Every real estate investment opportunity comes with risk, but it also comes with the opportunity to boost your bottom line like never before. You just need to know what a good opportunity looks like, especially if you’re contemplating pouring your money into office or retail real estate investment properties.
To help, I’ve compiled some property investment advice focused on the differences between a retail real estate investment property and an office property, so you can decide for yourself which one may produce the greatest return on your investment, or ROI, in your particular situation.
A major advantage of investing in retail spaces is that these properties are generally landlord-friendly. That’s because tenants typically pay all expenses in net net net leases, or NNN leases. In addition, retail properties often have high rental yields of between 5% and 12% because they have well-known companies as tenants or have several different tenants.
With the “anchor effect,” a large store, like Walgreens, is used to anchor an outdoor shopping mall. The benefit of this setup for investors like you is that the rents of the other shops in the area can go up as a result of the additional shopping traffic generated from the mall’s anchored properties.
Also, you can take advantage of what’s called the percentage rent with retail real estate investment properties. This rent is dependent on the mall retail properties’ sales volumes. That means if a shop is doing extremely well with its business, you can collect more rent. In this situation, you’re gaining profit via the tenant’s base rent and can also get a portion of the tenant’s sales to boot.
Investing in office space often means less risk for you. Additionally, these properties are a bit more cost-friendly compared with retail spaces, as long as you account for all the expenses carefully. At the same time, you may not receive as great of an ROI. However, if cost is a factor, investing in office space over retail space makes financial sense.
An especially good reason to invest in retail is that the lease terms can run as long as 10 to 15 years. Retail tenants have a tendency to stick around longer since they have invested in substantial amount of money in their leased spaces. For instance, they invest their capital in decorating, customizations, and improvements. If they stay in one place for a while, they can amortize these costs over a long period.
Also, retail giants are relatively established, which means that, compared with smaller businesses, big retail companies can more easily assume the monetary risk that comes with longer-term leases.
Meanwhile, office lease terms typically run from around three years to as many as 15 years. Newer or smaller companies usually can’t guarantee that they’ll be financially strong long-term, so they usually choose shorter leases. So, if you prefer longer leases, retail may be the way to go. On the other hand, office tenants often renew their leases, so office real estate investment properties are still an attractive option.
A major benefit of both retail and office properties is that the landlords and management companies that support them are usually free from responsibilities related to the property. This makes these properties different from apartment buildings, where tenants may contact their landlords when something malfunctions or is damaged.
For example, an apartment building tenant may need a floor refinished. In this situation, the tenant has to inform the landlord of this and then wait for the landlord to handle it. However, tenants in office and retail properties are usually more on top of problems with their spaces because they don’t want to lose business due to property-related issues. As a result, they typically have a greater amount of freedom to address repairs before they affect their businesses.
All in all, both retail and office properties are excellent sources of passive income if you want to be more hands-off after the deal is done.
If you’re interested in diversifying your portfolio, your best bet is to go with retail property investment. This is especially true if you plan to invest in a shopping center or mall. Why? Because this type of deal features several income sources from many tenants. That means, if a single tenant ends up going bankrupt or moving locations, you won’t be affected as much financially.
The above is good news considering that retail has had a hard couple of past years, with the increasing popularity of online shopping. However, experts say that retail sales in the third quarter of last year actually rose by more than 6% year-over-year. This was the largest gain since back in 2012. Retail sales are expected to continue to be healthy in 2019 due to increasing consumer confidence, a robust job market, more wage growth, and lower taxes.
For office properties, the outlook also remains positive. During the first three quarters in 2018, activity began to slow down, but it remained positive. However, during the final quarter, the industry had a very optimistic outlook due to a leasing market that was active, coupled with rent growth. In 2019, this same momentum is continuing. The demand for flexible space is continuing to boom, especially space used for technology and coworking purposes.
If you’re ready to take your bottom line to a whole new level, both office and retail real estate investment opportunities and office vs retail real estate may be a smart choice depending on your end game. The great news is that you don’t have to dive into the property investment world on your own.
Learn how to raise money to invest in real estate from me, Joe Fairless, to start your journey towards financial independence.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.