I am a huge fan of these BP forums and have learned so much! I feel like I am in the "analysis paralysis" stage though as I have been studying real estate investing for over 5 years now.
I first was interested in duplexes, fourplexes, etc...but this past year have become more interested in CRE as my first investment. After some mentorship from a current NNN Jack-in-the-Box owner, I see it as a great investment.
So my question. As someones first NNN real estate investment, is it better to go for a high cap rate, low cost, low lease years remaining property, that has great financials and will most likely renew in a few years....OR invest in a higher price, lower cap rate, long lease in place (where the lease will pay for the purchase price)?
1 - Starbucks: great corner location, drive-thru, 2008 build, lease expires in 4 years (2018), $625k price with 9% cap rate.
2 - Long John Silvers: ok location (off freeway, mall and Walmart outparcel), older 1980 build, 20 year lease, $1.3 million purchase price with a 7% cap.
-So my question is....should the lease MINIMALLY pay for the property (as the Long John Silvers would, plus some depending on my loan/downpayment)... OR is a short lease ok if the stores financials are solid and the high cap rate will mean a short breakeven (as the Starbucks would be paid off in 11 years at that cap rate).
I really appreciate any beginners advice on selecting my first NNN property. Thanks!
Choosing is a matter of risk. The Starbucks will be hard to finance because of the short remaining lease term and the relatively low purchase price. You will most likely be looking at a recourse loan and probably a 4 year term.
On the Long John Silvers, do you know if they are credit rated? Restaurants are not popular with lenders because so many fail. Is the store a franchisee or corporate guarantor? LJS used to be part of Yum brands, but I believe they were taken private by their franchisees.
I believe if you are going to buy NNN properties, I would be looking for long leases with good corporate guaranteed leases.
Thank you for the info. That is another element I was in question about, with the need of a "corporate guarantee".
I just offered on a Dairy Queen with a 15 year lease NNN, $530k purchase price, 7% cap...but it was a single franchisee owner and NO personal guarantee.
I was told ONLY invest in corporate guarantee properties, but I liked that DQ so I submitted a $500k offer, but didn't end up getting it.
Have you ever bought a non-guaranteed property? Also, besides restaurants, what other type of NNN property would you suggest I look for (what type do you prefer)?
I think you were over paying for the DQ franchisee. It should sell at a 8+% cap rate. I don't like restaurants, as they fail to often. I would only consider a restaurant with a corporate guarantee.
I like GSA deals. I have a 15 year GSA deal that we just got an accepted LOI at a 7 cap rate with a 15 year lease. The price is higher as it is over 2 million, but consider a US government lease vs a 1 franchisee lease with same lease term for 7 caps. The loan on the GSA deal will be non-recourse.
I also like multi-tenant retail right now as returns are better the single tenant.
Where was the DQ restaurant? Maybe the location would justify the 7 cap. Let me know your thoughts.
Justin it won't be just the down payment. You will need to have a certain net worth and liquidity to qualify for the loan.
A Jack in the Box is way overpriced. The price you pay per sq ft if it ever goes dark you are in a world of hurt as you will not rent close to that for the second generational tenant.
As Mark said the cap rate, rental increases annually, and lease terms are tied to the quality of the tenant.
4 levels from best to worst.
Taco Bell - corporate guarantee all stores
Subsidiary of Taco Bell corporate guaranteeing say a particular state of 200 stores
Large franchisee long time in the business and a bunch of locations
Small franchisee with one or two locations and a personal guarantee.
A 7 cap is good for a Taco Bell corporate but crap for a single Franchisee, a 1.5% annual rent bump is great for Taco bell corporate but crap for a franchisee. It should be 2.25 to 2.5 for a small franchisee. The starting cap makes a difference as well. You could have a high cap with very low annual increases and conversely have lower cap rate but higher annual increases so that the blended cap and return is better that way.
The debt available with a corporate guarantee versus a franchisee is drastically different. Corp rate is better and 25% down versus franchisee will require 35% down etc. and a higher rate. Lenders are willing to give non-recourse on a corp store backed by thousands of other stores and a protected credit rating versus a one store franchisee that if that store is not doing well they will go under.
Hope it helps.
Thanks for the reply! Good note on the corporate guarantee...a new requirement I will add to my search list.
Now I really like your GSA idea! I don't see many government properties on loopnet...do you use a specific site for GSA deals? I did find quite a few Post Offices (many have been in place since the 1970's) for sale, but they were net leases where I covered maintenance/roof, and prop. taxes. They all had under 5 years left as well which I see as a problem with the downsizing USPS and government offices in general nationwide. Are most GSA properties not NNN?
The DQ was on the only freeway to the Hoover Dam. A ton of nationals around it...seemed like a solid location and 15 year lease...but the single tenant and no guarantee was the deal breaker now looking back.
I love the multi-tenant retail property angle, but just don't have the capital as of now.
Have you dealt in ground leases ever Mark or just free standing buildings? Is the depreciation more important to you? I just saw a new Starbucks build listing come up for $1 mil with a 20 year ground lease that has a cap rate that would breakeven the initial $1 mil cost in 20 years. Seems like a great deal to do...but it doesn't mention corporate guarantee on the 20 yr...so that is problem in this deal then, correct??
Thank you for he reply as well Joel...great info! You mentioned "I need a certain net worth and liquidity to qualify for the loan". My investing partner and I have stable incomes and $150k saved for downpayment on our first property. We plan to do a 50/50 split in an LLC...More money = bigger buildings and more potential for profit. Our goal going forward is upgrade to bigger cashflow properties via 1031 every 5-15 years. What are your thoughts about partnerships for building ownership...and qualifying for loans?
Also, thank you for the corporate guarantee "level" explanation...very helpful.
Thanks again for the amazing advice fellas!