Should I buy this out of state commercial property?

Question

I am a new commercial real estate investor. I have never owned any commercial real estate before. I have two residential real estate rentals both locally. This potential new property is out of state, which makes me a bit nervous. I would appreciate your feedback. My spouse doesn't mind going forward with possibly tying up the property and doing due diligence.

This is what my commercial real estate broker wrote to me.

"This is a good investment for you to look at. This is a supermarket. Supermarkets are very stable businesses. It is NNN so you don't have to do anything - just receive the rent checks. The tenant has over locations across the nation - so is a very established tenant. The rent the tenant is paying is super low, which makes it very secure because the tenant can't move anywhere else to get lower rent and if they ever leave, you know you can get higher rent so there is a lot of potential upside.
Corporately Guaranteed Supermarket, Out of State

• Corporately guaranteed supermarket 
• Very low rent - $0.50/SF, which means the tenant is very unlikely to ever leave, making the asset very safe. If they ever do leave, rent for a new tenant would be a lot higher so there is a lot of upside potential.
• Dense area with over 200k residents within a 3-mile radius
• Busy traffic counts of over 20k cars per day - makes it a desirable location for any tenant and guarantees business for the tenant
• 6.75% cap rate with 6yrs remaining on lease and 5-5yr opt
• Surrounded by a combined 4 elementary and middle schools -  makes it a desirable location for any tenant and guarantees business for the tenant
• Just note, this is a NNN lease with tenant paying all taxes, insurance and interior maintenance. Landlord is responsible for structure and roof. Roof has a warranty for another 16 years, so really only the structure. The property was completely renovated in 2017 so you still want to inspect it but it should be in good condition."

Nathan Gesner · Answer

It depends on the numbers. If the purchase price is low enough that it cash flows, it would make a good investment now and a great investment later when you bump the rent.

There is a big downside here. They are way below market, still have six years left on the lease, and they have the option to renew. In other words, it's losing tens of thousands of dollars every year in potential income and there's no sign of that stopping in the near future.

You'll have to crunch the numbers to see if it will work. You can use the BP calculator and then share it with us so we can help analyze.

Christopher Chen · Answer

The OM said that it was a 6.75% cap.

Christopher Chen · Answer

https://www.biggerpockets.com/...

Christopher Chen · Answer

I appreciate your kind post Stephen Brown. However,  my commercial broker is actually not in that state. Should this be a concern? I am glad for your perspective.

Stephen Brown · Answer

I applaud you for finding a commercial broker that's helping you out here and for taking on OOS investing... expecially in the commercial space. I'd say ask your broker to connect you with other investors in the area to hear their thoughts and analyze your long term goals. If you need cash flow now, I would pass. If you're okay with the low rent for a couple years and this is a long term strategy, then pull the trigger. Let me know if you're in need of any assistance for OOS tips.

Christopher Chen · Answer

I appreciate your insightful insurance advice Jason Bott.

Jason Bott · Answer

@Christopher Chen keep in mind many investors with a NNN will have the tenant pay for the insurance, but the investor will choose the policy.  This way you control the coverage limits and endorsements that are in your favor.

Secondly, an additional General Liability policy in the name of your holding company is carried for any claim that exceed the tenants policy limits or is not picked up by the tenants policy.

Example. Your grocery store tenant gets a policy that excludes Assault and Battery.  This is commonly excluded in high crime areas.  This excludes coverage from a suit where a claimant is beat up or shot on your property and claims you should have had safety measures in place to make is safer.

Unless you control the insurance process, some of these coverages can leave you exposed.

Christopher Chen · Answer

Thank you Jai Reddy. Appreciate your perspective. There is six years left on the lease. I can carry the mortgage.  I requested the lease. Let me check the surrounding cap rates.

I appreciate your post Brock Mogensen.

Christopher Chen · Answer

Thank you Jai Reddy. Appreciate your perspective. There is six years left on the lease. I can carry the mortgage.  I requested the lease. Let me check the surrounding cap rates.

I appreciate your post Brock Mogensen.

Brock Mogensen · Answer

Based on the info provided it sounds solid but would need to look into the numbers further to truly analyze.  NNN deals are great, I own a few and they are pretty hands off for the most part.  That being said, you will need to find a PM that has experience with NNN deals because you will still be responsible for coordinating all maintenance, lawn, snow, etc..then bill back to the tenant through CAM. That cap rate seems a little low given your comment about it being in a lower income area. The long lease term is good though.  Feel free to shoot me a message and I can answer any further questions.  I have a good amount of experience with underwriting NNN deals.

Should I buy this out of state commercial property?

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