Buying retail store with singe tenant Dollar General tenant.

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Buying retail store with singe tenant Dollar General tenant.

Brijesh R PatelPro Member
Member since 2024 · 6 posts · 3 votes

Hi

I am just about to go into contract in buying 3 retail stores with the same National anchor tenant, " Dollar General", in a small rural area, with an absolute NNN lease for the next 8 years with two 5-year options. Question: Has anyone in BP community done something similar, and did you come across any unforeseen pitfalls that would have you reconsider your decision in hindsight? I know the biggest risk is that if they don't renew after 8 years, I may have a really hard time finding another tenant. (This is a diversification investment).

Thanks 


Brij

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  • JD MartinBusiness Member
    Moderator
    Rock Star Extraordinaire · Northeast, TN · Member since 2015 · 10k+ posts · 16k+ votes
    1y
    Quote from @Brijesh R Patel:

    Hi

    I am just about to go into contract in buying 3 retail stores with the same National anchor tenant, " Dollar General", in a small rural area, with an absolute NNN lease for the next 8 years with two 5-year options. Question: Has anyone in BP community done something similar, and did you come across any unforeseen pitfalls that would have you reconsider your decision in hindsight? I know the biggest risk is that if they don't renew after 8 years, I may have a really hard time finding another tenant. (This is a diversification investment).

    Thanks 


    Brij

     @Joel Owens would be a good resource so I'm linking him in here. He has a lot of experience with commercial and triple n leases. 

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  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    1y

    Have been in NNN 21 years. I own properties across the county and my clients do as well.

    Most Dollar Generals are WORTHLESS investments. WHY?

    They are in tiny towns as I call them and have little to no dirt value. For example if you buy a 1 million DG in tiny town and 8 years remaining lets say cap rate is 7 and you pay cash.

    You collect 560k over 8 years and DG does not renew the lease. You have a sheet metal sides and back building that no other tenants usually want because it is built cheaply. The land might be worth 100k as other investors want strong suburban to urban core areas for investment. 560k plus 100k is 660k when you paid 1 million. Even with tax depreciation you are upside down on the investment.

    Diversifying for the sake of diversifying is a bad investment. It can be better to have 1 better location property in high demand for the dirt than 3 mediocre sites that all have little value in the dirt. 

    Why do people buy these DG's then? Because it is tiny price point and investment grade tenant and lenders will give loan to them. Lenders do not typically care about long term value they just look at getting paid while they have the loan.

    If you buy DG or Dollar Tree stick to strong suburban towns to urban core where dirt has value long term. Those are more 2.5 million range to 3 million and 5 to 6 caps but long term investment value for return is often higher. They often have brick construction on large lots with high traffic corner intersections.

    If you do not want to put 2 or 3 million into one property then instead of owning 3 dump DG's in tiny towns with little value long term you might want to invest with syndicators if this is not 1031 exchange money.

    Example on my single tenant stabilized and value-add deals we pay all cash. My limited partners invest 200k or more at a time. That way you can diversify and own a percentage of an overall investment with much higher quality dirt in stronger markets where the chance for equity growth and appreciation over time is superior to tiny towns. Most investors when you exit are not looking to purchase in tiny towns so that makes cap rates rise in those smaller markets and harder to sell later on.

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  • John M.
    Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes
    1y

    Don't do it! I am a NNN retail investor and have seen the good, bad and the ugly. Joel is right that you need to buy the dirt and not the brand. Most people chase these stores because they have a higher cap rate than say a starbucks would. If you are buying 3 retail stores that are all the same then you are really not diversifying. There are many ways to diversify into real estate if that is your goal, but I would be careful of traditional syndications that are being advertised on facebook that promise the world. PM me and I will show you how I am downsizing out of retail but still being active in real estate. These times are a changing!

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