically gravitate toward renting space in shopping malls, on main streets, and in downtown areas. Retail real estate is a popular because of the high yields that it offers. For instance, a percentage of the annual rental income divided by the price you paid for the property, offers an average yield of 5%-6%. Compared to capital gains growth (increase in value of the property over time), yields of a good retail real estate investment offer a great deal for investors that prefer more of an income stream investment.

Tenants of retail real estate consist of business owners who agree to commercial lease terms i.e. gross, single net, doubt net or triple net leases. You will also find some investors charging a base rental fee in addition to a percentage of the tenant’s monthly sales. Lastly, retail lease agreements typically cover a duration of five years. The reason for this revolves around the real estate owner’s security of income while allowing a tenant’s business to become established.

Retail Real Estate Example

Retail real estate properties are most widely available and listed over the web through various real estate companies. The following is an example of what information would be included for a typical shopping mall/plaza real estate listing:

  • Property Type: this describes the intended use of the property, in this case the property type is retail.
  • Tenancy: this refers to how many tenants occupy a property, in this case a plaza has a multi-tenancy.
  • Price/Sq Ft: is the value of each square foot of area of the property.
  • NOI (Net Operating Income): is a calculation of income used to analyze a real estate investment. To calculate net operating income, subtract all reasonable operating expenses from all revenue.
  • Lot Size (sq ft): this refers to the size of a plot of land that makes up a property, typically measured by acres.
  • APN (Assessor’s Parcel Number): this refers to a number assigned by the tax assessor of that jurisdiction for record keeping and identification purposes for that specific property.
  • Lease Type: this refers to the type of commercial lease the tenant and real estate owner agree to. There are four primary leases available for a retail property: single net, double net, triple net, and gross leases. A percentage of the tenant’s monthly sales may be charged in addition to the monthly rental fee.
  • Square Footage: is the size of the property by the square foot measurement.
  • Capitalization rate: is the rate of return on an industrial real estate property based on the income that the property is expected to generate. To calculate the capitalization rate, you can divide the net operating income by the current property value.
  • Year Built: This refers to the year the building or buildings were built.
  • Parking(Spaces): This refers to a portion of the property that is designated to parking space.

In Summary

If you are interested in investing in real estate, the retail sector is a great asset class to get involved with. Like other types of real estate, the end goal is almost always the same. Keep in mind that investing in retail real estate, you have the option of charging a percentage of the tenant’s monthly sales in addition to rental fee. There will always be risk investing in real estate, however choosing the right asset class for your intended end goal is important. Retail property may be the right move for you and your next investment.

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