Beginner questions - NNN

8 Replies

Hello all,

I am looking for the NNN property in Houston area. I am totally newbie.

1. What will be the mortgage rate and term for the NNN loan? For example, Starbucks or some new strong long term tenants.

2. In you all experts' opinion - which works out better? Rental Homes or NNN properties?


Appreciate the feedback in advance.

@Raj Patel for NNN lease are not a qualifying factor for loans. It's great for your DSCR ratio.

It’s a great investment as all the rent goes to your bottoms line. Little to no expenses to add to your PnL.

Originally posted by @Raj Patel :

Hello all,

I am looking for the NNN property in Houston area. I am totally newbie.

1. What will be the mortgage rate and term for the NNN loan? For example, Starbucks or some new strong long term tenants.

2. In you all experts' opinion - which works out better? Rental Homes or NNN properties?


Appreciate the feedback in advance.

Mortgage rates depend on the property, loan amount, down payment, your financials etc.

NNN are easier to scale, generate more income and are easier to deal with than SF residential but they do have less attractive loan rates and terms so it all depends on your available cash, financial goals and return requirements.

Originally posted by @Raj Patel :

Hello all,

I am looking for the NNN property in Houston area. I am totally newbie.

1. What will be the mortgage rate and term for the NNN loan? For example, Starbucks or some new strong long term tenants.

2. In you all experts' opinion - which works out better? Rental Homes or NNN properties?


Appreciate the feedback in advance.

NNN is very passive. More comparable to joining in on a syndication. The return will never be on the high side as high as it can be with rental homes. On the converse, Rental homes to achieve the highest return have a value add. These take work. Managing PM is still work. In addition, many investors in rental homes are using very optimistic estimates to show fairly small profit margin. It is an exuberant market at this time with many properties selling at prices that will be tough to obtain a good return. The point is that while rental homes can achieve a higher return, many of them will not.

Good luck

Raj - Properties with Starbucks or other investment grade tenants with long term leases are very much favored by lenders. For a Starbucks in a good location with strong demographics and 8+ years remaining lease term, you could expect up to 70% financing with interest rate around 4.00% fixed for 8-10 years and 25-year amortization schedule.

Thank you all for your thoughts.

We have a developing area as far as the commercial real estate goes. How do I look up for the listings for brand new NNN properties in Houston area like Starbucks. Can you buy one straight from the developer?

Also, if I can not manage alone, what is you experts' note on me involving one more of my friends or two and acquire such property?

@ Kevin - So, pretty much I am putting 30 % down and let's say I get loan at 4% and cap rate is 4.5% then I am making 4.5% on my 30% down amount plus 0.5% on the 70% that I borrowed, correct? What other costs go in calculations? considering it's absolute NNN lease. I saw a property long time ago for 2 M.

Sorry if any of my questions sound not too smart, as I mentioned I am totally new to this.

Thanks a lot

@Raj Patel NNN properties are a completely different investment than a single-family residential home. The most important distinction is that there are very few opportunities to add value to a NNN investment when compared to a single-family home due to the fact that once a tenant is in place, there is very little left to do. Also, NNN properties are traded on a national level. It's not uncommon for an investor from Texas or Florida to purchase a NNN property in a small town thousands of miles away, making the market very efficient (akin to trading a stock or a bond). In my experience (from appraising NNN properties), the most important factors to consider when evaluating NNN investments are as follows:

1. Is the lease corporately backed? Different NNN tenants have different business models. For example, Starbucks are typically corporate owned stores while approximately 97% of Burger Kings are owned an operated by franchisees. If you are interested in a property where the tenant is a franchisee, evaluate the franchisee's track record and financials.
2. How much time is remaining in the initial term of the lease and how does that mesh with your desired holding period? Most NNN leases have a string of renewal options but that does you no good if the tenant decides that your location doesn't work for their needs.
3. How is the reimbursement income structured? I've seen numerous examples where tenants' reimbursement obligation for real estate taxes is capped based on the tax liability at the time when the lease was executed. In states like Ohio where your assessed value is largely determined by your purchase price, is your tenant obligated to reimburse for increases in real estate taxes that resulted from the property transferring? Don't rely on the broker selling the property to tell you.
4. Understand the market in which your tenant operates. NNN money is not guaranteed. For example, Dollar Tree recently purchased Family Dollar and is closing 200 stores across the United States. That's a lot of leases that will not be renewed.
5. Understand who is buying NNN investments in the markets in which you are interested. Does your city have a lot of foreign influence? Market trends in areas like South Florida are highly dependent on events taking place in Central and South America. When a bunch of investors from Venezuela are in a crunch to put cash overseas, its not uncommon for NNN properties to sell at cap rates where you are guaranteed to lose money. For some foreign investors, the prospect of overpaying and losing money is better than loosing all of their money in their home country.

Hope this helps.

Hi Raj,

I review tons of retail properties each week for clients nationally.

If you are a random buyer contacting a developer most won't give you the time of day. They do not know your experience level, credibility, how you plan to finance a property, etc. The buyer could end up being a flake and waste the developers time. Many developers want to build more property to sell off or hold and not educate new buyers to a space. That is not what they do for a living.

That is why developers like to go through brokers like me because they know I require to see financials. I have buyer commit and sign an exclusive agreement. The developer or seller knows the buyer has been screened by an experienced broker in the field. They know the buyer is not all over the place and has FOCUS with a timeline and plan in place to purchase a property.

Rental homes are ACTIVE yield where NNN properties tend to be PASSIVE yields. There really is no comparison to the asset types. In one investment owning houses I have to deal with residential landlord tenant laws (yuck). I have to worry about the tenant losing their job or getting work hours reduced. I have to worry about unauthorized people living in the space, pit bulls, the place being trashed, etc. The yield might be higher IF everything goes as planned but you work for it.

Conversely NNN backed by thousands of stores tends to be more passive. You have an experienced operator who keeps the place clean and in good shape for patrons. They tend to pay rent like clockwork. Once an investor gets to a certain point in life or net worth/income they usually do not want more intensive assets like SFR, multifamily, etc. They like the passive aspects of NNN. Even though you have national credit lenders still qualify the borrower just not weighted as heavily as if you had a regional or mom and pop NNN tenant backing the lease.

Even if you have franchisee there are still levels to the guarantee such as are they a large operator with 100 plus units in that system for over a decade OR are they a smaller franchisee with minimal experience with the brand? Does the guarantee cover all of their stores on the lease or just the one you are buying? Does the guarantee burn off early in primary lease term at some point?

There are hundreds of questions to buying NNN. Once you own it mainly passive but analyzing the properties and having the experience to understand what you are buying can be key to success in the long term.

Raj, 

You've brought up some great questions as far as NNN investments are concerned, adds great variety to BP's many topics of conversation. A lot of buyers like typical NNN deals for a number of reasons: 1) they are very passive, stable investments 2) tax benefits 3) they are great for 1031 exchanges because of items 1 & 2. All That being said, the cap rates are generally lower comparatively. You could almost describe a number of NNN deals as the bond market of real estate.

My team works primarily with NNN deals nationally. If you have specific questions, please feel free to message me directly, would love to assist.

Create Lasting Wealth Through Real Estate

Join the millions of people achieving financial freedom through the power of real estate investing

Start here