Shopping Center Investing for Beginners

Shopping Centers can be a great asset class to invest in if you understand the fundamentals and choose your properties wisely. The following training provides extremely valuable advice on what every beginner needs to know before they embark on investing in a shopping center. You’ll discover an overview of the different types of shopping centers, the 4 critical aspects of shopping center investment you must know, the 3 most common leases, the power of triple net leases and some guiding principles to follow when you invest in shopping centers. Prepare to be enlightened on this commonly seen yet rarely talked about asset class. You may never look at those strip centers you frequent the most the same ever again. Here is a very powerful training on shopping center investing for beginners:

 

Shopping Center Investing for Beginners PodCast

Types of Shopping Centers

Shopping centers come in 2 different configurations, a Mall or a Strip Center.

#1. Mall

You are probably most familiar with a mall structure. They can take up 50-100 acres of property and include a central walkway with stores facing each other on both sides.

#2. Strip Center

A strip center is much smaller, taking up around 3-830 acres of property. It is open-aired, with nothing covering you, and consists of a “strip” of stores.

8 Types of Shopping Centers

Within these 2 types of configurations are 8 different types of shopping centers.

• Neighborhood Center
• Community Center
• Regional Center
• Sub-Regional Center
• Fashion/Specialty Center
• Power Center
• Theme Center
• Outlet Center

Key Term

The term “Anchor Store”. This is one of the most important terms to learn when investing in shopping centers. The concept behind this term is that an anchor store is a prominent store that every knows, anchoring that location and bringing in traffic. Think of an anchor store the next time you go to the mall. It could be a grocery store, a pharmacy, a name brand restaurant, or department store.

4 Critical Things to Know About Shopping Center Investing

#1. Grocery-anchored shopping centers will perform better. This because it will attract visitors 2-3 times a week, so there is consistent traffic coming into the area. Another benefit to this is that the grocery business is a non-cyclical business. Whether the economy is up or down, people need groceries, so you can count on a certain number of visitors, regardless of the state of the economy. With grocery-anchored centers, protects you from sales leakage from the internet because shopping online for groceries has not been majorly successful, so customers have to come in person.

#2.Buy a shopping center with multiple stores/tenants. As a beginner, this protects you if one of the shops goes out of business, but since there are other shops available, it should not harm you financially.

#3. Leases are more valuable than the property itself. The banks need to be reassured that you will have income coming in for the next couple of years before they give you a loan.

#4. Size does not equate to less risk. For example, RadioShack is a billion dollar company, but is actually closing to file for bankruptcy. You might think it’s a good idea to buy a shopping center near a RadioShack store, since the company is worth so much, but it will likely close. You are much better off purchasing a shopping center located near a Starbucks or Walmart, two companies that are doing very well and receive lots of traffic.

3 Most Common Leases

The type of lease is determined by who pays for what expenses.

#1. Gross Lease: The landlord will pay for the maintenance, insurance, and tax expenses. He will then charge you for something above that cost.

#2. Modified Gross Lease: The landlord will pass on some of the expenses to you, charging you anything over that amount.

#3. Triple Net Lease (NNN): This is a favorite among landlords because all the landlord has to do is pay for their mortgage, receiving a net payment for the maintenance, insurance, and tax expenses.

Why Investors LOVE Triple Net Deals

One of the most popular real estate investments are triple net leases. These include banks and fast-food restaurants, which act as anchors. Most of the triple net buildings are new or newly built with strong tenants who have good credit. There is no management responsibility, simply the mortgage payment, which you are responsible for. Any payment above that is pure cash flow to you. A deal like this will be a long-term lease, so you will have stable cash flow from the company renting out the building. If the company does decide to move out, despite the low turnover in this kind of deal, you will still have a corporate rent guarantee, so the corporation will pay you for the amount of time left on the lease after they leave.

Who are Triple Net Deals Ideal For?

Deals such as NNN are ideal for people who are retired and would like to remain hands-off in their shopping center investment. They are also great for people who are looking for a source of long-term income, since it is a fixed payment for a fixed number of years. Your money, however, will be tied up, so you need to be okay with that when choosing this deal. Triple Net Investments do protect against inflation, so long as you are able to increase the rent of the shopping center ever few years to keep up.

7 Shopping Center Investing Guidelines

#1. Look for stabilized properties with a strong anchor and good street appeal; no deferred maintenance.

#2. Demographics that are best include a metropolitan location with strong income in the area, as well as high population growth.

#3. The occupancy needs to be at least 80%.

#4. Try to buy below replacement cost, which is the cost to build up another shopping center in case the original is destroyed.

#5. Lease terms of 5 or more years are ideal.

#6. Have a mix of different tenants to create a diverse “destination” for the population to visit and shop at.

#7. It all comes down to risk and leverage. Stay at 50-65% loan-to-value.