1031 into NNN: what return and hold period are you actually underwriting to?

Question

Curious what the market is actually pricing in right now, not what a broker’s pitch deck says.

For those of you who’ve done a 1031 into a triple net lease property, what return were you actually underwriting to going in, cap rate, cash-on-cash, whatever number you look at first? And separately, what hold period were you planning for when you bought, versus what you’d actually want if you could do it again?

Mainly trying to get a read on whether the “5-7% and hold forever” expectation I keep hearing is really what people are underwriting to, or if that’s just what brokers say because it’s an easy number to defend against the alternative of paying tax.

Jay Hinrichs · Answer

I bought one at 6 cap  my doctor tenant though is buying me out in 27 so 5 year hold.. will have to 1031 into something else which is a pain but at least I have time to try to line up another NNN .. its my kind of investing I am fine with 6 cap and very limited management issues.

Dave Foster · Answer

@Chris Seveney "Forever" is more than a little bit optimistic.  In the last 10 years alone, NNN has undergone the Amazon/online shopping phenomenon, COVID, work from home, and return to work.  Great real estate that can be repurposed for another national credit tenant is still going to be safer "forever".  But not a guarantee.  The thing that is killing NNN deals now is debt.  Debt is pulling down good cap rates into subpar returns.  If you can buy in cash, then "forever" becomes a manageable waiting game.

Dan Handford · Answer

I would treat the entry cap rate as the starting point, not the conclusion. With a NNN property, the tenant’s credit, remaining lease term, rent escalations, unit-level performance, renewal probability, re-leasing cost, and debt maturity can matter more than the initial yield. A 6% cap can be attractive if the income is durable, or expensive if a major rollover creates a large capital requirement. Which assumption have you seen change the investment outcome most often: tenant renewal, financing, or the eventual exit cap rate?

Chris Seveney · Answer

@Rob Bergeron  answer is none of the above as i am just trying to educate myself on 1031 and expectations and realities. I am not looking at anything at this time or underwriting anything I was asking the group for those have done it what is their experience

Rob Bergeron · Answer

@Chris Seveney the "5-7% and hold forever" framing always leaves out that you're underwriting a credit tenant, not a property. You're buying a lease. And when the lease is the asset, the residual is the whole question, which is the part nobody models honestly, because modeling it means admitting you don't know what a single tenant box in a secondary market is worth in year twelve with eight years of term left.

Where I'd push back on my own side of the comparison: the small multifamily number is fiction unless you underwrite management honestly. Plenty of people put 8% in the model and then spend their weekends doing the job themselves. If someone is exchanging specifically to stop working, that isn't a rounding error, it's the entire reason they're looking at NNN in the first place.

On why the low momentum metros are interesting here. NAR just launched a Commercial Real Estate Demand Index scoring all 306 metros on job growth, population and migration, where 100 is average. Louisville, where I work, came in at 94.5. That's 225th out of 306, down 5.1 points year over year. St. George, Utah topped the list at 128.

I'll take that trade every time. Go try to find a duplex in St. George where the rent covers the note. The index measures momentum, not whether a deal pencils, and those are genuinely different questions. Metros at the top of that list get priced like metros at the top of that list.

So back at you, since I think you asked the right question: what hold period are you actually underwriting to? If the honest answer is seven years rather than forever, then the residual assumption is doing all the work, and that's the number I'd stress test first.

1031 into NNN: what return and hold period are you actually underwriting to?

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