Real Estate Investment Economics

When considering the economic viability of an investment, present income and future income should be evaluated carefully along with changes and predictions of demographics. A fully rented strip mall may look attractive to start with but an evaluation is in order to determine economic viability. Is the area growing at a rate where future increases in rent will be realistic? Or, is the property at its maximum for rent in the area? If ongoing maintenance is needed and improvements are necessary to help the tenants remain competitive, is there room for rental increases to offset these costs?

Perhaps if the mall is in a growing area and all improvements would enhance the tenant’s business and there is room for incremental increases in rent, then it’s safe to say it’s a good investment, however, if the property is in an area that’s flat or declining and all improvements to make it more attractive are unlikely to be recovered through rental increases, then the investment might not be so good, unless you just take it as is because it has a cash flow and don’t make any improvements. But, then it would be wise to check the monthly rental history and see how many late pays there have been (and why) – it may be that the area is doing so poorly it’s a very poor investment all around. Present cash flow might not be maintained when tenants move out, leaving you with empty space and high payments.

Area demographics can be obtained quickly over the internet to determine if it’s likely the type of tenants you’d have at the mall will be successful. It might not be a bad investment if the property is generating a cash flow, if you’ve determined what the maintenance costs will be and you’ve determined where you can cut costs the present owners didn’t see, even if the demographics don’t look good now, but with your knowledge of area you can predict changes that would be advantageous in a few years.

This is probably the smartest investment IF you are reasonably sure about the changes and you haven’t underestimated your costs and can maintain the least amount of overhead. One reason it’s smart is that you can purchase the property at a much lower price and as the area improves you’re building wealth (at least on paper) through appreciation. Good numbers and estimations are critical, as is good vision. If you can maintain a bare-bones operation, then determine if your savings will be enough to do major renovations when the area starts improving, and whether you’ll be able to attract new tenants at higher rents that create an even higher cash flow, you‘ll be in a good position.

Each to their own, but I’ve never been an advocate for buying properties and using them up, no repairs, no future renovation plans, just riding the cash flow and then dumping it. I think the best scenario is one where you can do renovations when the time is right, making the property more valuable once you’ve determined the area will improve – this is not only good for the community, but if you’re smart it’ll develop into something special , tenants will find it valuable and it’ll be in demand. Being in demand is where you want to be. You pretty much know the limited benefits of being a slum lord, but the benefits of creating something special are limitless. Having a little pride is where you want to be. Economic conversion is something to think about, too, with a property in this position of growth and potential, and next week I’ll go into that.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.