Looking to buy NNN investment property

Commercial Real Estate Investing
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Looking to buy NNN investment property

Vijay Sid
Atlanta · Member since 2018 · 12 posts · 1 vote

I am looking to retire early and interested in purchasing a fixed income commercial property. I have been reading about NNN investment properties which will have potential to generate monthly income with limited or no landlord responsibilities. I have been researching around the web to find out about NNN leases and listening to prod casts as well.

However I am requesting help to find a good real estate broker who can help me to navigate through the process of buying NNN investment properties, help me with proper duedeligence process, understand the risk mitigation techniques if NNN goes dark, come up with a plan and exit strategy. Most of them require purchasing a million dollar or more NNN property, my budget is around 500K and will be taking a mortgage . I have called some of them and they require a minimum of 1 million investment, is it very hard to find a brokers who can help me with this kind of purchases.

Has anyone gone thorough the NNN process with lower investment amounts like 500K or less and had good results, what kind of pros and cons I may run into purchasing NNN properties. Is it hard or easy to get financing , if so how much down payment is required , do we have 15 or 30 years mortgages on the market. Does interest rates or higher when compared with traditional home market. Can you please share your experiences or provide guidance

I have been researching properties and finding out that most of the properties on sale has less than 5 years and then the options to renew? Is that a good investment to get in to, what sort of duedelegence is required. I heard terms like corporate guarantee, good credit rating, location etc. 

How hard is it to get a new lease in case tenant goes dark. The properties I was looking at are big national restaurant chains . What are the risk mitigation strategies.

Any help or advise is really appreciated.

Regards,

Vijay

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Joel OwensBusiness Member
Moderator
Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
7y

Vijay try to find a GRUNT on a commercial real estate team that is a junior agent. That's about the only shot.

500k NNN is like 20k house. Nothing worth anything out there much in that range...almost impossible. My minimums are about 2 million because I review 1,000 a week nationally for clients and I know what is out there in what ranges.

Are you an accredited investor? You might do better to go into a syndicate NNN deal with a bigger and better property than you might could afford on your own.

Even if you get a junior agent they are on splits with a team. So if 3 people on team and commission is 15,000 on 500k sales typically HALF goes to brokerage. That leaves 7,500 between 3 people to split. Senior broker might get 3,500, middle agent 2,500, junior agent 1,500. They will typically have junior agent do all the work because other brokers are working on bigger deals.

Even me as a principal where I would keep it all the amount of work you are asking for in a 500k transaction is a ton to make only 15k. Commercial brokers like larger deals where they make 80k,100k commission at a time.

You could use a commercial attorney that is experienced in retail but costs could be 10,000 to 20,000 on a small deal like that if attorney is doing everything versus a broker helping out.  

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  • Richard W.
    Property Manager · Orlando, FL · Member since 2014 · 31 posts · 16 votes
    7y

    These guys seem to be focused on what you are looking for 

    https://srsre.com/

    1Reply
  • Greg Dickerson
    Developer · Charlottesville, VA · Member since 2018 · 4k+ posts · 4k+ votes
    7y

    @Vijay Sid financing all depends on the property, tenant mix, your financials and the bank. Every lender is different and offer different rates and terms. That being said the max loan term on commercial other than multifamily is usually 20 years. Multi family can go up to 30-40.

    Its best to shop several banks and commercial lenders and get prequalified so you can go in strong with your offer.

    2Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    Vijay try to find a GRUNT on a commercial real estate team that is a junior agent. That's about the only shot.

    500k NNN is like 20k house. Nothing worth anything out there much in that range...almost impossible. My minimums are about 2 million because I review 1,000 a week nationally for clients and I know what is out there in what ranges.

    Are you an accredited investor? You might do better to go into a syndicate NNN deal with a bigger and better property than you might could afford on your own.

    Even if you get a junior agent they are on splits with a team. So if 3 people on team and commission is 15,000 on 500k sales typically HALF goes to brokerage. That leaves 7,500 between 3 people to split. Senior broker might get 3,500, middle agent 2,500, junior agent 1,500. They will typically have junior agent do all the work because other brokers are working on bigger deals.

    Even me as a principal where I would keep it all the amount of work you are asking for in a 500k transaction is a ton to make only 15k. Commercial brokers like larger deals where they make 80k,100k commission at a time.

    You could use a commercial attorney that is experienced in retail but costs could be 10,000 to 20,000 on a small deal like that if attorney is doing everything versus a broker helping out.  

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    3Reply
  • Azeez K.
    Investor · Atlanta, GA · Member since 2013 · 646 posts · 392 votes
    7y

    @Vijay Sid

    You asked a loaded question which involves a lot of typing so I will try to summarize your questions and keep my responses short as I could spend a whole lot of time crafting a response. 

    Your question: 
    Has anyone gone thorough the NNN process with lower investment amounts like 500K or less and had good results?

    Response: I am sure there are people who have. However, in Atlanta prices would typically be $1M plus. I purchased a NNN in 2017 around the $1M mark and it picked it up at an auction and it cash flows extremely well.

    Pros: Excellent cashflow and rent comes in like clock-work. Less headache overall but when problems arise you have to address right away

    Cons: Deferred maintenance - Depending on how the lease is written the landlord still has responsibilities such as Roof. Changing roof on a commercial building can set you back by 150-200k (again depending on size). Chillers/HVAC is another item if you have to replace can cost a lot of money. Paving parking lots cost a lot of money as well. 

    Your Question:

    Is it hard or easy to get financing , if so how much down payment is required , do we have 15 or 30 years mortgages on the market.

    Response: Depending on credit & lender (Assuming credit is not an issue). It's relatively easy to get financing since the banks look at the income from the asset. Plus if its a national tenant it is even easier. Typically, down payment of 25% is required although certain banks could require 30% or more. Typically, the terms would vary on the lender but most likely there will be a 5,7, 10 year balloon  

    Your question: ..properties on sale has less than 5 years and then the options to renew? Is that a good investment to get in too.?

    Response: Depends on individual risk profile, type of tenant, lease terms, tenant rating, history, location to name a few. Without doing dd it's hard to say 

    Your Question: How hard is it to get a new lease in case tenant goes dark. The properties I was looking at are big national restaurant chains . What are the risk mitigation strategies?

    Response: Depends on several factors the marketing period could be 12-18 months or lower again depends on several factors. Risk mitigation have holding power. 

    Feel free to send me a PM. Good luck

    1Reply
  • Vijay Sid
    OP
    Atlanta · Member since 2018 · 12 posts · 1 vote
    7y

    @Joel Owens Many thanks for your input. What do you mean by Syndicate NNN, you mean pooling money with other investors and then purchasing a bigger and better one. The bigger investments I am browsing are also in the same cap rate range of 6-7%. The Lower asking price investments are also in the same cap range. Help me understand the better one. Do you mean better return on investment or more positive cash flow or longer lease terms.

    0Reply
  • Vijay Sid
    OP
    Atlanta · Member since 2018 · 12 posts · 1 vote
    7y

    @Azeez K. many thanks for your insights. Do we run in to the maintenance issues including roof, structure even for absolute NNN leases. I was under the impression that absolute NNN leases have zero owner responsibilities. The roof, structure and external maintenance are Double or NN leases

    It’s interesting to know that the average turn around period could be 12- 18 months in case of tenant going dark. In others words, one must be prepared to take that calculated risk of managing the mortgage payment till the new tenant signs a lease or there may be costs involved modifying the structure or inside to suit the needs of new tenant and costs could be higher. In other words it may be good to go for longer term leased tenant than the expiring soon kind of deals. This risk could go bigger as the dollar value of the investment grows

    In regards to Maintenance, for primary or investment homes I can go for home warranty companies or home insurance that would cover most of the maintenance work. I am not sure if there are companies that do warranty for commercial properties 

    Appears like if I go out of metro area like tier 2 cities I am finding national chains under 700 or 600K , do you forsee any issues there . In regards to investment do you suggest opening an LLC.

    Thanks in advance,

    Vijay

    0Reply
  • Vijay Sid
    OP
    Atlanta · Member since 2018 · 12 posts · 1 vote
    7y

    @Greg Dickerson thanks for your input on mortgages, that helps .

    0Reply
  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y

    Vijay,

    Personally I love the NNN asset class.

    However:

    1) $500k is probably not going to get you much of a quality investment in this space.

    2) The "go dark" risks can be significant. There are ways to deal with this (such as getting a credit tenant or diversifying into multiple properties). But you are unlikely to be able to afford them at your low price point and budget.

    3) The closer you get to the possibility of the tenant having the ability to break the lease, the more risk you are taking on. So you are essentially being forced into considering the higher risk portions of this asset class by your current strategy. If you are an aggressive investor that might be fine and what you're looking for. If you are not, then that is not ideal.

    4) Even though it sounds like a very easy asset class, doing proper due diligence is not a simple thing. It sounds like you do not yet even know the basics here, and arguably have a higher than normal probability of making one or more expensive mistakes while trying to learn.

    Personally I prefer investing in this asset class in a diversified fund. These typically have hundreds of properties across multiple asset classes and geographies, which provides diversification and eliminates the dynamic of "one property goes dark and I lose 100% of my income". If you choose well, you can pick a sponsor that has years more experience then you could ever hope to have.

    I'm personally invested in a fund with hundreds of NNN leases, where the sponsor has full real estate cycle experience, has low leverage (typically around 40% although temporarily they are little bit higher right now as they are digesting a big new acquisition) and is the only fund of this type that I know of that has an investment grade rating. They market under 506B so I cannot post more publicly. But if you are interested, private message me and I can give you their full details.

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  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    7y
    Originally posted by @Vijay Sid:

    @Azeez K. many thanks for your insights. Do we run in to the maintenance issues including roof, structure even for absolute NNN leases. I was under the impression that absolute NNN leases have zero owner responsibilities. The roof, structure and external maintenance are Double or NN leases

    It’s interesting to know that the average turn around period could be 12- 18 months in case of tenant going dark. In others words, one must be prepared to take that calculated risk of managing the mortgage payment till the new tenant signs a lease or there may be costs involved modifying the structure or inside to suit the needs of new tenant and costs could be higher. In other words it may be good to go for longer term leased tenant than the expiring soon kind of deals. This risk could go bigger as the dollar value of the investment grows

    In regards to Maintenance, for primary or investment homes I can go for home warranty companies or home insurance that would cover most of the maintenance work. I am not sure if there are companies that do warranty for commercial properties 

    Appears like if I go out of metro area like tier 2 cities I am finding national chains under 700 or 600K , do you forsee any issues there . In regards to investment do you suggest opening an LLC.

    Thanks in advance,

    Vijay


    I don't think you'll find a warranty for any commercial building other than new construction. Tier 2 cities have more risk for finding tenants, but it all depends on location and demand. What is your strength on real estate investing? if its finding tenants, then don't worry, if its managing financing, focus on that, if its construction, etc. Going into a small NNN investment with no understanding of your strengths is an easy way to get pinched on a deal.

    I absolutely recommend an entity (LLC). It will shield you, it will be more professional, allows for flexibility (add partners), I could go on and on.

    0Reply
  • Joel OwensBusiness Member
    Moderator
    Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
    7y

    Vijay difference being a 500k price property you are likely looking at a rural area. If by the miracle you find a property in a strong suburban to urban core area for 500k likely a retail condo owning one unit of a retail center or similar.

    Having a 500k property even then likely it is a mom and pop tenant. So if cap rate is equal likely the location and amount of land you get with the credit of the tenant is vastly different. Ground up development new for NNN is about 500k to 1 million an acre in strong suburban to urban core areas. Sometimes less but about the average. Land cost is up, materials are up, legal fees are up, labor is up. Brand new builds with newly minted leases usually 2 million plus in price. Sale leaseback of older building might be able to hit low 1 millions or a ground lease with under market rents. Ground lease typically no tax depreciation.

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  • Vijay Sid
    OP
    Atlanta · Member since 2018 · 12 posts · 1 vote
    7y

    @Joel Owens yes it make sense and some of these tenants are mom and pop or some sort of medical offices.

    you have mentioned doing a syndicated NNN and doing so will the investor gets charged with hefty commissions and fees. What's the industry average and your advise on that. Some of them I have seen a down payment of 500K to start with

    Looks like it’s very hard to get an initial breakthrough with out having large cash funds. I am sure most of them may have started small and eventually made their way so that they can invest with that kind of cash down payments. Do you have any advise for starters like me to reach that kind of a goal

    Adding to that I was looking in to REIT crowd funding groups that will average out 6 to 8 % return. The fund managers manage large portfolio of NNN leases? Why is this different than syndicate NNN. What are the pros and cons

    Thanks,

    Vijay

    0Reply
  • Vijay Sid
    OP
    Atlanta · Member since 2018 · 12 posts · 1 vote
    7y

    @Ronald Rohde thanks for the insights . Yes, I will open an LLC before I start investing

    FYI, I had some sort of experience in short term rental. The challenge there was finding good property management local company and it took a while to find one after changing couple of them who is not only good at marketing and good at managing

    That’s the reason I wanted to start small, understand the waters and get some good experience 

    0Reply
  • Vijay Sid
    OP
    Atlanta · Member since 2018 · 12 posts · 1 vote
    7y

    @Ian Ippolito thanks for the insight 

    In regards to your following comment, are you referring to crowdfunding? And what do you mean by low average, can you please provide more details 

    “I'm personally invested in a fund with hundreds of NNNleases, where the sponsor has full real estate cycle experience, has low leverage (typically around 40”

    1Reply
  • Ian IppolitoBusiness Member
    Investor · Tampa, FL · Member since 2015 · 1k+ posts · 1k+ votes
    7y
    Originally posted by @Vijay Sid:

    @Ian Ippolito thanks for the insight 

    In regards to your following comment, are you referring to crowdfunding? And what do you mean by low average, can you please provide more details 

    “I'm personally invested in a fund with hundreds of NNNleases, where the sponsor has full real estate cycle experience, has low leverage (typically around 40”

    You're welcome Vijay.
    I'm sure there are crowdfunded NNN funds, but this fund isn't one of them. When I say low leverage, I mean it has 40% which is lower than the typical 65 to 75% leverage you might see on some other deals/funds. As I mentioned, they market under 506B which means they cannot solicit publicly (and I do not want to get them into trouble by providing additional information publicly here). If you want more information on them, message me privately.

    The Real Estate Crowdfunding Review
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    0Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    7y
    Originally posted by @Vijay Sid:

    @Ronald Rohde thanks for the insights . Yes, I will open an LLC before I start investing

    FYI, I had some sort of experience in short term rental. The challenge there was finding good property management local company and it took a while to find one after changing couple of them who is not only good at marketing and good at managing

    That’s the reason I wanted to start small, understand the waters and get some good experience 

    Sounds good, I'll echo the other comments, $500k is too small to have everything you want. Understand what you're trading off. You can co-invest with a partner, find people who are looking to acquire and toss in your funds with them.

    0Reply
  • Todd Goedeke
    Contractor · Sheboygan, WI · Member since 2016 · 917 posts · 266 votes
    7y

    @vijay did

    You mentioned you are in a NNN fund. What are you receiving in cash flow as a % of your investment

    0Reply
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