Basics of Single Tenant NNN Investing

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Hi BP,

Hopefully everyone's week is going well. I've included a brief description of single tenant NNN properties. Please let me know if you have any questions. Hopefully this helps find some good deals! Thanks.

What are Triple Net Leased Investments?

Many real estate investors become dissatisfied with the management problems associated with real estate investment ownership. In recent years, more investors are becoming familiar with the ease of owning commercial property occupied by a single credit rated national tenant, using the vehicle of a long term triple net lease (NNN). The advantages of NNN leases are that the tenant is obligated to pay for all expenses associated with the operation of the property including property taxes, maintenance, insurance etc. When a NNN lease is combined with a single national credit tenant, the investor can be assured of a management free property with minimal risk. Companies with a net worth of over $1 billion such as Walgreens, Walmart, O'Reilly, Jack-in-the-Box, Barnes and Noble, Winn-Dixie, 7-Eleven, Inc. and Sherwin Williams are the typical types of NNN leased investment properties that investors look for.

What are the typical returns from Triple Net Leased Investments?

That depends on how you evaluate your investment. Capitalization Rates are the most common way to evaluate returns (take 1 year's net income/purchase price). NNN leased investments currently average 5% to 8% capitalization rates depending on credit risk, location and value of the income stream. With the ups and downs of the stock market and the recent turmoil in residential housing, more and more investors are seeking refuge in single tenant NNN leased real estate investments. This increased demand, coupled with low interest rates, has driven cap rates down over the past 10 years. Internal rate of return (IRR) is the value of an investment over a period of time. Assuming over a specified period (usually 10 years) of income, appreciation, payment of debt (if any), resale value, cost of resale and discounting the numbers into today's dollars, IRRs for NNN leased investments are usually 10%-14%. Yield from single tenant NNN leased real estate exceeded that of 10-year U.S. Treasury securities by 467 basis points as of November 2012.

Credit: Net Leased Real Properties, Inc/National RE Investor

Kofi,

I have a question for you. Near Portland OR, cap rates are ridiculously low for commercial properties around 4-7%. But when I drive around industrial areas near airport, every single building have open spaces available for lease. There seems to be a ton of space available.

So why do cap rates continue to go down. There seems to be little value in most commercial properties around here.

In hot markets, do you feel there are any more opportunities right now?. Or do we wait for a correction. REIT's getting hammered over past few months and elf's that are double inverse commercial real estate look like its taking off now. Has the correction started???

At present it is December 14, 2018. The cap rates in Northern California are in the 3 to 4% range. If you get a loan, the rate will likely be higher than this cap rate range in the future. This seems to offset any tax advantages of investing in NNN leases. I realize that brokers want to earn a commission, and they will push these investments hard. But I do not see the reasonableness of these investments at present. you are better off holding cash, investing in short term treasuries, and waiting for a return to better cap rates. What do you think?

In certain price ranges NNN STNL are all cash transactions so the interest rates do not affect price points paid or cap rates hardly at all.

Developers typically have a cap rate to cost breakeven of an 8 to 9 cap for STNL. They have capital gains (long or short term), and brokerage commissions along with commercial attorney costs for resale. They are not going to sell high quality national tenants for very little profit. They will hold with a long term loan and wait for a better time in the cycle to sell. We tend to negotiate some with developers to try and get a better yield for our clients but at some point the developer says it doesn't make sense and they stop negotiating.

Buyers get all these wild ideas with NNN on things they think can be achieved. They get on a call with me and I give them the realities of NNN investing and see if they still want to do it or not.

With a Single Tenant NNN lease (with the right tenant), you are getting long-term stability. Unfortunately, that usually comes at a cost (a lower cap rate). I have a good client who has owned a CVS pharmacy NNN lease for more than 12 years and it's been a great investment for them as they live out their retirement years. All of this while many of my other clients who bought properties at much higher cap rates wound up losing them as the market crashed back in 2008 / 2009 / 2010.

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