Strip mall or shopping plaza for starter. Good idea or bad?
Hello - I've been in residential RE for almost 10yrs (1, 2 family rentals and flips).  Now have some funds and itch to go into CRE.  Goal is to get cash flow with minimal hassle.


Assuming a mid 7 figure investment, are strip malls or retail plazas a good idea for starters?  What are some of common gotchas that may not be apparent to residential owner?
[{"id": "hlvzapj", "text": "Typically retail tenants have more \u201crights\u201d and it can be a more volatile market in that if a tenants earnings are down then they have cause to request (and receive) rent reductions. I am speaking on behalf of Australian CRE however realistically the idea here is if you don\u2019t abide by the request the tenant goes broke and you have the hassle of moving them out at your cost, vacancy and downtime. \n\nRetail can be great, but it all depends on the covenant. \n\nResale of a strong long term covenant can result in a very tight yield.\n\nThe wrong spot though can be unleasable and easy to burn investment", "replies": [], "depth": 1}, {"id": "hlvzjhl", "text": "TI and being prepared for extended vacancies is a leap. Evictions are easier but there is a difference between you fixing a broken toilet and maintaining your fire sprinklers and resurfacing the parking lot, which btw, insurance is another one.", "replies": [], "depth": 1}, {"id": "hlvzkbi", "text": "If returns looks good, credit risk of your tenancy, WALT, capex deferral, co-tenancy &amp; exclusive use clauses are just some of the asset specific items you should understand before making a plunge.  Additionally, market vacancy, leasing activity, new development, VPD and pricing are area factors you should consider as well. That all being said, I\u2019ve come around on retail as an asset class. If above looks good, I think it has the potential to be a solid investment.", "replies": [{"id": "hlxb08k", "text": "Totally agree. Seriously recommend having a portion of rental income set aside as a CAPEX allowance to draw from if in case of roof leaks or TI from backfilling.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hlw8rkw", "text": "If minimal hassle is your goal I\u2019d be looking for NNN lease deals not shopping centers.   Even the most basic shopping center requires some level of \u201cactive management\u201d, and a lot more risk than residential.    Backfilling spaces is capital intensive and time consuming so be prepared for periods of 12+ months without revenue on vacant units followed by large TI payouts (and huge commissions to brokers).\n\nTenants are exerting a lot of power (whether real or perceived) in the current retail market, so the growth in those long term retail leases is muted, and further compounded in an inflationary environment.", "replies": [{"id": "hlw9tz5", "text": "Agreed.", "replies": [], "depth": 2}, {"id": "hlwdyy6", "text": "Interesting. I'm intentionally avoiding office spaces precisely because of rise in remote work.  The strip malls in my area at least are full and active.  Would not have thought those are under pressure too.", "replies": [{"id": "hlxafr8", "text": "This, along with the comment above, really depends on your market. I\u2019m in Phoenix, and our retail and office market in the West Valley is INCREDIBLY landlord-dominant. East Valley, where the CBD is, is hurting a lot - especially with corporate office. We\u2019re seeing a trend of most corporate offices (30k+ sqft per user) shutting down or subletting and going to a suburban satellite office that is closer to your workforce. Case and point, very little vacancy as well for office in the West. \n\nAs aforementioned, this is all market dependent. A lot of MSA\u2019s are repeating the same trend, but there may be others that are totally backwards. \n\nAlso, unless you\u2019re buying a AAA credit, longterm lease NNN deal - you\u2019ll usually be stuck with backfilling and whatnot. But golly gee those are at at sub 4.5% CAPs in my market. Seen even some below a 4%.", "replies": [], "depth": 3}, {"id": "hn0us1z", "text": "Take a look at freestanding dollar generals. They are all NNN, and they bring in steady cashflow with no work and they can be developed in just about every small town. Over the past 5 years the prices have rose ~20% or so and this doesn\u2019t seem like it\u2019s going anywhere. You can find one for $1m - $2m in a good area.", "replies": [], "depth": 3}], "depth": 2}, {"id": "hlwiqjk", "text": "I\u2019m assuming you mean stnl deals that offer very little upside, you may not be at 100% occupancy but still netting a better return. That said, it does require more active management but most of those shopping center leases are nnn, and those TIs and commissions  should make sense when looking at the return on investment.\n\nInflation isn\u2019t exclusive.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hlwc8ko", "text": "I can think of at least ten other types of CRE I'd want to own before retail space in this day and age.", "replies": [{"id": "hlwcx3u", "text": "Let's hear about those. genuinely curious.", "replies": [{"id": "hlwfpon", "text": "multi family residential, self storage, RV &amp; boat storage, car wash, hotel, warehouse, RV campground, light industrial, transload facility, and auto racing track (admittedly, this one has the most emotional/personal attachment)", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hlwcdra", "text": "I would stick to residential or multi family. Unless your goal is to be a micro managing alum lord, you can\u2019t make money in the ghetto.", "replies": [{"id": "hlzao04", "text": "Lol wut.", "replies": [], "depth": 2}], "depth": 1}, {"id": "hlwka3e", "text": "Go. Buy. Industrial.", "replies": [{"id": "hlwu1ho", "text": "Don\u2019t give away our secret.", "replies": [{"id": "hlwwvn5", "text": "It's a secret?", "replies": [], "depth": 3}, {"id": "hlx4l7u", "text": "Definitely industrial \ud83c\udfed https://youtu.be/AgG8_JLrdHc", "replies": [], "depth": 3}], "depth": 2}, {"id": "hlxpgq6", "text": "At risk of sounding dumb, do warehouses fall into industrial bucket?", "replies": [{"id": "hlyd7xz", "text": "They do.", "replies": [], "depth": 3}], "depth": 2}], "depth": 1}, {"id": "hlx4fqt", "text": "If you are trying to eliminate hassle a strip mall is not the way to go, I would say look into NNN deals with zero landlord responsibility or NN deals that the only landlord responsibility is the roof and structure. Also, you will most likely not be dealing with mom and pop tenants in the net-leased market rather than national brand credit tenants that will never default.", "replies": [], "depth": 1}, {"id": "hlxfz35", "text": "A lot of factors here that can influence the amount of hassle in a retail investment. I could go on forever, but location and tenant mix are two of them. Also having good vendors is huge. When you have a property that is open to the public you are susceptible to issues that don't arise in other types of investments. Using my location as an example, here in CA we have an ongoing homeless issue. This creates illegal dumping, graffiti, possible need for security, etc. that can all be costly.  Retail can be a great investment and I have centers that require almost no additional work, but not all retail is created equal. Happy to discuss in more detail if you move forward with pursuing a retail investment.", "replies": [], "depth": 1}, {"id": "hlykcat", "text": "Highly dependent on the neighborhood. Ask your broker for average income for the sub market. Big box and Amazon leaving retail bare in lower income areas.", "replies": [], "depth": 1}, {"id": "hlyqut6", "text": "Industrial.", "replies": [], "depth": 1}]