Retail plaza vs Apartment building

[rickymehra]

Hello Experts,

I`ve been contemplating investing in commercial real estate and wondering what in your opinion would be a preferred invetment vehicle: Retail Plaza or Apartment Building.

The purchase price range for the Retail Plaza would be upto $1.5M at 75% LTV and the purchase price range for the apartment building would be upto $2.5M at 85% LTV.

The key criteria include cash on cash return, equity recapture and appreciation. Thanking you in advance for your time and guidance.

Ricky

 

[Thomas Beyer]

both are great investments .. at the right CAP rate and price !!

Retail MUST have a 2% higher CAP rate than an apartment building as the mortgage will be 2% higher and vacancy risk is higher too.

A well located shopping centre is likely a 6% CAP rate .. and as such too expensive. A poorly located shopping centre has high vacancy risk.

The internet poses much threat to the classic retail model and as such location and store mix is critical. Many lease rates are dropping due to weaker retail environment, internet / online competition, reduced consumer spending and triple net costs (condo fees, R&M, TI, taxes, ..). Special expertise is required in both asset classes or you will likely overpay and get burned !

85% LTV mortgage is very rare these days in apartment buildings.

Assume for mortgages: 75% LTV apartment building and 60% retail. Rest is just theory ..

 

[housingrental]

Thomas`s post above is good
I`d add though - and my impression only - is that most retail is exceptionally pricey in almost all areas...

 

[Berubeland]

If i had a choice of what asset class to pick... I`d recommend a mixed use property with residential up top. You get the best of both worlds. Juicy landlord friendly commercial leases with the vacancy risk combined with the tenant friendly leases but stability of residential tenancies.

They are often available at better prices than both strictly retail or residential properties. Not sure why

 

[housingrental]

The residential portions are often less desirable and harder to rent in low rise two-three storey type setups - due to noise and community concerns.
They also don`t appeal to the same investors / lenders who are often looking for one or the other - especially smaller investors which are the primary purchaser`s of these setups.

 

[RCrein]

A furher comment on tenant mix. Mortgage lenders like big name tenants: franchises, chains, and medical professionals. Stay away from mom and pop anything, one of a kind stores, gas stations, dry cleaners or laundries that process on site. Convienience stores and independent restaurants can also be weak tenants. You may have other challenges with mixed use properties. I think you will find financing is based on commercial rates even though there is a residential portion. Just some ideas to try to help.

 

[rickymehra]

Agree and this is why I`ve been focussed on investing in either an apartment building or retail plaza but stayed away from the mix use asset space

Are there any pros and cons in investing in a REIT vs buying an apartment building on my own? looking to invest about $375K - $400K.

QUOTE (RCrein @ Aug 17 2010, 08:11 PM) A furher comment on tenant mix. Mortgage lenders like big name tenants: franchises, chains, and medical professionals. Stay away from mom and pop anything, one of a kind stores, gas stations, dry cleaners or laundries that process on site. Convienience stores and independent restaurants can also be weak tenants. You may have other challenges with mixed use properties. I think you will find financing is based on commercial rates even though there is a residential portion. Just some ideas to try to help.

 

[RCrein]

Thomas is a better guy to respond to this question. For my 2 cents - Any money you invest with someone else takes management headaches off your shoulders. But you lose control and have to pay for their management and profit. You may also not have access to all of the upside.

I`m a do it myself guy but everybody has to find their own path. Buying your own requires you to find a property that cash flows. If the property can afford to pay for a property manager then you have it all. I`m sure there are others here that can comment on their experience with REITs.

QUOTE (rickymehra @ Aug 18 2010, 11:11 AM) Agree and this is why I`ve been focussed on investing in either an apartment building or retail plaza but stayed away from the mix use asset space

Are there any pros and cons in investing in a REIT vs buying an apartment building on my own? looking to invest about $375K - $400K.

 

[Thomas Beyer]

QUOTE (housingrental @ Aug 16 2010, 09:26 AM) Thomas`s post above is good
I`d add though - and my impression only - is that most retail is exceptionally pricey in almost all areas...
true .. as it takes years to build and fully lease a new shopping centre !

However, a 5% CAP rate shopping center in primo areas is a license to print money (like apartment buildings) as income stream is virtually guaranteed !

and a 5% CAP rate shopping centre often beats a single family house asset at a 3% CAP rate that (too) many (REIN members) are buying as a "great investment" !!

 

[Thomas Beyer]

QUOTE (rickymehra @ Aug 18 2010, 09:11 AM)
Agree and this is why I've been focussed on investing in either an apartment building or retail plaza but stayed away from the mix use asset space



Are there any pros and cons in investing in a REIT vs buying an apartment building on my own? looking to invest about $375K - $400K.


are you coming to the course in Edmonton on Aug. 28/29 ? Let's chat there .. as we'll teach you how do it yourself. For 400K you can buy a 20 suiter in Edmonton at 80/door .. more or less.



Pro's (of doing it yourself):

a) you get all the profit

b) you determine leverage level

c) you determine exit



Con's:

a) you get all the headaches

b) you get to sign a personal guarantee on mortgage (and thus, can lose more than you invest .. and believe me, many have ..)

c) you do all the work upfront to find location

d) you do all the work upfront to find asset

e) you do all the work upfront to write offers

f) you do all the work upfront to deal with banks and/or mortgage broker for mortgage

g) you do all the work upfront to deal with often croocked sellers

h) once you own you do all the work as it relates to

- property management

- cash-calls

- insurance

- risk

- setting of acceptable rent and vacancy levels (via PM usually)

- tenant selection/collection - via PM usually

- insuite/exterior upgrades decisions

- banks

- annual filings required for banks, tax man/CRA, insurance firms, provincial and federal government







So if you have the time and emotional stamina to deal with this then yes you should do it yourself .. and will (hopefully) be rewarded with more profit at the end of the day.



Related posts:



Items to consider when buying an apartment building: http://myreinspace.com/public_forums/Real_Estate_Discussion/62-14548-Buy_vs_Build.html



Multi-Family Primer in May 2009 Issue of Canadian RE Magazine:

http://myreinspace.com/rein_members_only1/Members-Only_Discussion/81-10996-Multi-Family_Primer_-_May_2009_Issue.html



50/50 in a JV ` is this fair ?

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-2015-5050__is_this_fair_.html



Pro`s and Con`s of creating a company for real estate holding:

http://myreinspace.com/public_forums/Real_Estate_Discussion/62-10292-54272-To_create_a_company_or_not.html#54272



Raising money/OPM options (JV vs. securities): http://myreinspace.com/search/public_forums/Real_Estate_Discussion/62-16913-85903-Raising_Money_for_your_venture_-_The_legal_way.html#85903



JV options: Pro`s and Con`s of LP vs. Corporation

http://myreinspace.com/public_forums/General_Discussion/61-10979-JV_vs_Limited_Partnership.html

 

[housingrental]

I`ll agree with this
With the caveat of:
For well financed institutional purchasers who:
View that low level of a return desireable for their portfolio (I don`t and most small investors aim for more)
Are looking for a very long term hold or comfortable absorbing downside potential if market valuations adjust to higher cap rates.
Have ability to draw on additional funds if leveraged and mortgage holder at end of term drops them or requires more cash / lower loan amount.

Not a lot of good choices for cash flow in any asset class in 2010!

QUOTE (ThomasBeyer @ Aug 20 2010, 12:29 PM) true .. as it takes years to build and fully lease a new shopping centre !

However, a 5% CAP rate shopping center in primo areas is a license to print money (like apartment buildings) as income stream is virtually guaranteed !

and a 5% CAP rate shopping centre often beats a single family house asset at a 3% CAP rate that (too) many (REIN members) are buying as a "great investment" !!

 

[housingrental]

In Thomas`s post above item g) is very important and often burns experienced buyers...
Never solely trust a seller`s pro-forma`s... Verify, verify, verify!

 

[Thomas Beyer]

QUOTE (housingrental @ Aug 20 2010, 09:41 AM) In Thomas`s post above item g) is very important and often burns experienced buyers...
Never solely trust a seller`s pro-forma`s... Verify, verify, verify!
indeed .. my friend .. indeed !