Pro’s and Con’s of Investing in Retail Real Estate
When you’re searching for the right investment opportunity, you can choose to invest in any type of commercial real estate. For 2023, retail real estate may be a good sector to invest in. You can choose to purchase, lease, or rent out retail spaces that include everything from pop-up shops to large shopping centers and everything in between. This guide covers the pros and cons of adding retail real estate deals to your investment portfolio.
Pros of Investing in Retail Real Estate
There are many benefits of investing in retail real estate, which include everything from the potential for high returns to lengthy leases.
Potential for High Returns
When you invest in retail and commercial real estate, you could obtain an annual return of 6-12%. In comparison, the average annual return for investments in residential properties is around 2-5%. If you can afford the investment, retail real estate can significantly increase the value of your portfolio without causing you to take on high amounts of risk.
Hours of Operation Limits
You’ll also benefit from limited hours of operation. Most businesses in retail spaces close at night, which means that managing the property won’t be an all-day endeavor. While there’s a possibility of fire alarms or break-ins at night, you can avoid issues like tenants calling at midnight because they lost their key.
Lengthy Leases
In most cases, the average tenancy contract in a residential building is around 6-12 months. In comparison, commercial tenancies last for around 3-10 years. It’s also common for commercial tenants to stay even longer than the original contract if they’ve invested money into improving and customizing the space.
Small Deposit Requirements
Investing in retail real estate can be done without paying an exorbitant sum of money. For instance, smaller retail spaces can be purchased for as low as $90,000-$100,000. In comparison, smaller apartments cost at least $300,000. If you’ve never made a commercial real estate investment before now, placing your money into retail real estate is a great way to enter the market.
Cons of Investing in Retail Real Estate
Despite the many benefits of investing in retail real estate, there are some drawbacks to consider.
Ample Time Commitment
If you invest in a retail building with around five tenants, you’ll need to perform extensive management. The many tasks that must be completed include:
- Handling multiple leases
- Making annual common area maintenance adjustments
- Additional maintenance issues
- Handling public safety concerns
You can’t be a passive investor unless you hire a property management company to help you perform these tasks.
Sensitivity to Economic Conditions
If the economy is currently healthy and strong, your retail investment should see high returns. In this scenario, demand for retail space will be high, which should result in market value increasing for these properties. When an economic downturn occurs, demand can fall for these properties. Residential homes don’t have the same sensitivity to economic conditions.
More Risks
There are also a few more risks that occur when you invest in retail real estate. Properties used for commercial purposes will have more visitors, which means that there are several people on the property every day who could become injured.
Some of the more common incidents that occur at retail spaces include cars hitting patrons, customers slipping on ice, and the sides of a building being spray painted by vandals. While these incidents can take place on any property, the chances of them occurring on commercial properties are higher. If you want to keep risk low in your portfolio, another type of real estate investment may be preferable.
Challenging to Find Tenants
Finding the right tenants may seem simple, however this isn’t always true for retail real estate. Since these properties attract more long-term leases, finding the right tenant who wants to commit to a lengthy contract can be challenging. There are times when retail real estate will experience long vacancies. During this time, you’ll be tasked with paying all costs associated with maintaining the structure and property.
Investing in retail real estate can be beneficial for your portfolio if you’d like to hold a long-term investment and bring in monthly returns. Before you make this investment, weigh the pros and cons to identify if this opportunity fits your portfolio’s risk profile.