Investments in the rental business today is one of the most effective ways of investing money. Compared with bank deposits, the yield is 1.5-2 times higher. And unlike deposits and securities, there is no risk of devaluation or falling share prices. The property can always be sold or leased. If the premises were purchased free, and then sold as a formed rental business, the sale price can be 20-30% higher than the purchase price.
The easiest option is to buy premises with a ready tenant. The main difficulty is the choice of a liquid object. From the investor will require not only knowledge of the real estate market, but also an analysis of the current financial performance of the tenant, the location of the premises and the competitive environment, as well as the potential for future rentals.
Therefore, when selecting a retail property, there are 3 main aspects to focus on:
1. tenant and current profitability;
2. location and customer traffic;
3. the characteristics of the premises themselves.
Let us consider each point in more detail.
The profitability of the facility and return on investment directly depend on the rental rate paid by the tenant. The most effective tenants are food and basic necessities. They are in demand at all times. Chain tenants are always a priority: grocery retailers, liquor stores and pharmacies. They are stable, set up for long-term cooperation and can pay high rents. In addition, to open a new chain outlet, they always carefully analyze the potential traffic and competitive environment, and choose promising locations in terms of turnover. As for profitability, it varies depending on the location. A good return today is considered to be 8-12% per annum, in the region up to 15%.
Hence the conclusion: the main criterion for assessing the quality of space is the location and the presence of customer traffic.
From the successful location of the object depends directly on the passability, and thus rates of turnover. There are two basic locations: bedroom communities and shopping corridors of the center of the capital. Dormitory districts are large communities with dense residential buildings, while the center is an active tourist and business district.
Each type of tenants has its own target audience, and there is a demand for one location or another. Supermarkets, especially low-price segment, alkomarkets, drugstores, Internet delivery services are mainly localized in residential areas on outskirts of cities and region. In the center there are mostly dining establishments, flagship stores of world brands, and chain tenants of high price segment. Regardless of location, premises located on the first line of busy streets with intensive pedestrian traffic are in the highest demand.
No less important are the parameters of the premises themselves. There are always risks that the current tenant can terminate the lease, so when choosing an object for investment it is important to analyze how easy it will be to rent the premises to an alternative tenant in the future. The most successful option – room free layout with a minimum of load-bearing walls, large windows and high ceilings of at least 3.5 m. Of the important advantages – the availability of exhaust for catering or the possibility of equipping it, a sufficient amount of electric power and a specialized unloading zone. The combination of these parameters makes the space versatile and increases the pool of potential tenants. Basement, ground floor and multilevel rooms, non-standard layout, cabinet system, with low ceilings and no windows are considered difficult premises. They are difficult to rent out, and rental rates are always at least two times lower than the first floor. So it’s better not to choose such options, even if the current yield is high. You do not know if the tenant will want to leave the site tomorrow. The analysis of the property cannot be complete without a thorough inspection by lawyers of the documents of title and the lease agreement of the premises.
In addition to retail real estate, there are alternative ways to invest. Retail real estate is a tool for an investor with some experience with retail chains and a budget of 1 million dollars. Today on the market most investors with a budget of 0,1-0,3 million dollars. For them, the most understandable investment tool is small offices and studio-type premises for rent for housing, private practice rooms, showrooms, etc. And the yield when renting ranges from 8-12% per year. This is:
– A smaller amount to start;
– skills for beginner investors; without much risk;
– minimal contact with the supervisory authorities.
Investor in such a rental business has leverage over his property: there is an opportunity through negotiations or optional improvements to increase his rental income.
This is a worthy alternative to the retail real estate, where proposals below $ 0.2 million is practically absent, and in the center even below $ 0.5 million. There is no need for an in-depth analysis of the location, the competitive environment, and the tenant’s financial performance, as is required in retail real estate. It is sufficient to analyze the rental rates for housing and offices in the location of interest, which will allow you to understand how much space can be rented out, to calculate the payback period of the investment. There are similar options with full service, where the rental and operation is engaged in the management company for a certain percentage. Such investments will steadily generate a monthly passive income.