So the key is to identify properties with below market rents and a low price per square foot. These properties will provide you with upside potentials. However, the market rents often have a wide range. For example retail space in San Jose commands between $2-5/SF a month. It's not easy to determine if the tenants of the property pay below market rent.The following are some properties that have low upside potential that we may want to screen out:
1. Big-box properties with anchor tenants, e.g. Wal-Mart, Target, or Safeway. These big national tenants often sign long termwith low rent due to its creditworthiness and large rental space. Once the lease is signed, the rent is locked in for 20-30 years. So it's almost impossible to drastically increase the income within a short time. As a matter of fact, many big-box retail properties in California are listed at below replacement cost. This is because they have long term leases with below market rent. They are on the market for a long time and yet is not sold because the cap is low, e.g. 4%. The prospect for higher income is sometimes 15-20 years away when the lease expires.
What do you think? Is this basic strategy or is there some good new information here?