Investing in triple net properties

49 Replies

I have 6 residential units and would Like to transition into the commercial real estate world. Preferably triple net properties. I've read that you have to have 30-40% down for a NNN property. Is there anyways around this if you lack capital? Can somebody help me transition in to the commercial side of real estate? And advice would be great!

@John Michael Mattingly , while 30-40% might be what many of the big lenders require, be sure to call around to local lenders. I was able to find multiple lenders that would only require 20-25% down payment on a NNN property as long as it was within their banking footprint.

You could always investigate a lease option. If you negotiate and sign a master lease for the entire property at below market value you could sub-lease the property at market rates and generate cashflow with very little out of pocket. The option is there should you decide to ultimately exercise it and purchase the building. At that point if your negotiated option price is significantly under appraisal Value you may be able to purchase with very little down.

@John Michael Mattingly , I would recommend looking to local lenders for financing on NNN deals. A lot of the bigger banks are not interested in deals that are not very large and will not offer as favorable terms on deals below $5 million. The amount of downpayment required will also vary depending on the type of asset you are buying and the credit of the tenant. If you buy a mom-and-pop restaurant, then you are going to have to put quite a bit more down as it is a riskier investment. If you buy a credit tenant like a Dollar General or a Family Dollar, then lenders are going to be more flexible on financing terms as they are taking on less risk that the property will end up coming back to them. I just closed on a Dollar General deal with 20% down. You will need a long-term lease though and good credit. Conversely, because these deals are lower risk, they also typically have a lower cap rate, which equates to a lower rate of return. Let me know if you would like to jump on a call - I am happy to discuss in more detail.

My advice. Get in bed with a local lender that has less than three locations. I have been with the same small local lender for 10+ years. For the first couple of years I had to put down 30% on all commercial deals. Since that time, all of my deals are at 20%. This includes everything from NNN to vacant buildings. The same people that I dealt with 10 years ago are still there. Even regional banks have a lot of personnel movement which makes it harder to build relationships. I used to bank with a big bank and was part of their private client group. Big banks only want to finance the easy deals and often want nothing to do with smaller value add deals.

I also have an 80% LTV, 7/25 national single-tenant I'll be closing on in February. Call three or four smaller Regional banks.

I am in similar situation, any advice on where to find commercial properties that are stable/longer term leases. What CAP can one get? Any TIC syndications worth looking at?

Rick, the longer the lease, the lower the cap.  The larger the surrounding population, the lower the cap.  A single national tenant, on a ten year lease, in a major area, will be in the 5’s to low 6’s.  Longer leases could put you in the 4’s.  

You’ll get higher caps, but less favorable financing, for, as example dollar stores in smaller communities.

7 to 8 cap national STNL tenant with a long term lease is usually a pipe dream especially in the lower price ranges. Sometimes a Dollar Store with flat rent in a weaker area can get there for 7 cap.

The details matter on these deals so I think it can be misleading to the regular buyers looking for NNN thinking they will get 80% LTV loans on NNN in these forums.

That is not normal at all. I have seen it before for 20 to 25% down for very, very strong buyers like doctors that already have a relationship with a lender and do full recourse and cross collateralize everything.

30% down for the investment grade tenants and a long term lease is more customary and sometimes 35% down is required.

There can be times where there is say 8 years left on primary lease term with a national tenant. Those cap rates can be somewhat higher and still get good financing. Those properties fly off the shelves and many go for all cash. I have seen some national STNL at 7 cap but price range is higher like 6 million and above.

I review about 1,000 properties a week for NNN nationally. Not saying there are exceptions sometimes but it is very rare and not normal.

I'll disagree on the LTV, Joel. I'm not a doctor nor am I a big player as this is my first venture into commercial single-tenant 1031 as I lived in the multi-family world for a long time.

Joel, I did a single STR with the bank and live hundreds of miles from both the bank and asset.

I’m not going to publicize this bank as I have more business to do with them.  I can  tell you that I did get the same offer from 1st National Bank out of Pittsburgh but they recently came up with the rule that either the buyer or the asset had to be within 2 hours of one of the branches. 

Originally posted by @John Michael Mattingly :

I have 6 residential units and would Like to transition into the commercial real estate world. Preferably triple net properties. I've read that you have to have 30-40% down for a NNN property. Is there anyways around this if you lack capital? Can somebody help me transition in to the commercial side of real estate? And advice would be great!

 Where are you located? Finding someone in your local area you can build a relationship would be ideal 

@Joel Owens I got 3.5% for the 7 years fixed.  The bank in Pittsburgh was offering the same.  They guaranteed that rate upfront with the understanding I would include them in the property choice and that certain properties (non-QSR restaurants, QSR without drive-thru's, dollar stores in smaller areas, office buildings, industrial) would not get the same treatment.

Originally posted by @Mark H. Porter:

I'll disagree on the LTV, Joel. I'm not a doctor nor am I a big player as this is my first venture into commercial single-tenant 1031 as I lived in the multi-family world for a long time.

OK, so as a first-time investor have you actually checked with a lender to be able to have some backing for your statement?

I'd take his word at 70% over yours. Only way you'd get a higher LTV is a relationship loan with a bank or some kinds non-bank lender.

I have seen grunts at banks promise the world as an order taker on the phone or in person. Then when the investor is tens of thousands of costs in and under contract the committee doesn't do the loan or re-trade it to something much worse than can have been gotten elsewhere.

Lenders talk a lot of stuff but actually performing and closing on what was said is a whole different Universe.

There are many components to finance. When buying NNN properties the good ones often have multiple offers. The seller will review the offers and when they see something such as 80% LTV ( all other terms being close to equal with offers) will tend to throw that offer out.

WHY?

Because they know 80% LTV is not customary and odds of closing are low conversely the other buyers with 30,35%, 40% down they know likelihood of closing is higher. It also brings the seller comfort if they know the lender or capital markets broker.

The other factor is TIME. The lender might have great rates but only do so many loans and take a ton of time to close which the seller might find unacceptable.

With lenders it is also important to know how they make the decision process at each step. Sometimes there is a 2 factor committee approval process where the local branch approves the loan but the main board at headquarters does not.

If Mark Porter can get those loans he describes than great for him and I am happy for him.

I have clients sometimes where LTV is not the main factor in a deal. They are a 1031 exchange. They need to win a deal for a high quality property. Putting down 35% and paying maybe 15 to 20 basis points more on rate having a national NNN lender that is known to perform with no question can be more beneficial than going with an unknown lender promising the world where a failed exchange could cost 1 million in penalties.

Anyone buying NNN should analyze their own situation and create a plan of action based on their own individual circumstances. Mark thanks for sharing the bank contact info earlier. I will check it out and see what they offer.

@Steve Morris - As I mentioned above and similar to what @Mark H. Porter is saying, yes, I have closed on a NNN property as a first time commercial investor (previously in the SFR space). My loan was 80% LTV and it was my first account with the lender. I had competing lenders offering similar terms (rate being the difference). I understand what @Joel Owens is saying that it might not be the norm, but just highlighting it is possible.  

@Joel Owens - Sure thing, here is a basic overview....

Tenant:  National Retail (not a dollar store) - Corporate Guarantee

Lease: Absolute NNN with 5 years remaining + options

Location:  Secondary city in SC on the main retail strip 

Price:  <$1M

Cap Rate:  ~8%

Loan Terms: 80% LTV @ 4.625% 5yr/25yr (would have been willing to go up to 10yr or length of the lease which ever was shorter).

Lender:  Regional Credit Union  (had similar offers from a 2nd Credit Union and a larger Regional Bank)