Even if real estate investing has been a hot button issue since forever, many investors are still wondering whether it’s better to invest in commercial or residential properties.
Some consider residential properties as the least riskiest investments, whereas others say commercial buildings are much safer because they have bigger cashflow potential.
Either way, before investing your money, you must know the differences between residential and commercial properties.
In today’s post, we’ll focus on the differences between investing in apartment buildings, industrial properties, and retail properties. It can be difficult to distinguish between these three types of properties, but we will try to make it simple.
Let’s discuss these properties based on several factors.
Factors That Affect The Success Of Real Estate Properties
It wasn’t long ago that only a few people have heard about Triple Net Investing. Now, it’s becoming more common as more and more investors are looking towards this type of investment.
Commercial real estate properties are usually Triple Net Lease properties and their success depends on multiple factors.
Below we have outlined a few.
1. Return on Investment
- Apartment buildings have higher building and maintenance costs and lower NOI. Therefore, they produce less profit compared to other property types. Rental yields for apartment buildings vary between 2-3%.
- Industrial properties cover a smaller market. These properties have cheap maintenance costs and great margins. Certain types of industrial properties may have more wear and tear, however, they can be covered with the margins. Since these buildings take their value from the number of square meters for rent, the rental income is higher. Rental yields are usually about 8%.
- Retail properties are more landlord friendly because the tenants usually pay all the expenses in an NNN lease. Since retail properties have tenants that are either a well-known company or have numerous different tenants, it is quite understandable that they will produce more income. Compared to Apartment and Industrial buildings, retail properties have higher rental yields, that is above 5% and sometimes they reach up to 12%.
2. Lease Term
- Apartment buildings tend to have shorter leases, which turn over every 6 to 12 months.
- Industrial buildings have tenants who agree to sign leases for longer periods (let’s say 5-20 years).
- Retail properties leases vary from 10 to 15+ years. Tenants stay longer because they invested a lot of capital in the leased space.
3. Hands-on Management
Landlords of retail and industrial properties are almost free from any property related responsibilities, which is not the case with apartment buildings.
In an apartment building, tenants might need to call upon their landlord when a damage is being done on the property. For example, if the floor needs to be refinished, the tenant must inform and wait for his landlord to deal with it.
On the contrary, tenants in the retail properties cannot wait for their landlord to fix any damage, because even a single day of non- working business can mean a serious financial loss. So, they have more freedom to deal with the repairs before it affects their business.
4. Different Tenant – Different Needs
Apartment buildings, Industrial buildings, and Retail properties all have different tenants, meaning all tenants have different needs.
Tenants in Apartment buildings usually have more universal needs, they want to live near restaurants, shops, and retails. When it comes to retail properties, even tenants in the same industry may have different needs.
Some retails focus on foot traffic, some on drive-through traffic. For example, those who sell car decals or sound systems do not necessarily need to be located in crowded areas because their clients can reach them by traveling.
Industrial buildings, on the other hand, are mainly located on the edges of, or outside of the main residential area of the cities, and of course, they are provided with a good transportation.
Why Investing In Retail Properties Might Seem Like The Best Option?
Retail properties are playing a huge role in the real estate industry and they include a variety of properties.
From pharmacies, grocery stores, restaurants, mobile carriers to mega malls, retails can be found almost in any neighborhood. You can also spot many outlet malls, fashion malls or big-box stores and well-known chains. All of these are considered retail properties.
Retail properties are usually Triple Net Lease, where a tenant is responsible for taxes, common area maintenance, and insurance, either proportionally or fully.
The so-called ‘anchor effect’ is quite popular for these properties. That is, when a store such as Walgreens or Home Depot anchors a shopping mall, other tenants will raise the rent due to the extra shopping traffic gained from the anchored properties.
The percentage rent is also beneficial for you as an investor. The percentage rent is based on the sales volume of the retail properties. This means that if the tenant is doing well in his business, you will be collecting more rent. The investor is still gaining profit by the base rent, but he may get a percentage of the sales.
Retail property tenants usually sign up for long leases because they invest a lot of money in improvements, customizations or decorating. So, it’s not unusual that they want longer leases since they will want to amortize those costs over an extended period.
It’s nonsense to think that tenants would put their money into leasehold improvements and move out in a year or two. That’s why long leases are beneficial to investors. They prevent themselves from vacancy and sometimes they can request higher rent structure.
Retail properties are also the best way for portfolio diversification, specifically when it comes to investing in a mall or a shopping center. That’s because this investment type has multiple sources of income from multiple tenants. Even if one tenant goes bankrupt, you will be minimally affected and won’t depend on a single tenant.
Retail properties are also great passive income investments. You won’t be bothered answering phone calls from tenants because management will take care of it.
How Can A Buyer’s Agent Like Westwood Help You Get The Desired Retail Property?
Successful retail investment requires an understanding of the rather complex factors which affect the commercial real estate market. That’s why it can be quite challenging to work on your own.
This is where a Buyer’s Agent steps in.
Buyer’s Agents have a great knowledge of these factors and will help you make the right selection when purchasing a retail commercial property that will produce constant income.
A Buyer’s Agent is there to help you with any property related issues and questions. Buyer’s Agents have powerful negotiating skills and they will present you with numerous retail properties from which you can choose from.
Westwood Buyer’s Agents have more than 18 years of experience in the commercial real estate industry, specifically with retail properties.
As an investor, you may not know that commercial real estate properties have numerous tax benefits such as depreciation allowances or plant equipment. Westwood team can advise you on these tax benefits and provide info on how to add value to your property.
So, why bother with managing tons of paperwork, zoning issues, property hunting, lease structures etc. when you can have a professional to take care of it, for free? Yes, Buyer’s Agents services are free of charge for you, the investor. They split the transaction fee with the Seller’s Agents.
Speaking of Seller’s Agents, they love to work with Westwood Buyer’s Agents. They know that we cover all the details, and they see our Letter of Intent as an already closed deal.
If you want to learn more about Buyer’s Agent responsibilities, take a look at this article: How Buyer’s Agents Help You Make The Right Commercial Property Investment.
So, if you have some property in mind or you need a help from Buyer’s Agent to make you a shortlist of properties, please feel free to contact us.