Better to buy now or wait?

Question

I’m looking to make my first commercial real estate purchase, seeking a single tenant triple net lease deal.

It seems that there is a lot of demand in the marketplace right now. I’m wondering if it is better to wait to see if we do enter a recession and the market cools off and prices come down.

I just recently started looking so I’m still learning a lot of the basics of the marketplace, but wondering with interest rates continuing to rise if it makes sense to try to lock down some thing now, or to be extra patient and wait and see  how the economy is six months from now.

Bob Okenwa · Answer

There's never a wrong time to buy the right deal. We were in a recession 2 years ago and people still bought property. Timing the market is going to leave you on the sidelines and disappointed. We have people on BP who have been predicting a crash since 2012 and are still waiting on that first/next property purchase...

John McKee · Answer

Never wait to buy real estate or you will be too late!  Yields in NNN properties don't move that much anyway.  Just because lending rates went up and inflation is a bit hyper, that starbucks is still going to cost you a 4.5% cap.  Why is that you say?  Because you can't find a 4.5% guarantee income anywhere in the marketplace.  Happy to help

Evan Polaski · Answer

@Dan Cahill, I generally agree with Bob, and I also see a lot of reasons why the market is not cooling down, primarily construction costs will keep any existing product inflated (when compared to years ago) and when those do calm down, general inflation will have likely pushed your value anyways.

While not specifically a NNN deal, I still think about how "frothy" the 2006 single family (and commercial market) was too.  Clearly there were better opportunities in the financial crisis, but anyone that owned in 2006, if they held on, likely, are in a very good position overall now.

Personally, I do not see a correction like 2008-2010 ever coming to real estate again.  With NNN, the dynamics are a little different than other types of real estate, so it always depends on the use you are looking at, sales volume, technology resistance, and tenant quality.  To me, admittedly having never invested in NNN, you have two primary risks: renewal and retenant, assuming you are buying a quality, credit tenant.

Bud Gaffney · Answer

@Dan Cahill Buy buy buy !

Dan Cahill · Answer

Thanks for the thoughtful post, Erica.  I do like the idea of a refi if rates go back down, although I've been told a lot of investors only hold the STNL properties for 4 - 7 years max before flipping, since the risk elevates and the value drops as the lease term draw downs.  One lender I was speaking with even mentioned swaps as a way to hedge against potentially higher interest rates, but sounds kind of exotic.

Tyler Derickson · Answer

There is not a bad time to buy if you have a long-term horizon, buy solid buildings in good locations. I share some similar concerns to yourself, but my partner and I are still buying commercial properties in 2022. To counteract some of the interest rate and recession risk, we are making sure our reserves are higher than normal before buying the next property along with focusing on operational improvements before acquiring the next one.

Uncertainty in the market brings about fear and greed at the same time in which you can sometimes find great deals (think COVID in March-May 2020). There are folks who fear a recession and are looking for to sell and there are those who see inflation being an issue and are buying up hard assets. Each buyer and seller has different motivations. The hardest part in investing is filtering out the FOMO and FUD blasted everyday by social media and the press.

Katelyn Andrews · Answer

If the numbers make sense and you have an exit plan in place then by all means, don’t let fear hold you back. Just make sure you still have your reserves and are comfortable with the risk that you are taking. 10 years from now, I highly doubt you’ll be sorry.

Ronald Rohde · Answer

Buy now, be sure its covers the interest rate and recession risk. You need to be able to buy in all types of environments, no one has a crystal ball.

We're net buyers of industrial NNN, no better time to lock in long term debt...

Benjamin Goodman · Answer

Dan what is your investment objective and time horizon? Generally NNN increase in value when interest rates decrease and they interest rates seem to be heading the other direction but if you are planning to lock in for 10 years and sit on the cash flow you may not care about fluctuations in value...

Erica Ricketts · Answer

Hey there Dan!

There are many different reasons why people are being priced out of our current market, and also many reasons why investors should continue to purchase properties regardless of the interest rates and regardless of the possible upcoming recession.

1) Investment properties allow a historically safe way to protect your cash through a recession. As people typically divest from the stock market or more volatile investments, they still want an investment that will ensure returns. Although home appreciation may slow down in comparison to the past couple of years, home values will continue to rise. Unlike other investments that may actually decrease in value during recessions, home values remain steady followed by a rapid increase after recessionary periods.

2) Mortgage rates typically go down during recessions. If you find a property now, why not purchase it and then refinance after doing your rehab and initial repairs and then recoup that capital with a cash out refi once rates decrease?

3) You have tenants/clients that pay for your investment as your investment continues to appreciate (NOTE: any professional mortgage professional will tell you that the conditions in 2008 are NOT the conditions today, therefore, you would not be upside down on your investment). In most cases, you have tenants that are paying for your investment and are steadily recouping your initial contribution.

4) Someone else is paying for your mortgage interest regardless of the rate and you get to write it off! Why not lower how much you owe while someone else pays you to do so?

I don't think that real estate investments are fool-proof, but I definitely believe that you should not miss out on investment opportunities just because of current interest rates, especially since you'll want to refinance at some point to recoup your initial investment!

Better to buy now or wait?

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