Zack Childress - Pros and Cons in Retail Real Estate Investment

I will now be talking about the retail real estate in which the investors can invest. The beginners might ask this question, “What is a retail real estate?”

The answer to this question is simple. It simply means retail properties that are used in the market to sell customer goods and services. Supermarkets, shops, offices, dry-cleaners, cafes, etc. come under retail real estate category. Other retail properties are stand-alone retail buildings, restaurants, retail within offices, industrial and residential developments.

 Retail property investment offers solid returns to the investors.  Zack Childress has mentioned about its pros and cons.

Pros and cons in retail real estate investment

The Retail real estate investment gets the customer to your doorstep and enables you to sell your products to them. Shopping malls are the main attraction in the city as it has all the products under one roof. Below are the pros and cons about retail real estate investment.

Pros

1. High Returns – Investors go for the retail business as they get more yields in this business. It is calculated as the percentage of annual rental income/Price paid for the property. It offers 5 to 6% to the investors who prefer an income-stream based income over capital gains.
2. Long Leases – Retail leases provides longer leases than residential leases to the tenants. They are signed for at least 5 years, which gives the security to the landlords. Most of them also include annual rent increases, which is very often tied to customer price index (CPI). The turnover rents give the percentage of the gross annual income to the landlords, which can be a good motivation for the retail real estate investors.
3. Low maintenance – Retail leases have the tendency to be net leases as the expenses like real estate taxes, insurance, utility bills and maintenance costs as the tenants have to bear them. If you are the owner of the real estate property and renting it out, you get tax benefits.

Cons

1. Retail can be tough business – The retail industry is very sensitive to economy state. If the economy is down, it affects the retail sectors and businesses might fail. If you decide to invest in retail real estate, you should be prepared for the long vacancy periods during the economic crunch. You need to find out about the prospective tenants before signing the lease.
2.  High Investment – This is the major obstacle for the investors as they have to deposit at least 30% and pay the high interest rate.
3. Changing consumer patterns & demographies – As far as real estate property is concerned, location plays a critical role. It should be easily accessible for the tenants with respect to parking, public transportation, grocery, clinics, hospitals and pharmacies.

Conclusion

Retail property attracts more investors. It is more suited for private buyers, overseas investors and property trusts. A-REIT’s are suitable for the small investors as it is the easiest way for them to start their business in retail real estate.