Making Smart Decisions: Assessing Factors Affecting Returns on Retail Real Estate Investments
If you want to add commercial real estate investments to your portfolio, one sector that you might be interested in is the retail real estate industry. Retail real estate is comprised of shopping and entertainment venues, which include everything from shopping malls to florists. Before you make an investment in retail real estate, you should understand the factors that can affect your returns.
What You Should Expect Your Retail ROI to Be
The ROI you bring in when investing in retail real estate differs depending on the specific property that you’ve invested in. A good cash-on-cash return can vary greatly. However, the level of risk you’re taking on also plays a role in helping you set a target ROI.
If you use the cost method of calculating ROI, take the equity on your retail space and divide it by the amount you spent on purchasing and maintaining the property. If you bought a piece of retail real estate for $1.5 million and invested around $250,000 in total renovations to bring the value of the property up to $2 million, you should have $300,000 in total equity. This would result in an ROI of just over 17 percent.
Primary Factors that Impact Retail Real Estate ROI
There are numerous factors that affect your return on investment with a retail real estate property, the most important being the cash flow you bring in. Your main goal is to receive more money than what you put into the property without taking expenses into account.
While there are many additional factors that impact your ROI, the location of the property is an essential one. If a retail store or shopping center is in a place that’s far away from the city center, it may be difficult for the store to gain the amount of foot traffic that’s needed for you to have a high ROI. Better locations attract better companies that are willing to pay more. When considering the location, note that neighborhood grocery stores and shopping centers have seen a sharp increase in popularity since the onset of the COVID-19 pandemic. This trend should continue for the foreseeable future.
A couple of additional factors that might affect your ROI include the property’s development potential and your financial instincts. If you know when to get out of a fledgling property, you may be able to maximize your returns. If the property accommodates additional development opportunities, you could substantially increase your return on investment.
How to Increase Your Retail ROI
There are numerous things you can do to maximize your return on investment with retail real estate, the primary of which include but are certainly not limited to:
- Create a long-term investment strategy with a clear understanding of when to exit
- Work alongside experienced professionals to make sure that mistakes are kept to a minimum
- Take full advantage of tax breaks
- Add more value to your property with renovations and enhancements
- Make sure to conduct extensive research on possible investments before putting forward any money
You might also want to invest in analytics. If you’re searching for ways to improve your ROI, data analysis allows you to track investment income and determine how your property can be improved.
The right renovations can add a substantial amount of value to your property while also making the building more appealing to businesses that are searching for a new location to remain in for years to come. Anything you can do to bolster your retail property and location will help you improve your ROI. At the very least, you’ll bring in higher quality tenants that are more likely to make their payments on time and sign multi-year leases.
Keep in mind that a poorly performing retail real estate investment may provide you with a higher return long term. If you purchase a rundown property at an affordable price, any improvements and renovations that are made could increase the property’s value to an amount that’s much higher than anticipated.
Retail real estate offers several advantages that aren’t available with other types of commercial real estate. However, making the wrong decision on which property to invest in could negatively impact your entire portfolio. Understanding which factors affect returns on retail properties should give you the tools you need to choose the right investment.