Pros cons with apartments versus strip mall investing
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Investor · Houston, TX · Member since 2013 · 195 posts · 102 votes
11yI can shed some light on this as I owned both and still have a strip mall. I rarely ever hear of a 500k strip mall with good tenants and as a quality asset. I own a strip mall. Purchased for mid 5 million. I have good tenants, some credit quality, others mom and pop. The location is good, near a major mall and restaurants.
Here is what I will say. As far as maintenance goes, the strip center has very little. Just make sure the roof is well intact. Most of my leases are NNN, so tenant pays for everything. If something happens to their unit, they take care of it. Otherwise structural cost such as roof and landscaping are on me. This is almost minimal. I rarely ever step foot on the property. I just don't need to. One issue with retail strip is that the process of leasing up vacant spaces when a tenant leaves. You typically get a leasing broker and they take a pretty big cut and their may be some down time in the vacant unit due to tenant improvements as well as waiting to find the right tenant. However, once the ordeal is done, assuming you did it right you'll get a new tenant with a 5 year, or hopefully longer lease.
Multifamily is good in certain ways, but requires a lot more attention. With a 50 unit complex, you have 50 kitchens, 50 bathrooms (maybe more), several hundred light fixtures, HVAC units, water heaters, maybe even washer and dryer. So this property requires you to be there a good amount of time. The nice benefit of multifamily is that leasing up is easier. Tenants only sign one year leases. As long as the property is in the right location, releasing shouldn't be an issue.
So in one, you have very little responsibilities, but have issues during releasing. For the other, you have a lot of responsibilities, but should be able to re-lease fairly easily. Each has their own benefit. In both, LOCATION MATTERS.
12 Replies
- Investor · Pasco, WA · Member since 2014 · 30 posts · 7 votes11y
Some advice I got from a local seasoned investor is that commercial is where it's at. He prefers the Strip Mall investing over the Apartments for a number of reasons. Here are a few:
1. Less time investment on your part. A strip mall will have a lot less maintenance.
2. Your tenants will be in it for the long haul. If you get Sprint, Master Cuts or some other big name business in a unit, they won't just walk out one random month the way a tenant in an apartment would.
3. You can buy one suite at a time. Today it is easier than ever to get started in Commercial Real Estate because you don't have to buy the whole $1 Million+ building on your first deal.
If you do your homework, whichever route you take, you will be glad you did. Just go as far as you can see, and when you get there, you will see a little farther. Keep moving forward and good luck with your business!
- San Jose, CA · Member since 2015 · 4k+ posts · 3k+ votes11y
I don't know much, but there are a couple things I do know about. One is that dealing with residential tenants can be challenging. If you don't want to practice your "firm diplomat" skills, lol, you might want to stay away from dealing with residential tenants.
I worked for a PMC where the owners owned the PMC. These were their properties, and they had property managers on staff assigned to the different commercial tenants (I was not a PM for this company - I just worked there part time while going back to college, as a receptionist and file clerk).
I was amazed when the tax bills came in, and I was assigned the job of sending all the tax bills to the commercial tenants. Apparently it is common, at least in CA, for commercial tenants to actually pay the taxes. Couldn't believe it. So, this is something to check out.
Commercial tenants will usually require changes to the property, such as walls added, etc. I am not sure if the owner or the tenant pays for this, or if they're required to put it back the way it was at the end of the lease.
Commercial leases will be longer, and generally commercial tenants would be much less work than residential tenants. Less turnover, less "people" problems.
OTOH, they appear to take much longer to rent, after a tenant has moved out.
Maybe you could find a commercial lease agreement online for your state, and see who normally pays for what.
For what it's worth. Good luck to you!
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes11y
Depends on your capital to start.
A 1 million asset looks very different from a 5 or 10 million asset.
For example a strip center in the 500k range likely has local bank financing, mom and pop tenants, older building, and a second or third tier location. If you are local and want to be active maybe not bad but if out of state a big difference.
Right now strip centers are trading at higher caps relative to apartment buildings. Apartments are about 2 years further ahead on the recovery cycle. Too frothy for my taste right now. When everyone jumps in and starts buying at low prices and high caps that is when you sell or do not buy unless you get a great deal.
- Investor · Houston, TX · Member since 2013 · 195 posts · 102 votes11y
I can shed some light on this as I owned both and still have a strip mall. I rarely ever hear of a 500k strip mall with good tenants and as a quality asset. I own a strip mall. Purchased for mid 5 million. I have good tenants, some credit quality, others mom and pop. The location is good, near a major mall and restaurants.
Here is what I will say. As far as maintenance goes, the strip center has very little. Just make sure the roof is well intact. Most of my leases are NNN, so tenant pays for everything. If something happens to their unit, they take care of it. Otherwise structural cost such as roof and landscaping are on me. This is almost minimal. I rarely ever step foot on the property. I just don't need to. One issue with retail strip is that the process of leasing up vacant spaces when a tenant leaves. You typically get a leasing broker and they take a pretty big cut and their may be some down time in the vacant unit due to tenant improvements as well as waiting to find the right tenant. However, once the ordeal is done, assuming you did it right you'll get a new tenant with a 5 year, or hopefully longer lease.
Multifamily is good in certain ways, but requires a lot more attention. With a 50 unit complex, you have 50 kitchens, 50 bathrooms (maybe more), several hundred light fixtures, HVAC units, water heaters, maybe even washer and dryer. So this property requires you to be there a good amount of time. The nice benefit of multifamily is that leasing up is easier. Tenants only sign one year leases. As long as the property is in the right location, releasing shouldn't be an issue.
So in one, you have very little responsibilities, but have issues during releasing. For the other, you have a lot of responsibilities, but should be able to re-lease fairly easily. Each has their own benefit. In both, LOCATION MATTERS.
- Rental Property Investor · Durham, NC · Member since 2014 · 1k+ posts · 1k+ votes11y
I am a long time partner in a REI group that owns two smaller strip malls in a neighboring small town. One is in the middle of downtown and has eight units (we use the smallest unit as our office,) the other is a half mile away and has four units including one restaurant space. All the tenants are small-town mom-and-pop type business owners, insurance offices, lawyers, hairdressers, home health care, dentist, etc.
Most of the units have long term tenants, some more than 10 or even 20 years or longer. The other units turn over every two-to-four years. Every once in a while, we'll have a unit turn over in six months or less, but that's rare. However, as mentioned, a vacancy in a commercial unit might take months to fill with a quality tenant. With residential properties, I can usually have a new tenant in a couple of weeks.
The maintenance is mostly nil. A hot water heater one year, a HVAC unit one year, repainting parking lot one year, that sort of thing. Not very detrimental to the bottom line.
After I get a few more residential units under my personal REI business, I plan to get a (smallish) strip mall. I just want to make sure I have enough capital before I make that plunge.
Good luck. And yes, location matters!!!
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes11y
I would like to add also that for strip centers current rental increases average about 2% annually.
The leases depending on who the tenant is can have that go up each year or say in 3 years a 6% hike. With national tenants the blocking isn't as much of an issue as likelihood is high they will go the full term of the lease and not turn over so you will see the return.
If you are taking a chance on a mom and pop I like to see the rents increase annually on the lease. This way out of a 5 year lease if they take a bath year 3 I have extracted maximum rent.
In regards to NNN the leases it is true there is a base rent and then a CAM re-imbursement so they are essentially covering all the expenses. There are caveats to this in national tenants tend to be smart and have a clause that limits expenses to a certain ratio relative to their space. So if your center loses a few tenants they are not going to be paying the share of CAM for those spaces. The other component is even though the tenants pay CAM expenses on top of base rent you want to fight for your tenants expenses to keep them low. This means challenging your property tax assessment thinking of all ways possible with common areas to reduce expense sharing for the tenants. They will respond to you helping them out with loyalty usually plus it helps them stomach the base rent increases and thrive when the additional CAM is kept as low as possible.
In apartments you might hit 3% annually but you are working for that yield unless you are buying in high end areas with tenants that are professionals with a lot of income. In those situations the returns are reduced though for extra security and ease of headache.
This is why I am bullish on retail personally and my clients as well as myself individually are in purchasing mode for 2015.
- Glendale, CA · Member since 2013 · 303 posts · 67 votes11y
Med office space can be very profitable depending where. But here's 1 concept i like and think about often when comparing asset classes. With office space, you're always exposed to new competition. New construction in large projects in the market is always a possibility. Your tenant will have the option of packing up and moving as they see fit. Now, Imagine you own a small retail space on Rodeo Drive in Beverly Hills or 3rd street promenade in Santa Monica with an upscale clothing tenant, it's a "1 of a kind" property. Your tenant is bound to your location for its success. It always puts the landlord in a position of power.
- Investor · Houston, TX · Member since 2013 · 195 posts · 102 votes11y
While I agree with you. There is one factor you left out in your example. Yes those locations are phenomenal, but you will never be able to purchase those assets more than 4% cap. In fact I think one traded in that area for under a 3% cap. So risk is lower, and your return is much lower.
- 10yAdrian StamerPro MemberReal Estate Investor & Agent · Richmond, VA · Member since 2013 · 319 posts · 167 votes
Can anyone suggest me a good book on strip mall retail type commercial investing?
- Specialist · Dallas, TX · Member since 2010 · 511 posts · 252 votes9y
Hi,
For Strip Mall or Medical Offices, if you buy vacant and fill in tenant, there is significant jump in price?
I just start exploring Retail center and when i see Brand New construction in range of $200/Sq Feet. whereas 1 or 2 year old fully occupied are in $300/Sq feet range.
Anyone has experience developing retail center..?
- Full time investor · Cincinnati, OH · Member since 2013 · 405 posts · 312 votes9y
@Shital Thakkar - You mentioned vacant and fill in tenant then mentioned developing a retail center.
I have purchased vacant/bank owned retail and office space. I have also taken raw land and developed a medical center. My opinion is if you are not a developer, don't play developer. I would rather purchase buildings below build cost and add value to them. Value add commercial investing takes a lot of work and capital but the upsides can be very rewarding. Medical space is tricky with 85% of physician offices now owned by hospitals. Ancillary med services near hospitals can be a good play.
- Lender · Agoura Hills, CA · Member since 2016 · 9 posts · 6 votes9y
@Shital Thakkar I would be careful getting into retail right now. I work on the lending side and retail construction in particular is pretty much a red flag from a lending perspective. A lot of major companies (ie. Macy's, Sears, JC Penny) are shuttering stores and retail in general is a weaker asset type. I would not recommend developing. However, purchasing an existing project with leases in place and 3ish years of operating statements could be a good investment. From there, you can analyze existing lease expiration and cash flow to evaluate the risk/ return. Hope this helps- PM me if you have more questions
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