NNN beginner question

[Eli K.]

Hello I have about 650k of equity in a home and I'm thinking of getting out and buying a NNN like a Starbucks or another strong tenant with a long lease term, my first question is can I put it as a down payment on a 2m property like a 30% down payment? Another thing I read here is my net worth has to be over 1m to qualify for the loan and my net worth isn't, do I have a chance? Can you get a pre approval for commercial like you do before you buy a house ? Thank you guys

[Brian Kloft]

Most commercial loans don't really care much about you and your credit. There are not any commercial pre approvals as it is based on the property and not you. They want to make sure that the property itself will pay for the loan. Typically they are going to look at what the property generates in net income and then want it to cover the loan plus something like 20% more. There might be some differences if you are looking at single tenant buildings. Keep in mind that sometimes even strong tenants go out of business or bankrupt. When you have a single tenant building if they go under and you no longer have rent coming in that you are going to have to cover the loan with your own income until a new tenant is found. Often finding a new tenant on those buildings will take a while and then they are going to want you to pay a significant amount of money to make the place the way they want it. (either in cash or in free rent) Single tenant NNN properties can be great as long as you have a tenant. There are lots of people that love them because typically the tenant takes care of everything and all you do is have your own insurance.

[Michael K Gallagher]

@Eli K. As has been mentioned here, the loans on commercial are more based on the income of the property and NOI as well as the debt service coverage ratio. The best way to tell if you'd be "approved" or have any issues getting a loan would be to speak to a local bank/credit union that has these kinds of loan products, often times these banks keep their loans and service them so they are able to set their own standards in a way.

As far as what to buy, if you are looking to get into the NNN world you might want to consider buying dirt and ground leasing it, their are nuances here of course but it could be a good way to reduce your risk as you won't be on the hook for the building or development, or as has been mentioned here, a mutli-tenant building near a grocery anchor shopping center can be a good way to hedge your risk as well vs a FSST building.

[Brock Mogensen]

NNN is a great investment vehicle. I would connect with a good commercial debt broker to see what options you have. Certain banks are going to require higher net worth and liquidity requirements than others. The NOI, lease, and strength of the tenant are the first thing the bank will look at but they will also want a strong guarantor on the note.

[Evan Polaski]

@Eli K., Joel Owens with NNN Invest would be a great guy to talk to. (For some reason I can't tag him in this post).

I would generally say with NNN, the $2mm price point is not going to get you too far. Typically, you will either get a credit tenant without a ton of lease term, or a tertiary market, or limited rent bumps, etc.

So the things I consider in no particular order(not that I am a well versed NNN investor):
- Tenant credit
- Lease Term (current term and any extensions)
- Tenant Sales (and understand what a successful sales volume is, or ratio to rent + NNNs)
- Is building current tenant style (i.e. new Chipotle's have "Chipotlanes" for drive-up pickup, so buying an old format is that much more likely to not renew)
- Demographics of new locations vs yours (i.e. Aldi is starting to target slightly higher income demographics than they used to)
- Quality of land (mid-block or corner?  Signaled? Ingress/egress? Going home or going to work side of street?)
- Building use if tenant vacates? (i.e. a Walgreens is not a very useful building for almost any other use once Walgreens leaves, so you are likely stuck with land value)

As for lending, while the lenders will more often than not focus a bit more on the property, specifically DSCR and leverage amounts, they will almost certainly have some level of requirements on you as the guarantor. Like Brock noted, companies, even credit ones, run into problems from time to time. Even if the company doesn't go under, they can go dark and stop paying on your lease. Not common, but not unheard of either. The bank will want to protect against that.