We like shopping! Sucre, Boliva with Food for the Hungry

Greetings from the metropolis of Cedar Crest, NM.  Finally back home from my travels….and wow is it hot at 7000 ft elevation.  I do not remember it getting this hot.  Many homes in my area do not have air conditioning because it is rarely needed…including mine.  Wow….I sure could use an AC right about now.

Anyway….

Today’s post is about my favorite of asset type….retail.  Of all the asset types, and I have owned them all (I think) in one facet or another, retail is the asset that is the most interesting and easiest to manage per se.  From property management to leasing, and from maintenance to tenant default.  Retail is a little more clear cut than the other assets.  This of course is my opinion….although my opinion is based on my own experience.

This is the next post in a series that will highlight the different types of properties available to investors. The posts are an overview of general information. As with all investments, you should properly research the opportunities to determine whether they fit your portfolio.

What Do I Need To Know?
When choosing which retail property to invest in, you need to garner a good understanding of retail operations and understand a retail cash conversion cycle. Cash conversion cycles denote how quickly a retailer sells goods, how quickly it collects customer payments and how long retailers maintain the goods before having to pay suppliers. Ideally, retailers should sell goods and collect payments before having to pay suppliers.

This is also represented by the following equation dictated by myinvestingnotes.blogspot.com:

= Days in Inventory + Days in Receivables – Days Payable Outstanding
= 365/Inventory turnover + 365/Receivables turnover – 365/Payables turnover

Where, Inventory turnover = Cost of goods sold/Inventory; Receivables turnover = Sales/Accounts receivable; Payables turnover = Cost of goods sold/Accounts payable

Realistically, the two most important components of this equation are days in inventory and days payable outstanding. Looking at historically patterns to determine that a retailer has increased days in inventory over previous cycles can show a decline in the profitability of the retailer. A retailer with excess inventory caused by failure to move products off the shelves, leads to decreased revenue because the retailer must then liquidate inventory. Likewise, a retailer is considered exceptionally strong when the days payable outstanding is substantial. When a retailer is strong, then the retailer can negotiate better with suppliers.

What are the basics for retail investing?
Retail can be leased by street frontage or square foot. Street frontage encompasses the amount of linear feet a building occupies on a street. This measurement only accounts for the side of the building most likely to attract customers.

One of the most common types of retail leases is a percentage lease that requires the retail tenant pay a percentage of the tenant’s gross or net income as rent as long as it exceeds the predetermined minimum amount.

Choosing which property to invest in can be difficult. Many high-end retail developments are beyond the scope of a beginning investor. But, small strip malls can be affordable. Make sure when researching a property to study the anchor tenants. Anchor tenants are the largest tenants that offer the largest potential income (usually, the hope is the anchor tenant is a credit tenant as well). It is also important to make sure the property offers a good mix of retail options for the community.

I don’t want to own a retail building, but I do want to invest. What are my options?
You may want to consider retail stocks. Investing in the stock market requires a different mind set than investing in commercial property. If retail stocks interest you, be sure to consult an expert in your area and do your research.

We are just at the tip of the iceberg when it comes to retail.  There is so much to consider…but we will wait until next time….rob