Is NNN lease a good first investment?

[Siah Hawton]

I have been looking into investing in the commercial real estate space. Triple Net Leases have caught my eye as a good possible investment. I was wondering if this kind of investing is good for a novice or not? Especially with the perceived high capital barrier for entry along with large debt.

Also, suggestions on how to overcome the fear of making this kind of investment. 

[Greg Scott]

It depends.

Most NNN lease deals are bigger, so very few newbies start there. They don't have the capital.

With NNN, you have less day to day responsibility than you would on other properties. On the other hand, you have more tenant-side risk because it can take longer to find a replacement tenant than in something like a single family house.

Some NNN leases are long-term leases which then also exposes you to the risk that inflation will outpace the rent increases.

[Benjamin Aaker]

NNN not as well-promoted as it is usually used in the commercial world and residential vastly eclipses it. NNN would be great for starting out on the financial ledger side of things. The risk to the landlord is very small as the tenant reimburses for almost all expenses. Time involved managing is less because many improvements and repairs are the tenant's responsibility.

The other side is the leasing and bookkeeping side. Leasing takes a lot more work because most commercial leases are 5-20 years and go under a lot more scrutiny than a 12 month residential tenancy. A good commercial broker would be handy, at least when starting out. They'll usually require 6% of the rents for the first term of the lease. Bookkeeping needs to be meticulous as you regularly pay bills, then send a bill to the tenant(s) to pay back. Though you can set it up so the tenant directly pays many of these, making a mistake can cause a big headache.

On the capital barrier side: You can buy small commercial properties, but tenants for smaller properties are more likely to demand a gross lease (more typical of residential leases) than a NNN lease.

On the fear question: Start evaluating deals every day. This is a great way to educate yourself on what is happening in the market and the terms that are asked. When you start making offers, you'll get to see the current leases in your area and how they are structured. Preparation is the best way to conquer that fear. Good luck!

[Steve Vaughan]

NNN cap rates are lower, so usually a capital preservation move for the wealthy.

My comp would be 10yr treasury yields. As those approach 4%, they look more attractive than the same relative return without the work and risk of a NNN.

If this happens to be a motivated seller with a new 10yr+ lease with an anchor tenant selling 20% above market cap, that changes the discussion.  

[John McKee]

It's a great investment and that's how I started out. I would start with focusing on the retail condominium space as these are more affordable and then eventually graduate up to the bigger deals unless you have lots of capital. There is no fear if you buy in the right location and do your due diligence. My favorite part is the due diligence and underwriting the deals. It's all about the numbers such as traffic counts, demographics, and sales. PM me if you like. Nothing is more passive than NNN yet still gives you ownership, builds equity, and provides significant tax write offs.

[Ronald Rohde]

NNN is great. As mentioned, you'll typically need more capital to start. And deeper reserves if something breaks.

NNN is very broad. It covers, office, retail, industrial, etc. Figure out the location and asset sub type that you like. Look at deals every day. Build a team and pull the trigger.

I only invest in industrial NNN, have over 100,000 sq ft in DFW--fully leased. I'm not worried about inflation--I have time to adjust leases to market. My costs are all pass through in the meantime. I also have fixed debt.

[Josh Levy]

I am looking at doing the same thing. Still trying to find the right property. Keep me posted when you find something!

[Ronald Rohde]

Quote from @Josh Levy:

I am looking at doing the same thing. Still trying to find the right property. Keep me posted when you find something!

 What, more specifically, are you doing thats the same?

[Paul De Luca]

@Siah Hawton

For a novice, probably not. Like you said the biggest barrier to entry would probably be your capital but also your network.

I used to work in commercial property management and I helped manage an industrial portfolio for a large REIT fund. Pretty much all of their leases were triple net so it's relatively hands off except for things like major capital improvements. The returns were relatively low but stable overall. I think it's a smart, passive way to manage your investments.

[Andrew Syrios]

NNN leases are the gold standard in commercial real estate but there are a few problems 1) the cap rate will usually be low and so your return isn't going to be very high (usually) and 2) you usually only get NNN on stand alone or larger commercial properties, which are very capital intensive. Not really a newbie investment

[Bob Stevens]

Its all about the numbers if there good then do it , Fear, connect with someone doing deals, learn then apply what you learn 

[Brock Mogensen]

If you have the capital to buy a NNN deal, I think it is a great segment to focus on. Generally these deals are "easier" to operate as well. That being said, you will need to learn the fundamentals of what constitutes a good deal..its all about the leases.

[Melanie McDaniel]

@Siah Hawton I love NNN, but as it is in all things, it depends. I would say everything is deal by deal, and nothing is the perfect asset class. Everything has its pros and cons, but I think the operator is the key piece. If you are the operator and you don't know what you are doing, I guess you have to ask yourself how much risk you are willing to take. You don't know what you don't know, but if you have liquidity and have a good head on your shoulders, NNN is pretty straightforward. Hire a lawyer to review the lease, and have at liquidity to hold the property if your tenant leaves in the middle of the night. If this is your first deal, I would consider finding a partner who knows what they are doing--the bank may require that anyway.

[Joel Owens]

Can't really comment without knowing your:

Annual income from your job or business?

Total net worth?

Total liquidity?

Talked to thousands of millionaires over the decades over the phone. They answer the above questions on my website form before we hop on a call. People asking about NNN space basically have theory and what they HOPE NNN will give them for passive real estate returns.

I am the hammer of REALISM telling it like it is and what to expect. I look at over 1,000 a week nationally. Good luck   

[Eliott Elias]

NNN is great, just make sure you know what you're buying. Commercial in Killeen sits on the market for 100 days+

Tenant are never consistent with payment 

[Ronald Rohde]

Quote from @Eliott Elias:

NNN is great, just make sure you know what you're buying. Commercial in Killeen sits on the market for 100 days+

Tenant are never consistent with payment 

 To be fair, thats a risk you should know before buying in Killeen. Its a tiny market, not close enough to anything to matter. Plenty of 10-12 cap deals in Tyler, TX, Greenville, etc.

[Eliott Elias]

Quote from @Ronald Rohde:

Quote from @Eliott Elias:

NNN is great, just make sure you know what you're buying. Commercial in Killeen sits on the market for 100 days+

Tenant are never consistent with payment 

 To be fair, thats a risk you should know before buying in Killeen. Its a tiny market, not close enough to anything to matter. Plenty of 10-12 cap deals in Tyler, TX, Greenville, etc.

 It's close enough to Austin, and residential get swallowed up in a heart beat 

[Josh Levy]

Quote from @Ronald Rohde:

Quote from @Josh Levy:

I am looking at doing the same thing. Still trying to find the right property. Keep me posted when you find something!

 What, more specifically, are you doing thats the same?

I am looking to potentially invest in NNN commercial properties in the maximum $2million price range.

[Josh Levy]

Quote from @Ronald Rohde:

Quote from @Josh Levy:

I am looking at doing the same thing. Still trying to find the right property. Keep me posted when you find something!

 What, more specifically, are you doing thats the same?

 Looking in the retail and shopping center arena. That is our main focus at this time.

[Neil Cronkrite]

@Siah Hawton What's your ultimate investing goal? To work very hard and earn an appropriate return? Do you have a lot of cash to invest? Are you looking for management intensive or something more passive? Another question is: what are you interested in? I lost interest in residential and apartment investing. Never had my heart in it. But when I had ACL surgery, I suddenly was thrown into the world of NNN medical office investing. Now my investing asset class is closely aligned with my interests.

[Ronald Rohde]

Quote from @Josh Levy:

Quote from @Ronald Rohde:

Quote from @Josh Levy:

I am looking at doing the same thing. Still trying to find the right property. Keep me posted when you find something!

 What, more specifically, are you doing thats the same?

 Looking in the retail and shopping center arena. That is our main focus at this time.

 Lots of opportunity in retail, who will do your leasing?

[Josh Levy]

If the property manager in the location we find a property can handle the leasing, they will probably do it.