Getting into NNN investing questions

Rental Property Investor · RVA · Member since 2016 · 5k+ posts · 4k+ votes

3y

The biggest issue I see is that your competition will be big money investors with significant experience investing in properties with existing, well-qualified tenants with long term leases. I would question any deals that are left over that the big guys pass on.

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Andrew S.

Investor · Raleigh, NC · Member since 2013 · 1k+ posts · 708 votes

3y

@Joel Owens is a NNN guru - he will have answers!

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Account Closed

Louisville, KY · Member since 2023 · 71 posts · 34 votes

3y

Your questions are valid and I would STRONGLY suggest buyer representation. A reputable and experienced broker can answer those questions and provide tremendous value and savings.

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

3y

20% down is a pipe dream.

In low interest rate environments before with cap rate at 5.0 and debt at 3.5% with DSCR ratios still looking at 30 to 35% down.

Now because cap rate maybe in 6's and debt in 5's for credit grade BBB- or better tenant making down payment about 40% or more down.

20% down not happening on these.

I don't want to comment further because you are looking for a miracle. I have been in NNN about 20 years now as a principal broker and an investor. I review about 1,000 a week. In a suburban core area to urban core in NY not finding a 2 million pharmacy CVS or Walgreens. You would likely need to go to small suburban to rural towns with weak demo's. The more expensive the dirt gets the more per ft the tenant pays in rent. Cheap rent is 20ft for 10k sq ft box that is 200k NOI in good location. Also not all pharmacy equal (some leasehold, some absolute NNN, some NN, some have rental holiday, some zero cash flow, etc.)

If you want to get serious look for putting down about 1 million to get something decent with dirt and location.

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Chui Chan

OP

Member since 2019 · 5 posts · 1 vote

3y

Quote from @Joel Owens:

20% down is a pipe dream.

In low interest rate environments before with cap rate at 5.0 and debt at 3.5% with DSCR ratios still looking at 30 to 35% down.

Now because cap rate maybe in 6's and debt in 5's for credit grade BBB- or better tenant making down payment about 40% or more down.

20% down not happening on these.

I don't want to comment further because you are looking for a miracle. I have been in NNN about 20 years now as a principal broker and an investor. I review about 1,000 a week. In a suburban core area to urban core in NY not finding a 2 million pharmacy CVS or Walgreens. You would likely need to go to small suburban to rural towns with weak demo's. The more expensive the dirt gets the more per ft the tenant pays in rent. Cheap rent is 20ft for 10k sq ft box that is 200k NOI in good location. Also not all pharmacy equal (some leasehold, some absolute NNN, some NN, some have rental holiday, some zero cash flow, etc.)

If you want to get serious look for putting down about 1 million to get something decent with dirt and location.

Well, if a million is the buy in price then I guess I will just save up a little bit longer. I could do it but I wanted to miniminze my investment for now since the returns appear to be so low. The idea was to have a spot to park money, hopefully appreciate, and get regular rental income that would be almost tax free with depreciation deduction. It would also be a route to transition out of residential rentals to be free of so many tenants while delaying depreciation recapture with a 1031 exchange.

I will continue researching and investing. If this is a low point in the stock market then my liquid cash has the potentially to increase significantly over the next few years, maybe then would be a better time to try to transition into parking my money in a commercial deal. Thanks all for the input, especially Joel.

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

3y

I have this conversation all the time. Literally have talked to thousands of millionaires over the phone through the decades. 7 to 9 figure individual net worth and some families that are billionaires.

I do this day and day out so know the reality. Buyers with a thought of the space have well intentioned theory but often does not line up to doing a real deal in the marketplace.

Brokers and agents just starting out live off the deal. Brokers in the business and already wealthy can tell you what they really think. They do not want to sell high risk stabilized deals that can go dark and the client wants them to fix it. When you already have tons of money you do not want that headache plus it's slimy to just sell junk to close a transaction. Be careful who you listen to and what they are saying.

If you do not want to deploy 1 million down an alternative is to invest in syndication deals as an accredited investor or value add NNN. I focus on value add NNN minimum 100k investment at a time for accredited investors. Some will do that while stockpiling more cash to eventually own a NNN property.

It's better to wait and own a quality NNN property then just buy one that fits in the budget you want to pay. Those can be lemons. I mention to people a 2 million commercial NNN property is like a 200k house. It's the starter level with lots of buyers looking for the quality and often unrealistic expectations.

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John M.

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

3y

I would be cautious when looking at a Walgreens. Although they are a great tenant they have been closing stores. Their traditional suburban foot print is too big so it's hard to rent out a large space of that size. The one near my house has been closed for 3 years before it became an Indian Bazaar. The good news is that it's a busy corner lot. You Just have to make sure you get the real estate right....I.E. the dirt!

Joel is spot on with the the amount down you will need in today's interest rate environment.

On a large deal in Commerical the commission % is typically lower like 4%, as opposed to 6% in residential.

There are smaller NNN asset types you can focus on now with your cash that are more affordable than a wall greens. Your residentials however are a good fit for a 1031 exchange into a DST depending on the equity of each rental.

You won't be able to change the lease, but you just need to understand it. Eventhough NNN investing is mostly passive, there is a lot of due diligence that goes into understanding the property. Happy to share my checklist with you if needed.

1 Reply

Chui Chan

OP

Member since 2019 · 5 posts · 1 vote

3y

Quote from @John M.:

I would be cautious when looking at a Walgreens. Although they are a great tenant they have been closing stores. Their traditional suburban foot print is too big so it's hard to rent out a large space of that size. The one near my house has been closed for 3 years before it became an Indian Bazaar. The good news is that it's a busy corner lot. You Just have to make sure you get the real estate right....I.E. the dirt!

Joel is spot on with the the amount down you will need in today's interest rate environment.

On a large deal in Commerical the commission % is typically lower like 4%, as opposed to 6% in residential.

There are smaller NNN asset types you can focus on now with your cash that are more affordable than a wall greens. Your residentials however are a good fit for a 1031 exchange into a DST depending on the equity of each rental.

You won't be able to change the lease, but you just need to understand it. Eventhough NNN investing is mostly passive, there is a lot of due diligence that goes into understanding the property. Happy to share my checklist with you if needed.

John, I could see store closings being an issue. We had 2 Walgreens relatively close to each other and they consolidated. The vacated one sat empty for about 2 years before becoming an auto parts store. I don't really have a great answer for this. I was thinking 1st one would be CVS or Walgreens, then the next would be the different company. At least if one company went down it wouldn't be everything but it my exposure would still be to pharmacy, commercial real estate, and the local market in NY state since that's where I would want them to be. So maybe not true diversification but some measures to mitigate the risk. It also wouldn't be everything I had. I would use the commercial real estate to provide tax free, true mailbox (hopefully), income to live on while my excess cash would remain in the stock market hopefully achieving higher returns.

I haven't heard of DSTs before but I will do some more research. A quick google search shows that it's like buying shares of a fund but its shares of real estate and qualifies for 1031. If these shares are liquid then it could be a game changer. My residential portfolio consists of over a dozen properties and trying to time buying a commercial deal for the highest dollar residentials was going to be a potential nightmare. Bundling the properties in packages would make it better but also harder to sell since it would price a lot of people out compared to selling individual duplexes. I had kind of resigned myself to being able to roll over a few of the highest value ones into a commercial property and just eating the taxes on the rest of them. If DSTs can function as a way to park the funds from individual sales into a holding pattern, defer taxes, and then roll it all into one big commercial property later on, that would be the dream. I don't know if it works like that though.

I wanted a few pharmacies because of the lower cap rate, with the idea that the tenants are low hassle and it's priced in the cap rate, and that these tenants are usually NNN vs other commercial tenants. Part of it may also be an ego thing too. I want to be a pharmacist or a former pharmacist who owns a CVS and a Walgreens, maybe 2 Walgreens and a CVS in my golden years. Pharmacist who owns 2 Starbucks and a Dennys doesn't have the same ring to it.

I will absolutely take the checklist and add it to my commercial real estate notes and knowledge folder. Thanks.

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Wesley N.

Developer · Hammond, IN · Member since 2014 · 34 posts · 7 votes

3y

you don't need to go NNN to get what you want, or need a credit grade tenant. You can find NN or other low maintenance commercial properties that don't require much time or tenant laws and headaches. Look for smaller good locations that you can start with and look for favorable leases with decent term remaining. I see them all the time.

1 Reply

Wesley N.

Developer · Hammond, IN · Member since 2014 · 34 posts · 7 votes

3y

what about smaller pharmacies? Personally, I'd need a higher cap than a Walgreens. why not shoot for a 10 cap?

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Chui Chan

OP

Member since 2019 · 5 posts · 1 vote

3y

Quote from @Wesley N.:

what about smaller pharmacies? Personally, I'd need a higher cap than a Walgreens. why not shoot for a 10 cap?

If it's an independent pharmacy I don't have a lot of confidence in the future of the industry. PBMs are squeezing retail pharmacies and it's hard for mom and pop pharmacies to stay open with declining reimbursments. Independent pharmacy numbers have been declining. They're also very localized businesses, especially in smaller towns. The pharmacist there is tied to the community, knows everyone, etc. Once that pharmcist dies or retires, there is a high chance the business also ends then and there. I do not want to outlive the operation. A chain will continue to operate that location forever if it's profitable. Since they don't have a lifespan they might not care about a 40 or 50 yr lease. As an individual I have a limited lifespan. My behaviors would certainly be different though, depending on whether the goal is to maximize net worth upon death, or have a stable tax-free income to enjoy with minimal hassle until death.

If it's a larger chain with a 10 cap then there's a reason the cap is 10. Maybe they've already given notice that they're not renewing, the property is already currently dark, or it's in the ghetto and it's a store where shoplifting is occuring rampantly on a daily basis and loss prevention has basically given up. What are the chances that corporate's going to want to keep that store open in the long term? My line of thought is there is no such thing as a free lunch, a 10 cap is there for a reason. I am not looking to buy more trouble with the lure being a temporary 10 cap based on a snapshot of how things are at this very second.

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Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

3y

You're asking for low cap deals that have negative leverage. It simply doesn't exist and cash flow positive.

Why not industrial NNN with a single tenant? You can buy that with positive leverage and similar LL obligations as your STNL retail example.

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Kevin SellersPro Member

Lender · Charleston, SC MSA · Member since 2018 · 52 posts · 29 votes

3y

Chui - Joel Owens and I have worked together many times for clients who needed financing for their acquisitions. The amount of leverage we can obtain is dependent upon the name of the tenant, length of remaining lease term, demographics of the location and the cap rate of the transaction. Financing for commercial real estate (retail, office, industrial) is different than for multifamily where we can typically get higher leverage. There have been a few rare occasions when I obtained 75% leverage for CRE transactions but even when interest rates were lower, the highest leverage was usually in the range of 70-72%. Now, with interest rates much higher, you should plan on at least 35% down and potentially more if the cap rate is < 6.00%. If you would like to discuss in more detail, I am available for a call next week. Thank you!

480-229-3522

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Joel OwensBusiness Member

Moderator

Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes

3y

Walgreens and CVS are fine my clients own many of them. The key is what are the terms of the lease and what rent are they paying?

There are historical rents in place on some of those where in exchange for excess TI paid by the developer the tenant started with inflated rents for the market and hoped to make it up over time with increasing sales. When that didn't happen Walgreens likes to sublease the space until they can get out from under the lease or pay extra to terminate it early.

Often the sublease goes to a Dollar Tree or Dollar General. The key is if you can get sales for the location of a Walgreens or CVS. If you can get sales you can compare that to the in place rent to gage how they are doing at the site. Poor sales and higher in place rent even for a good location is a big no-no for a purchase. In that case you want the rent to be replaceable if they go out. There are newer Walgreens at maybe 5k sq ft in smaller suburban areas now. Before decades ago they put locations everywhere expanding in all directions on an upcycle. Wal-mart used to do this also. The tenants learned over time when they paid high rents and hoped the growth would come there and not fully materialize then they hardly made any profit running a business at that site.

Tenants are smarter these days and really analyze the sites more they go in for controlled and high impact profit growth. That is why you have to be careful with vintage leases.

The 5,000 sq ft building in small town if it doesn't work out they can subsidize with much less rent to sublease and exit the market.

This is where the experience of NNN brokers and investors comes into play to know what you are buying.

Some Urgent Cares can be good if backed by a super strong A tenant like BCBS. You get the long term lease plus rental increases and the 2.4 to 2.8 million range. The good ones are hard to find and I locate them off market for my clients. Finding the good stuff takes a lot of time and effort. There's a lot of crap on the market just like any asset class.

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NNN Invest53 Reviews

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Mark H. Porter

Investor · SC NC, VA · Member since 2020 · 1k+ posts · 756 votes

3y

Right now cash is king. Any debt will be in the 6.5-7.0% range so the cap rate you will need is 7 plus to make any decent cash flow. Add to this the banks wanting a 1.25 DSCR, especially for new commercial investors, and you're going down a very tough road. A year ago you would have been fine. Banks are now very picky.

And, the STNL pharmacies are not cherished as they were. The longer the remaining lease the lower the cap rate, so if you want 10-years remaining you'll be facing cap rates in the 5's which is very hard to make the banks' DSCR demands. One major pharmacy, that I owned, even has an "incentive" program in which you need to pay them more than a years lease in order for them to exercise a 5-year option.

Do your research on investing in these and it will help you narrow things down.

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Kevin SellersPro Member

Lender · Charleston, SC MSA · Member since 2018 · 52 posts · 29 votes

3y

For WAG and CVS properties with 10+ years remaining lease term, I have lenders at 6.00% or perhaps slightly below depending upon the demographics of the location.

480-229-3522

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Account Closed

Lender · Atlanta, GA · Member since 2018 · 108 posts · 28 votes

3y

Quote from @Chui Chan:

Looking for insights and opinions on my personal situation. I am exploring the transition into NNN investing because I'm tired of residential tenants. If someone's heat or toilet is broken I would rather that not be my problem. I thought more units means more money but it also means more issues and more units is not the answer. I'm thinking commerical, good tenant, higher dollar cost but overall fewer units.

I'm looking at CVS and Walgreens with NNN leases. I am a pharmacist and I believe these to be stable companies even though cap rates might be lower to reflect that.

I would be looking for leases with over 10 years remaining since I'm not eager to value add and I would rather put off the potential for having to deal with a possible vacancy until I have more experience in the field.

I'm in New York state and I would be looking to buy in NY. I know with a NNN lease it shouldn't matter since I have no landlord responsibilities and I could be looking nationally, but I like the idea of being able to drive to these locations and check them out for due diligence and at least having it in the same state if I do have to deal with it going dark or have a vacancy.

I'm looking to buy the lowest cost property that's reasonable. Meaning I'm not looking for the cheapest listing overall, but maybe the cheapest that still has over 10 years on the lease. With a high quality tenant such as CVS or Walgreens I'm hoping the down payment would be 20%. With this being my first foray into the market I'm just looking for a good first transaction investing the least amount possible. My returns are going to be greater elsewhere but active management and volatility of the stock market both suck. If all goes well then maybe I either pay down the loan come refinance time for more return, or buy more NNN properties. If NNN is great then sell all residential rentals and accept lower overall returns in exchange for not having to deal with people and issues.

With a $2.5 million listing at 20% down we would be talking 500k down. I currently have about 800k liquid cash and another $2 million in residential rentals.

My questions:

1. How does financing work? Is 20% down reasonable for these high quality tenants? With residential it was easy, go to local bank and they just finance the deal with 25% down. I've been searching online to find commercial lenders or specialized lenders for CVS or Walgreens but it seems a lot harder to sort these companies out and terms seem to be a lot more opaque. Are national lenders better than local lenders for this marketplace, or are local lenders not even a thing?

2. How do commisions work in commercial real estate? I'm also a licensed real estate broker and for residential properties a trick I would use is to represent myself and collect a commision on the transaction. So on a 125k duplex my down payment might be 31k, but I would get a 3% commission on the 125k and get almost 4k back. Is that also possible with a commercial transaction? Do commercial brokers share commisions the same way? 3% on a $2.5 mil transaction is 75k, which isn't nothing. Especially compared to a 500k down payment. But I also know that commissions are generally lower for the commercial sector.

3. Any major "gotchas" in NNN that can blindside a new investor? In my research one potential concern would be a "rent holiday." A lease can have the commercial tenant just not pay rent in the last 3 years of their lease. This sounds crazy in my opinion and is not a thing for residential tenants. Is the owner supposed to charge more in the beginning and just hopefully have it made up for in the overall picture? Seems like it would wreak havoc for stable, consistent cash flow and it's like dropping a bomb on the new owner if it's going to happen on their watch.

Thanks to everyone in advance for their willingness to opine on my life.

Smart transitioning into single tenant NNN. Considering other states and industry/tenant types gives more property options. A $600k down payment @ 67% LTV with a 7%+ year 1 cap rate makes the first transaction comfortable and cash flow positive. This affords $1.8m.

1 Reply

Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

3y

Quote from @Kevin Sellers:

For WAG and CVS properties with 10+ years remaining lease term, I have lenders at 6.00% or perhaps slightly below depending upon the demographics of the location.

eek old footprint or new only?

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John M.

Investor · Fairfax, VA · Member since 2015 · 1k+ posts · 801 votes

3y

I was just listening to a podcast and the company said they have about 1,000 locations that are Dark out of the 9,000 or so they have.

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Aaron SchraderBusiness Member

Real Estate Agent · SD · Member since 2020 · 137 posts · 65 votes

3y

Full Disclosure- I have no experience with NNN, but it is of interest to me and I'm learning about it.

One observation I have made is that there is a need in my area presently and my previous state I lived in for "contractor garages". These would be a fourplex (or six or whatever) industrial metal type building, shared walls between each unit, and they typically have a tall garage door on them and an office space and bathroom. Renters that use these that I have observed are contractors, t shirt screen printers, a coffee roaster, and even guys with classic cars that don't have space at home. As I recall the shop spaces were around 1700 sq feet, and then they had bathroom and office space on each unit. These buildings were all NNN and were in all kinds of areas- suburban, rural, cities. It's something that interests me, maybe it would be something to look into for yourself. Just sharing the thought!

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Ronald RohdePro Member

Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes

3y

Quote from @Aaron Schrader:

Full Disclosure- I have no experience with NNN, but it is of interest to me and I'm learning about it.

One observation I have made is that there is a need in my area presently and my previous state I lived in for "contractor garages". These would be a fourplex (or six or whatever) industrial metal type building, shared walls between each unit, and they typically have a tall garage door on them and an office space and bathroom. Renters that use these that I have observed are contractors, t shirt screen printers, a coffee roaster, and even guys with classic cars that don't have space at home. As I recall the shop spaces were around 1700 sq feet, and then they had bathroom and office space on each unit. These buildings were all NNN and were in all kinds of areas- suburban, rural, cities. It's something that interests me, maybe it would be something to look into for yourself. Just sharing the thought!

Yes, its a common idea from new investors. The reason it has such demand is due to a lack of supply. The lack of supply is from the costs and skill needed to develop it. Once you can execute once, those buildings are not great to keep doing with land costs so high. Capable developers don't want to develop it, the upside is too low and risk too high.

The demand is a mile wide and an Inch deep. You can sign a pre-lease with them and get bank financing.

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Getting into NNN investing questions

Getting into NNN investing questions

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