NNN lease opportunities offered today are too low

10 Replies

I have been considering various NNN lease opportunities. In my area the cap rates are 3 to 4.5%. This seems very low to me. In the future interest rates probably will exceed this cap rate. There are the advantages of tax write-offs and property price appreciation. On the other hand, there is some real estate risk being assumed by the owner: building deterioration, earthquake retrofit, key tenant bankruptcy or relocating, etc. Is anyone investing in such a low cap rate environment today?? If so, what is your motivation?

I am restricting myself to areas which I can access within one day of driving. owning real estate too far away makes visual inspection very difficult. I understand that brokers want a commission, and they will promote any type of investment as long as they get a commission. But as an owner, I believe that real estate must be visually inspected on a regular basis. I realize that some tout NNN as "never go and never see," but that appears to me to be too high a risk profile given the percent return received. What are the cap rates available on NNN leases in good areas? These rates appear to be too low, given the likelihood of increasing variable rate mortgages in the future. Does anyone disagree? If so, why?

@Jerald U. , compressed cap rates and a rising interest environment are hall mark signatures of a mature market. It's probably not the cap rate by itself that's giving you angst but having to leverage into that cap rate. That's the killer of returns.

But the converse happens early in a market.  Interest rates ease rents go up and all of a sudden a new generation of buyers are willing to pay more for that same property and voila, the cap rate goes higher.  

The mantra is buy with a high cap rate and sell with a low cap rate. Unfortunately the market is against you right now. The smaller and more mom and pop the tenant and the shorter the leases and the higher caps you'll find. And there's still some fractional TIC NNN's with national credit tenants that are performing significantly better than that. As @Joe Villeneuve said, if that's what you're finding in your market it's time to look elsewhere.

Originally posted by @Jerald U. :

I am restricting myself to areas which I can access within one day of driving. owning real estate too far away makes visual inspection very difficult. I understand that brokers want a commission, and they will promote any type of investment as long as they get a commission. But as an owner, I believe that real estate must be visually inspected on a regular basis. I realize that some tout NNN as "never go and never see," but that appears to me to be too high a risk profile given the percent return received. What are the cap rates available on NNN leases in good areas? These rates appear to be too low, given the likelihood of increasing variable rate mortgages in the future. Does anyone disagree? If so, why?

You're treating a NNN like any other REI...and it isn't. One of the greatest advantages of a NNN is you DON'T nee it to be right around the corner. I want to own the first one on the Moon,...but I'll accept Mars,...if the CAP rates are too low on the Moon.

Jerald,

By what you are describing sounds like you are in CA. NNN is my specialty and I have lot's of clients from CA. Most of my clients with NNN do not have to be local to the asset. The local thing is likely more of something you have decided fits your comfort level.

In CA for STNL price points tend to be higher along with lower cap rates. The lower the cap rate the more down you need to make numbers work with a loan. Example a 4 to 5 cap property with a loan if you go lower down payment such as 35%  likely generating 2% cash on cash. To get 4 to 5% cash on those low cap deals generally putting 60% or more down.

Anything in the 2 million and under range in price a majority is usually being bought all cash by retirees today. They buy a 5 cap at 2 million cash and have 100k annual income with rental increases. They live off the money and then give to kids in the estate when they pass away. Enjoying their golden years they usually travel and see friends and family and want passive income that is headache free and avoiding worrying about (active tenants, toilets, and termites). For those benefits people are willing to take a much lower return.

Now as you head into 4,5,6 million dollar STNL properties sometimes you can land properties in the 6 cap plus range in other states. In CA I have seen a mid 5 plus cap before. If you go into retail strip centers maybe a 6 cap. In other states cap rates can be higher. The key is to have a great commercial retail NNN broker with a great network to scan for properties that might work. There are lot's of clients that owned houses or multifamily in CA and are tired of it and come to me wanting to buy NNN. They have made a big equity jump and now want to outpace index funds and paltry returns in savings and CD's in the banks.

Most of my clients tend to want to invest in warm belt states in areas with good growth and higher median incomes. It is not just the tenant it is the location as well. Sometimes buyers will purchase in CA for lower STNL properties on ground leases or NNN. Example a tenant has been there 20 years and option is coming up and says tenant pays market. If you buy 4 cap or 5 cap and tenant does not renew and rents are half of market then you can look to increase rents for next tenant and have a higher cap rate with valuable dirt. If existing tenant loves the location and wants to stay they pay the money. So there are various value add deals. I look at about 1,000 properties a week nationally and tend to work more exclusively on the buyer side. Individual commercial brokerages tend to just push their listing inventory whereas I search through my whole network trying to find the diamonds for my buyers to purchase.

I could keep writing on here but generally people jump on a call with me as there are high level details that would take a very long time to type out. Hope it helps.    

Originally posted by @Joel Owens Owens:

Jerald,

By what you are describing sounds like you are in CA. NNN is my specialty and I have lot's of clients from CA. Most of my clients with NNN do not have to be local to the asset. The local thing is likely more of something you have decided fits your comfort level.

In CA for STNL price points tend to be higher along with lower cap rates. The lower the cap rate the more down you need to make numbers work with a loan. Example a 4 to 5 cap property with a loan if you go lower down payment such as 35%  likely generating 2% cash on cash. To get 4 to 5% cash on those low cap deals generally putting 60% or more down.

Anything in the 2 million and under range in price a majority is usually being bought all cash by retirees today. They buy a 5 cap at 2 million cash and have 100k annual income with rental increases. They live off the money and then give to kids in the estate when they pass away. Enjoying their golden years they usually travel and see friends and family and want passive income that is headache free and avoiding worrying about (active tenants, toilets, and termites). For those benefits people are willing to take a much lower return.

Now as you head into 4,5,6 million dollar STNL properties sometimes you can land properties in the 6 cap plus range in other states. In CA I have seen a mid 5 plus cap before. If you go into retail strip centers maybe a 6 cap. In other states cap rates can be higher. The key is to have a great commercial retail NNN broker with a great network to scan for properties that might work. There are lot's of clients that owned houses or multifamily in CA and are tired of it and come to me wanting to buy NNN. They have made a big equity jump and now want to outpace index funds and paltry returns in savings and CD's in the banks.

Most of my clients tend to want to invest in warm belt states in areas with good growth and higher median incomes. It is not just the tenant it is the location as well. Sometimes buyers will purchase in CA for lower STNL properties on ground leases or NNN. Example a tenant has been there 20 years and option is coming up and says tenant pays market. If you buy 4 cap or 5 cap and tenant does not renew and rents are half of market then you can look to increase rents for next tenant and have a higher cap rate with valuable dirt. If existing tenant loves the location and wants to stay they pay the money. So there are various value add deals. I look at about 1,000 properties a week nationally and tend to work more exclusively on the buyer side. Individual commercial brokerages tend to just push their listing inventory whereas I search through my whole network trying to find the diamonds for my buyers to purchase.

I could keep writing on here but generally people jump on a call with me as there are high level details that would take a very long time to type out. Hope it helps.    

There are at least 5 or 6 votes that could/should be given to this posting. When @Joel Owens speaks about NNN, you need to listen.

@Joel Owens Thank you. I've looked the other way for STNLs at less than 8 % cap rate thinking, someone just wants to make money by overpricing these for suckers like me to buy, but I now understand their value is beyond just cap rate.
Originally posted by @Jai Reddy :
@Joel Owens

Thank you. I've looked the other way for STNLs at less than 8 % cap rate thinking, someone just wants to make money by overpricing these for suckers like me to buy, but I now understand their value is beyond just cap rate.

The 8% that you are targeting is at the top of the range for average market NNN cap rates. STNL rates generally range from 5-8% for credit rated tenants with long term leases. There are cap rates over 8% for local/regional tenants and also for multi-tenant investments. These may be better suited for you if you prefer to be close to your property.

I can share a blog post about this topic. Hopefully it helps. - What Are The Typical Returns From Triple Net Leased Investments?