NNN "mail-box" money

13 Replies

How much cash is needed for a deal?

Has anyone sold off some of their rentals to get into that space?

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Sorry if to generalized. In SFR mid west is 100k per house 25 down, coasts 400+ or 100k+ down.

I was thinking to get into NNN you needed much more than 100k

@Michael P. Yes we're seeing many clients go this route.  It's part of the natural market evolution.  It can be a form of defensive investing that allows you to stay in real estate while waiting for the next buying opportunity in other sectors.

There are some good fractional NNN products that qualify for 1031 treatment and will have a low minimum of $100 - $150K of cash. Some are debt free (the best defense). Some have required debt acquisition.

We were just talking about this today with a couple of clients. In this market with interest rates ticking up and cap rates compressed highly leveraged NNNs have a very hard time performing. So you may actually be much better in a cash only fractional product rather than a highly leveraged commercial NNN. Obviously this is a floating generalization but also highly counter intuitive for the normal residential investor.

@Michael P. Why would you want to? I get many NNN deals emailed to me and on most of them the returns are terrible compared to what I can find myself on residential or commercial rentals.

Most I see are selling at a 5-7 cap. If you're buying with cash or borrowing money at 3-4% that might be attractive... I'm borrowing at 5-6% so those cap rates aren't attractive at all. I can buy a sfr or small multi for 8-12% returns which gives a much better margin. 

NNN's I think are good for people with a lot of money to park it. But it's not without risk like many treat it. Just ask the people that owned a Block Buster or Toys r Us in a bad to fair location.

For NNN you have STNL and MTNL. I look at between 500 and 1,000 a week for clients and I am very versed in the space. I have thousands of contacts in my database.

With STNL a single tenant building the key is if the lease has any rental increases so the cap rate return blends UP as the primary rent term winds down. You want to be in a position where you made cash flow off the asset all of those years and when you go to sell after resale costs at a minimum you can recover your down payment equity. It's not just the cash flow it is the tax benefits as well.

Some married couples get one partner to qualify for real estate professional status.

Some buy these and are fine making 5 to 6% to start and then go into the 7's for cash on cash.

The strip centers tend to offer better returns but you do have management. You can get in sometimes with 25% down and rental increases at 2 to 3% a year usually beat single tenant NNN which can range from flat (nothing) to 1 to 2% a year. Sometimes they block the rent where it goes up 6,8,10% every 5 years etc.

Whether you want recourse or not makes a difference. Example if you want full non-recourse I have seen rates at 5 to 5.10 and if a buyer will take full recourse some lenders are at 4.6 %. On an STNL deal at lower caps every basis point counts for return if that is important to the investor.

Some buyers could frankly give a crap about money returns they are just getting crushed on taxes. Example  I have doctor clients making 700k to 1.2 million a year doing surgeries. For them making 6% return versus 8% is secondary compared to tax write offs of owning property. So strategies and the ways investors look at things vary wildly.

SFR or multi at higher coc the investor is working harder for that yield so there is a trade off versus passive NNN and you do nothing.

100k for NNN doesn't cut it to own directly. I get this all the time except it is investors with 300k to 500k. They want to own directly but want great markets for high population, income levels, traffic counts,etc. Those areas for NNN STNL quality about 2.5 million and up so minimum on STNL need about 30% to 35% down so about 800k. If investor is accredited then I mention they can possibly invest with me as a sponsor and for the 300k to 500k investment own a slice of a larger property in an area they find high quality that they could not afford on their own.

Michael, I invest in a NNN lease fund and have been happy with it.

Just so you know, I would definitely not call NNN lease on a single deal/property "mailbox money".

No matter how carefully you select your property, tenants can and do "go dark" (meaning that they leave and have to be replaced). Finding a new tenant is usually much more difficult than in, for example, a multifamily/apartment situation, where someone else will probably move in in about a month and 1/2 or so.  It may be a year or more before you find someone suitable, during which time your mailbox money will have dried up.

There's also a good chance that you will need to invest additional money to fix up the property to attract the new tenant, who is unlikely to be satisfied with the very customized layout of the last one. So you also have to have the financial resources to come up with this money if it's necessary.

If you are really looking for "mailbox money" I would recommend looking at a diversified fund instead, which provides much better protection when one of them inevitably goes dark. Typically these funds run from $200k-$500k. For example, BroadStoneNet lease has hundreds of properties, which is much better protection against the downsides when one of them goes dark. They also diversify into numerous recession resistant asset classes, and across the country, to again reduce the risk of any single class or area of the country having problems.

There are also a ton of DSTs that also offer triple net leases, but if you look behind the scenes at all the fees, they are almost always pretty outrageous (and in my opinion, only justifiable if you are doing a 1031 exchange, and the tax savings offset the fees better). On the other hand, a fund like Broadstone has extremely low fees.

Originally posted by @Joel Owens :

Those areas for NNN STNL quality about 2.5 million and up so minimum on STNL need about 30% to 35% down so about 800k.

Thanks, that's what I wanted to know

Originally posted by @Joel Owens:

Some buyers could frankly give a crap about money returns they are just getting crushed on taxes. Example I have doctor clients making 700k to 1.2 million a year doing surgeries. For them making 6% return versus 8% is secondary compared to tax write offs of owning property. So strategies and the ways investors look at things vary wildly.

 Good to know I have a future surgeon in my family, four more years of training.

Moving from a SFR to a fractional TIC ownership in the right building can bring stability and security to your portfolio. While it's not for everyone, it can bring peace of mind. I believe in a 100% debt free approach. Leverage = Risk.

Originally posted by @Dave Foster :

@Michael P. Yes we're seeing many clients go this route.  It's part of the natural market evolution.  It can be a form of defensive investing that allows you to stay in real estate while waiting for the next buying opportunity in other sectors.

There are some good fractional NNN products that qualify for 1031 treatment and will have a low minimum of $100 - $150K of cash. Some are debt free (the best defense). Some have required debt acquisition.

We were just talking about this today with a couple of clients. In this market with interest rates ticking up and cap rates compressed highly leveraged NNNs have a very hard time performing. So you may actually be much better in a cash only fractional product rather than a highly leveraged commercial NNN. Obviously this is a floating generalization but also highly counter intuitive for the normal residential investor.

Hi Dave, what do you mean by a "cash only fractional product"?

@David Babayev , Commonly called TICs (standing for tenant in common) but a structure like a DST. However instead of purchasing a membership interest in a Trust you are purchasing actual. interest in the real estate itself. These are frequently owned in cash with no debt and so are a cash only investment. DSTS once in a while will be also sold without debt making them a cash only passive investment.

But the non- recourse nature of the debt in a dst really makes it almost a cash only investment for you as there is no personal liability for the debt other than your investment.

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Originally posted by @Dave Foster :

@David Babayev, Commonly called TICs (standing for tenant in common) but a structure like a DST. However instead of purchasing a membership interest in a Trust you are purchasing actual. interest in the real estate itself. These are frequently owned in cash with no debt and so are a cash only investment. DSTS once in a while will be also sold without debt making them a cash only passive investment.

But the non- recourse nature of the debt in a dst really makes it almost a cash only investment for you as there is no personal liability for the debt other than your investment.

Thank you so much!