Investing in Texas NNN
I'm a long term buy and hold investor looking to diversify my portfolio. We currently own 38 doors of small multi-family apartments in Central Texas. As we grow our business I'm looking for options to diversify. We started off very hands on doing our own renovation work, we renovated 12 units in the last year anywhere from full gut reno to light reno. We did the self manage thing for a year but I've now turned everything over to a PM. My wife and chief painter, keeps reminding me we are supposed to be retired. With an eye to more hands off investing in the future I wanted to investigate NNN.
I see a number of properties in the $1M-4M price range. Starbucks, McDonalds, General Dollar, Autozone and etc Most are advertised for a 3.5-4.5% cap rate. Any advise on large National Brands vs smaller local mom and pop operations. Retail vs Fast Food? Do you get a percentage of gross?
I hear financing is a little different for NNN compared to small multi-family commercial. Can I use cashflow to qualify for a loan? Typical down payment and terms? Seller financing an option? I have a good relationship with a small local bank willing to do portfolio loans. The only issue is they are only giving me 15-20yr term and that isn't going to cash flow at a 4% cap rate.
How hands off are NNN really?
Any good resources to learn more about NNN? Books, PodCasts, etc.
You are throwing a lot out there in this post so I'm going to break it down by question.
1. Retail vs Fast Food - That's personal preference. Choose an asset class and tenant who is in demand today in your sub market, and who is likely to stay in demand for the foreseeable future
2. Do you get a percentage of gross - No. The tenant is going to pay you rent, just like any other tenant. You have nothing to do with their sales.
3. Can you use cashflow to qualify for a loan - Yes. A lender will qualify you based on the cash flow, strength of the tenant, length of the lease, etc. They may want a personal guarantee with a more "mom and pop" type tenant
4. Loan terms - You can do better than 15 to 20 year term. There are plenty of banks out there who will write a 25 year term, that is the industry standard. The deal still will not cash flow though at a 4% cap rate even on a 25 year term. Interest rates have gone up too much.
5. How hands of are NNN really - They are quite hands off. I have only done 2, but they were generally "mailbox money" in my experience. I had to pay the property taxes, HOA, and insurance on my own (which the tenant reimbursed). But the tenant handled everything else.
6. Good resources to learn more about NNN - Right here. There are some very experienced NNN posters on here. I'm some of them will follow my response.
I am a commercial mortgage broker specializing in single tenant and multitenant retail properties nationwide. Interest rates have risen 150 basis points this year with typical range for quality STNL properties at 4.65% to 5.15% interest rate. If you finance a low cap rate property, you will need to put 45-50% down. Amortization schedule is typically 25 or 30 years.
They can be very hands-off. Particularly new projects or complete renovations. I have had clients who purchased and literally never visited the building nor had local management until the lease term was up or the tenant otherwise vacated. Typically the tenant handles everything or reimburses, major capital items are handled by the owner, but they can be planned for. For instance, it is easy to have competitive bids for a roof, parking lot resurfacing, or HVAC system completed from a distance. If you plan ahead, the tenant deductibles/minimum reimbursements cover routine maintenance/repairs. Insurance covers catastrophies.
Seller financing an option? No, usually developers sell to raise capital for other projects. Owner users sell in leaseback transactions to free up capital for expansion.
NNN cap rate is a function of risk. You buy future payments from that particular business based on how it will perform during the investment period. As though you were investing in a promise of that business's success in that location and their inability to move or ability to lease it to a similar tenant. It's like buying a bond based on that location's success. It would be difficult to NNN risk gauge a singular location local tenant. In that case usually, the cap rate will be market-based if rent is at market rates.
The other two members answers well covered the other topics.
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Paging @Joel Owens please come in with your copy paste please.
I'm a NNN lawyer and investor. There is magnitudes of difference between an absolute NNN freestanding, national credit NNN and something like an industrial building. I think you'll find the latter to be more attractive both in terms of return and the amount of work you're already doing.
For information, definitely go on YouTube, there are more investors posting about NNN than on BP.
Quote from @Kevin Sellers:
I am a commercial mortgage broker specializing in single tenant and multitenant retail properties nationwide. Interest rates have risen 150 basis points this year with typical range for quality STNL properties at 4.65% to 5.15% interest rate. If you finance a low cap rate property, you will need to put 45-50% down. Amortization schedule is typically 25 or 30 years.
Thanks for reply. I have a follow up question on financing. Why the high down payment? Typically commercial requires 20-25% down. I would think NNN would be considered lower risk than multifamily.
Financing for commercial real estate (retail, office, industrial) is different than for multifamily or SFRs. These asset types generally need minimum 30-35% down. However, the higher interest rates this year led to narrower spreads between cap rate and loan interest rate. A lower loan amount is then required in order to hit the lender's minimum debt service coverage ratio (DSCR). It is a math equation where we derive the max loan amount based on the other variables such as NOI/cap rate, interest rate, amortization and lender's min DSCR.
Pete,
Lenders underwrite a single tenant differently than a retail center and different than a multifamily center. The best lenders tend to stay (in there box) and specialization. If the tenant quality and location fits in their box they can be hard to beat. If the tenant quality is mediocre to poor, the location, or the lease terms then the lender likely passes and then left with local banks. They know they are only game in town so give crap 5 year fixed with 15 to 20 amort and higher interest rates. Commercial only makes up maybe 20% of their lending business so they offer it to clients doing other loan with them but are not motivated to lend unless sweet terms to them.
Right now you are working for yield which CANNOT be compared to NNN investing. NNN is more passive yield so investors accept lower returns for being hands off. People go to my site and fill out my form and then I see where they are at and where they want to go. I have talked to thousands of investors over the years. This is a field I am a specialist in. NNN might not be right for you at this juncture of your investing career. I would have to talk on the phone as the persons life story and details matter with the goals they are trying to achieve.
I have a personal life story book and a NNN business book I have finished up launching in July.
All the best.
You will need a lot of cash down as mentioned to do a NNN deal. If you truly want to get out, then sell your assets and do a 1031 exchange and park that cash into a NNN deal. It's a good time to sell if you have been doing multifamily for a while. The most passive type of ownership will be called an absolute or ground lease on a brand tenant where you just own the land and the tenant owns the building. There is no percentage of gross. These are leases that have fixed rent with 10% increases once every 5 years.