December 6, 2021


Retail Investment Properties

Retail commercial properties are properties that are commercially zoned and used for business purposes only. These properties cannot manufacture goods; instead, they can only sell products. Common examples of retail commercial properties include malls, shopping centers, and retail stores. Retail commercial properties present a far greater income potential than single-family homes. Typically, retail commercial investors expect annual income percentages of 6-12% (depending on inflation and other economic factors). Compare that to the 1-4% annual returns that single-family home investors typically expect. Inflation rates have reached an astounding rate of 6.2%. Inflation, however, could work to one’s advantage in the commercial real estate market by decreasing the amount of debt you owe while boosting your principal value of the real estate you own. In this article, we’ll break down the types of retail commercial properties, explain financing options, reasons to invest, where to buy, and much more. Let’s dive in. Types of Retail Properties Shopping Centers and Malls Malls typically contain an enclosed area with multiple stores and/or restaurants attached. Some malls are built around an “open concept.” Most malls cater towards retail and apparel vendors. Shopping malls present a way for retail investors to diversify their investments. Malls contain multiple stores—if one store goes under or can’t pay rent, the investor won’t suffer a huge financial loss. Additionally, unlike residential real estate, mall tenants are extremely unlikely to damage property. Tenants have an incentive to keep their building in prime condition to attract customers walking by. Malls can be a great addition to any retail commercial property portfolio—they’re proven to provide steady returns over a long period of time. LifeStyle Centers Lifestyle centers offer a modern, open variation on traditional malls. Specifically, they’re shopping centers or mixed-used commercial developments that combine traditional retail functions of a shopping mall with leisure activities. They’re often located in expensive areas and orientated towards upscale consumers. In terms of tenants, lifeStyle centers often contain smaller chain stores, dining establishments, and entertainment options. As the world reemerges from lockdowns, data reveals a 6.8M increase in visits to lifestyle centers from August 2020 to April 2021. If you’re looking for a safe, diversified addition to your commercial real estate portfolio, lifestyle centers might be a great option. Power Center Power centers are real estate centers that typically include at least 3 massive, national stores. Think: Walmart, Target, Home Depot, Lowe’s, etc. They share the same parking lot, and they’re often surrounded by other “pad sites” occupied by restaurants, fast food operations, banks, and other well-known tenants. Power centers typically spread out horizontally; however, they’re also built vertically to save space in densely populated areas. Older malls are often renovated into power centers. Power centers generate a large amount of foot traffic by bringing together large, powerful retailers. Multitenant: Strip Malls Strip malls are another common type of retail commercial property. Often anchored around a grocery store, strip malls generate a high amount of foot traffic. Other tenants within the strip mall often include smaller mom and pop stores, boutiques, as well as national brands. Strip malls without an “anchor tenant” are usually occupied by professional service businesses—insurance agencies, clinics, real estate agencies, and more. Even despite the recent pandemic, strip malls are still a viable asset class for real estate investors, either through direct purchase or through REITs (real estate investment trusts). Mixed Use: Community Commercial Retail Community commercial retail properties are also known as “urban street retail” or “mixed-use” properties. These retail shops are typically found on the first or ground floor of a larger office or multi-family building. Located in the urban center of large cities, they can provide a steady source of income for real estate investors. Community commercial retail properties are all about proximity. They integrated planned shopping areas in close proximity to residential neighborhoods, thus increasing foot traffic and exposure for businesses. Convenient access helps boost day-to-day shopping and revenue for these businesses. Reasons to Invest in Retail Commercial Properties Long(er) leases Depending on your state, most tenants of residential properties turnover every 6-12 months. Commercial tenants, however, experience a much lower turnover rate—typically between 3-10 years. Additionally, retail commercial property tenants tend to stay longer at a property when they’ve invested capital to customize the retail space. As a landlord, it’s often a good idea to give your retail renters leeway when it comes to designing their space because this capital investment incentivizes them to stay longer in the space. High return on investment Commercial retail investment properties often generate returns of anywhere between 8-12%. Compare this to the average rental return for residential properties, which hovers around 3-5%. Minimal rates and other expenses Landlords of residential properties are typically liable for paying property rates like water, body, etc. This isn’t the case with commercial properties. Instead, your commercial tenant will be responsible for those expenses, which means less money from your pocket. Small deposit requirements Commercial retail properties are typically priced cheaper in comparison to the average residential property. That means, to purchase the property, you’ll only need to front a small(er) capital amount. For example, a small apartment complex might cost upwards of $300,000. A small retail space in the same area might cost as little as $90,000. Financing Options for Retail Commercial Properties When it comes to financing retail commercial properties, you’ll have multiple options, including bridge loans, CMBS Loans, bank loans, construction loans, small balance loans, permanent financing, and mezzanine loans. There’s no one-loan-fits-all approach to financing retail commercial properties. Instead, it’s important to talk to your lender in order to determine the style and size of loan that will best fit your needs. Where to Buy Retail Commercial Properties When it comes to retail commercial properties, the old adage rings true: location, location, location. Markets in some areas might constantly struggle; other areas might constantly support lucrative markets. Location also matters because customers need to be able to find your property and parking. Typically, urban areas like Charlotte, Boston, Dallas/Ft. Worth, Orlando, Atlanta, Los

Office Investment Properties

Office commercial properties (also known as office CREs) are used specifically for conducting business and workplace-related activities. Some businesses that occupy office commercial real estate own the property they reside in, while others don’t. Businesses that don’t own their own buildings typically rent from an investor or landlord. Office commercial leases tend to average 5 – 10 years. Factors like duration of stay, location, and size will impact the interest rate that lenders charge for commercial office buildings. In this article, we’ll explore different types of office spaces, explain their investment upside, examine different financing options, and give an overview of some of the best places to purchase commercial office space. Let’s dive in. Types of Commercial Office Properties In this article, we’ll look at 5 common types of commercial office properties: business parks, multitenant, medical, dental, and user-owner. Business Park Business parks are areas of land, owned by real estate corporations, where many office buildings reside close to one another. They’re usually developed in suburbs, and they typically offer cheaper lease agreements due to lower construction. Business parks used to be a staple in commercial office real estate. However, in recent years the development of these properties has slowed for numerous reasons: increased options for builders, a decrease in companies requiring in-person office work, and a general aversion to “archaic” design. That said, in recent years builders have designed more “modern” business parks to appeal to changing design sentiments. Multitenant Offices Multitenant office properties offer multi-tenant leases, which let several different businesses occupy the same general space. These leases often require that tenants take added responsibility or pay additional costs beyond just rent. For example, tenants might pay for select utilities or relevant costs to maintain the physical property. The property owner divides these costs among the tenants. Multitenant office properties offer 2 main advantages for potential investors: Lease length Multitenant lease agreements average around 7-8 years. Tenants fill up vacant spots quickly, and more tenants mean more rent money for investors. Additionally, even if a tenant leaves, you’ll still generate rent money from other tenants, which mitigates your losses. It’s rare to ever have a fully vacant multi-tenant property. Efficiency Owning several properties in several different areas makes it harder to effectively manage your investments. The ability to manage tenants in the same space is a major upside of multitenant office properties—this also limits the number of transactional procedures and fees you might face. Medical Offices Medical offices are commercial office properties designed to support health care practices and medical activities. They’re physically designed to accommodate the needs of medical practices and to enhance the patient experience. As a property owner or investor, keep in mind how the appearance of your property will affect tenant success. In other words, nobody wants to walk into a medical office that feels “overly clinical” or that isn’t well-designed. Similarly, think about location. The physical property should be easily accessible to major roadways and also provide plenty of parking. Always consider these factors before investing in a medical office building. If you’re leasing out a medical office building, consider the other medical offices in your area. While you want to avoid competition, remember that not all medical offices offer the same services. It might be beneficial to lease near another medical office property if that property offers highly specialized service and if your tenants offer a complimentary service or can receive referrals from them. Dental Offices Dental commercial office properties are similar to medical office properties, but they also have their differentiating factors. Just like other medical office buildings, dental offices are designed around a specific medical practice—in this case, dentistry. Given that purpose, they’ll usually have different rooms designed for multiple patients, certainly required utilities per room and specified rooms for certain dental service machines. Leasing dental commercial properties aren’t the same as leasing other forms of office real estate. Typically, dental offices are owned by dental professionals—they aren’t leased by a landlord. Although this isn’t always the case, different factors—the hassle of moving equipment, advertising the move, or issues with the volume of business upon moving—make it difficult to find occupants for a vacant property. We’ll discuss financing options later in this article. User-Owner Offices User-owner offices are office properties where the occupant of the space also owns the space. Technically the property owner must own at least 51% of the office space to be considered user-owner. User-owner property owners tend to present more financing options than other office property types. For example, the SBA 504 loan option gives some of the best financing options available for these properties. Remember that many user-owner properties for sale might be vacant or soon-to-be vacant. It might be difficult to find and retain tenants for these properties. Do your research before purchasing these properties. Why Invest in Office Commercial Property? Commercial office properties present numerous advantages over residential properties. Here are some reasons to invest in office commercial properties. Income Commercial office properties present significantly higher average annual returns (6-12%) than residential properties (1-4%). Additionally, while residential properties generate most of their value through appreciation, commercial office properties also generate value from tenant rent—this high-yield, a constant stream of income appeals to most investors. Lease control Commercial office properties give property owners a high level of control. Unlike residential properties, commercial office real estate isn’t subject to certain bylaws and regulations. As a commercial property landlord, you’ll control everything from lease length to deciding which tenants pay for what utility. Increased control over your property means less trouble for you. Direct and Indirect Investment Commercial office properties offer two main investment opportunities, both of which might be attractive, depending on your financial situation. Direct Direct investment—this is what most residential investors do—means owning and monitoring the property. If you have a high net worth or can generate enough financing, this can be a great option. Indirect Indirect investment means investing in marketable securities. These securities then invest in commercial real estate stocks

How to Build an ADU

What is an ADU? Accessory dwelling units are secondary dwelling units built on the same lot as your larger, primary residence. They’re a great way to add extra space (and value!) to your property. Certain features “qualify” a building as an ADU: Its own utility hookup Its own living space Its own foundation Its own water hookup Types of ADUs There are 4 primary types of ADUs. Detached ADU A detached ADU can be an apartment in your backyard or a cottage. It has its own entrance, it stands separate from your primary dwelling, and it has its own water and utilities. Another person/family could live there entirely separate from your home. Attached ADU An attached ADU shares at least one wall with your primary home, and there is no internal entrance to the ADU. The attached ADUs often share utility hookups with the main residence, but they still fully function as autonomous living spaces. Garage conversions A garage conversion might be an attached or detached ADU. Either way, it’s a garage converted into a living space, subject to the same four qualifications for an ADU. Interior conversions Interior conversions are typically either in the basement or the attic. They aren’t spare rooms; instead, they are fully functional living spaces that operate independently of your house. Although they might not be visible from the outside, they’re still considered an ADU. Why should I build an ADU? Before committing to an ADU, you need to know who you’re building it for. For example: Is your ADU for aging grandparents who can’t afford a nursing home? Or is it for an adult child still getting on their financial feet? Maybe you’re building for a special needs family member who needs extended care? Who you’re building for will direct how you approach planning and constructing your ADU. Aging grandparents need a space suited for limited or reduced mobility, so an interior attic conversion probably isn’t your best option. An adult child will want autonomy and his/her own space, so a garage conversion or detached ADU might work well. A loved one with special needs will require accessibility because they might need care during all hours of the day. An attached ADU or an interior conversion would be a good choice. Calculating the cost of your ADU You’ve decided what type of ADU fits your needs—now it’s time to start thinking about cost and financing your ADU. It’s impossible to tell exactly what your ADU will cost. Why? Because of the sheer amount of variables: the structure type, the builder, market cost of materials and labor, etc. That said, you can examine aggregate data from your market to get a good sense of what you might pay for your ADU. Notably, this data includes (i) design costs, (ii) permit costs, (iii) utility connection costs, (iv) construction costs. It doesn’t include landscaping or furniture costs. This data covers ADUs built in the Portland market from 2016-2019. Average Cost ($) Sq. Footage  Cost/Sq. Foot Detached 180,833 676 305 Attached 154,400 556 300 Garage 142,000 504 297 Basement 185,833 676 265 For a deeper dive into the data, check out this post from Building An ADU. The key takeaway? The fixed costs (development, labor, materials, etc.) of a new housing development drive the final price of your ADU. As these fixed costs increase year over year, so will the price of your ADU. The good news? The land you’re building on is free—you already own it! Land typically represents the most expensive part of any real estate project. But when you’re constructing an ADU, you already own the land! That means every dollar you spend goes into the actual property. Finding a builder Finding a builder is one of the most important parts of the construction process—you get what you pay for. It’s important to hire a professional who’s familiar with ADUs and with the ADU ordinances in your area. You’ll add months of time and headache by skimping on a good builder. A quality builder will know how to design an ADU that will adhere to local ordinances, and he or she will also be able to accurately assess costs. Before hiring any contractor or designer, ask questions and review samples of their past work. Getting your ADU approved You’ve found the perfect builder for your ADU. Now it’s time to start the building process. First things first: make sure you and your builder understand the ADU regulations in your city. With that knowledge, you can start the permit approval process. Each city has its own set of documents, but they’ll typically include things like an ADU Universal Checklist, ADU Building Plans Handout, an ADU Inspection Checklist, or something similar. Fill out the necessary documents, and then submit your building plans to your local government (usually at City Hall). Make sure your builder or architect draws up your plans. A quality builder will know all the technical details to include. Once your package is approved, you’ll start construction! Constructing a detached ADU includes steps like establishing your foundation footings, installing underground utilities, adding structural rebar, concrete placement, framing, and more. Key takeaways Constructing an ADU isn’t easy and it isn’t cheap. However, ADUs can add massive value to your property and/or provide rental income that makes them worthwhile! Before committing to an ADU, make sure you understand both who it’s for and why you’re building it. Your answers to those two questions will direct the rest of your planning and construction process. When you’re ready to hire a contractor or a builder, remember: you get what you pay for! Better to spend extra money on a quality, seasoned builder than waste time and money later dealing with someone who isn’t familiar with ADUs.