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Old 07-31-2012, 08:43 PM
 
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A strip mall has come up for sale and am being honest, I have no prior experiences dealing with strip malls. Appreciate your responses.

The owner is asking about $300K and the strip mall generates a monthly gross income of $4000. Is this a good investment for long term(am not looking to buy and flip)?

Am considering a strip mall since it generates predictable cash on a monthly basis.
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Old 07-31-2012, 10:01 PM
 
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I would look at the number of strip malls in your town. If the market is flooded it might be a risky deal. If the occupancy is steady you might be okay. It might be a good cash flow, but it might not turn the profit needed.
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Old 08-01-2012, 08:42 AM
 
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Quote:
Originally Posted by SD4020 View Post
I would look at the number of strip malls in your town. If the market is flooded it might be a risky deal. If the occupancy is steady you might be okay. It might be a good cash flow, but it might not turn the profit needed.
The occupancy has been steady and they have signed yearly leases with long term tenants but they've had to reduce the rents. Not sure if its a good thing or bad.

At $4K a month, its about ~ $50K and not taking into taxes and other things, this should pay off the $300K loan in about 6 years.

My question is, is 6 yrs the average in terms of breaking even on strip mall investment?
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Old 08-01-2012, 10:32 AM
 
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I've noticed a LOT of small retailers go out of business in the last several years. And I have noticed many retail spaces sit empty.

And I know a lot of "regular people" who have been cutting back on discretionary spending. They don't have much spare money lately.

Also food prices are expected to go up due to the lack of rain in the mid-west. So more cutting of expenses by people should be expected.

So do those retailers in that strip mall sell things which people could cut from their budgets? Could the income at those businesses decline more in the future?

I would take a hard look at the financial health of each business in that strip mall. Find out if they can afford the current rent. Find out what would happen if their business dropped a bit in the future.

If they can't afford the current rent, find out what they can afford. How low should the rents be so they can stay there and remain in business.

And commercial rental agreements / leases are MUCH different from housing rental agreements. Some may be based on the income of the business renting. Read every word of each rental agreement for every business in that strip mall.

Search google.com for the words...

retail lease

and

commercial lease

(Learn all you can about these leases.)

Then examine the books of the current owner with a fine tooth comb. Find out if free rent was given to any renters or rent was discounted. Basically find out if each renter has actually PAID the rent or if some were given a break because they could not pay it. Maybe make the current owners sign a statement saying all those rents were paid by the renters and no unpaid rents were "written off".

Find out the dates rent was paid by each tenant. Some have been paying late? That could be a problem!

If you discover the rents need to lowered further, then negotiate a purchase price which will allow you to lower those rents and still be able to pay the mortgage.

My thinking is that it is better to receive $200 a month on a retail rental than to ask for $1000 a month and have it sit empty for two years.

Also I suppose you could sit in the parking lot and see if people are buying things from those businesses or not.
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Old 08-01-2012, 10:36 AM
 
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It goes back to the amount of retail space in your town. If there is a glut of space, the seller might be trying to unload to avoid a crash.

There will be building maintence, if it snows, you will have snow removal as an expense, grounds keeping. Make you are fully aware of expenes.
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Old 08-01-2012, 02:02 PM
 
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Quote:
Originally Posted by Tampaite View Post
A strip mall has come up for sale and am being honest, I have no prior experiences dealing with strip malls. Appreciate your responses.

The owner is asking about $300K and the strip mall generates a monthly gross income of $4000. Is this a good investment for long term(am not looking to buy and flip)?

Am considering a strip mall since it generates predictable cash on a monthly basis.
Do you have cash or do you need to finance?

How is the mall divided? Is it leased out? For how long? What are taxes? Is there sufficient parking? What shape is the building in? How old is it? The parking lot? Is there street signage? What is the traffic count on that street? Is it on a corner lot?

Is the current owner one of the lessees? He told you the gross income - what's his NOI - net operating income?

What are market conditions in that town? What comps are there? Are the other strip malls in the area full? Is there a glut of retail space? Is the area growing or shrinking? Demographics?

These are just some of the questions you need to answer before being ready to make a commitment to buy that property.
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Old 08-01-2012, 02:05 PM
 
Location: Pennsylvania
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Quote:
Originally Posted by Tampaite View Post
The occupancy has been steady and they have signed yearly leases with long term tenants but they've had to reduce the rents. Not sure if its a good thing or bad.

At $4K a month, its about ~ $50K and not taking into taxes and other things, this should pay off the $300K loan in about 6 years.

My question is, is 6 yrs the average in terms of breaking even on strip mall investment?
Your math is very generous here - it would have to be $50K of profit per year to pay off just the principle of the loan in 6 years. You'd also be looking at taxes, expenses and interest, and have no vacancies in that time frame. I'm not saying it's a bad investment - I don't know - but if you'e thinking in this time frame you'll be disappointed.
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Old 08-01-2012, 02:12 PM
 
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Quote:
Originally Posted by Tampaite View Post
The occupancy has been steady and they have signed yearly leases with long term tenants but they've had to reduce the rents. Not sure if its a good thing or bad.

At $4K a month, its about ~ $50K and not taking into taxes and other things, this should pay off the $300K loan in about 6 years.

My question is, is 6 yrs the average in terms of breaking even on strip mall investment?
Sorry, didn't see this info. Reducing rent means there is either a glut of retail space in the area or the area is not doing well economically or the types of lessees are not doing well economically. It may be just the times we are in, but it is never a good thing.

Your lender will want to see a break-even ratio (BER) of about 85% or less. Get the BER by taking the annual gross operating income, add the annual debt service for the loan, then divide by the annual operating income.

Have you started talking to a lender yet? They will let you know what info you need to get from the current owner, then run the numbers for you.
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Old 08-02-2012, 06:06 AM
 
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Quote:
Originally Posted by PureHapa View Post
Your lender will want to see a break-even ratio (BER) of about 85% or less. Get the BER by taking the annual gross operating income, add the annual debt service for the loan, then divide by the annual operating income.

Have you started talking to a lender yet? They will let you know what info you need to get from the current owner, then run the numbers for you.
Thanks. I haven't spoken to any lender yet as I was contemplating on putting 30-40% down and then doing owner financing for rest of the amount.

Didn't think banks would bother with offering small business loans but will contact my local credit union.
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Old 08-02-2012, 09:52 AM
 
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I am guessing this is located in a rural area correct? I wonder what made me guess that. Has your county in any financial trouble? Has the taxes been going up and up year after year? Is there a lot of strip malls around? In other words, is your section of the road a commercial hub which people come from afar to shop? Or is there another stretch of highway nearby you will be competing with? Are there any anchor businesses nearby like a Walmart or Lowes?
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