February Blog
Stop Hunting for 10% Cap Rates — Start Creating Them
Many investors ask how to “find” a 10% cap rate property — as if they’re sitting on the market waiting to be discovered. The reality is, you rarely find them. You create them.
Instead of chasing brand-new retail centers filled with national tenants and thin returns, I take a different approach: targeting older retail buildings in strong, growing areas. These properties are often overlooked, under-managed, and priced below their true potential.
That’s where real opportunity lives.
Understanding Retail Property Types (In Plain English)
Retail properties are labeled Class A, B, or C. This does not just mean age — it reflects quality, tenants, and overall condition.
Class A
- Newer Construction or recently renovated
- Prime location with strong demographics
- National or regional credit tenants
- High rents and low cap rates
These properties trade on certainty. Upside is limited, but income is predictable. Buyers win by preserving value, not creating it.
Class B
- Solid location with stable traffic
- Mix of national and local tenants
- Functional but dated construction
- Moderate rents with room for growth
These properties are good but often heavily competed for. Light improvement and better leasing create an upside that enables many investors to execute here on these properties.
Class C
- Older construction with deferred maintenance
- Local tenants, often "mom and pop" operators
- Below-market rents
- Inconsistent management history
- Higher cap rates due to higher risk
These properties are where most investors either lose money --- or create real value.
My Rule and Why It Works
I do not buy Class C buildings in struggling areas. I look for Class C buildings in Class A or B locations — areas with population growth, recognizable redevelopment, strong household income, and consistent traffic. When an older property sits in a strong area, it is often just poorly managed — not fundamentally flawed. That creates opportunity.
This approach works because the market prices the building, not the land. The properties are often not maintained, mismanaged, and rents lag the market. Often, it still cash flows well for the owner because they have a low-cost basis or it is fully paid off. Tenants have stayed due to convenience, not quality. This creates a downward cycle.
By improving physical condition of the property and professionalizing management, value can be forced.
How Value Is Created
Value-add is not just cosmetic. It is operational. Here is what that looks like in simple terms:
1. Clean Up the Leases
- Adjust rents gradually toward market rates
- Add expense reimbursements where appropriate
- Stagger lease expirations to reduce risk
2. Improve the Tenant Mix
- Replace weak tenants
- Target businesses less vulnerable to online competition
- Strengthen the overall tenant lineup and placement
3. Make Strategic Improvements
- Update the façade and signage
- Improve lighting and landscaping
- Fix deferred maintenance
- One improvement per quarter keeps momentum without overspending.
4. Control Expenses
- Rebid management and service contracts
- Improve utility efficiency
- Eliminate waste and inefficiencies
5. Adjust Rents
- Move rents toward market pricing over time and use renewals as reset points
- Keep rents just below market rent to maintain higher renewal rates
Over 12–18 months, these changes improve cash flow. Over 3–5 years, the property stabilizes and becomes a strong, reliable asset.
The 4 Biggest Mistakes Investors Make
- Overestimating rent growth
- Underestimating renovation costs
- Ignoring tenant quality
- Poor property management
I underwrite conservatively and assume surprises will happen. Margin of safety matters more than projections.
That is how you protect capital — and build wealth.
My Final Thought
You do not need a perfect property. You need the right location and a clear plan.
That is how 10% cap rates are created — not discovered.
If you would like help evaluating whether a retail property fits this strategy, I’m happy to talk through your goals and see if it aligns.
Happy Investing!