All Forum Posts by: John P.

Hi John,

I have seen your situation tons of times.

I don't work with buyers doing what you are proposing in that small price range. Buyers tend to have an idea of what is out there but I tend to know from reviewing so many properties weekly.

You have urban core, strong suburban, weak suburban, and rural areas.

My clients invest in urban core to strong suburban areas. Developers typically pay 400k up to 1 million per acre just for the land. After build out costs they sell usually in the 2 million plus price range. They have legal, real estate commissions, and long to short capital gains taxes so their goal is about a 200 basis point profit margin. So if they build it break even for a 9 cap plus and lose 100 basis points in resale costs that makes sale price about a 6 plus cap range to make 200 basis profit spread.

For a newly minted lease with a credit tenant selling at 7 caps makes no sense to them whatsoever unless we are talking 5,6,7 million dollar properties where cost per acre can go down and cost per ft to build can be cheaper so breakeven cap rate is higher. There is some medical stuff in mid to high 1 million plus range but not investment grade tenants so loan is likely low 5's for rate with 20 year amortizations. 

Sometimes you can get sale leasebacks of older buildings for newer lease but even then might be high 1.7 or 1.8 million and up range.

1 million dollar existing building is high chance to be in rural to weak suburban markets. Granted you want no debt as likely might see that as less risky. It's still could go dark and then you are paying taxes and upkeep on a vacant property. As long as you are fine with that and know the risk it might work but no guarantees. A sweet spot for all cash is more value add STNL plays with maybe 7 years and under left on the lease for higher cap rates.

There are properties for 1 million but in markets I would deem too weak to recommend to my clients. You could buy say an investment grade tenant such as Advance Auto or Auto Zone with a long term lease in a good area and then do maybe 50% or 55% loan with no pre-pay penalty around 1.8 to 2 million price. You get more write off with depreciation likely and compounded returns with cash on cash and principal paydown. The loan you could add extra cash to chop it down so in year 10 it could be really small balance left.

It's hard to say which is why I have my clients send me financials. For instance if someone is retired and this is most of their life's savings that is a different discussion than someone worth 8 million and a doctor making 1 million plus a year doing surgery. Each situation is different.

If you want to absolutely stick to 1 million price all cash try to find the best building in the strongest market you can so at least the dirt is valuable. Those tiny towns if the tenant goes out the second generational tenant does not usually pay as much so some equity from initial down payment when the property was acquired is erased whereas a strong suburban location to urban area the rents might have actually GONE UP in that time for that area and you can re-lease at higher rates. Growing stronger markets attract regional to national tenants especially the warm belt states.

You would need maybe a Marco's pizza, a dominos, etc. for small price points or sometimes a ground lease can be cheaper in a more expensive area. An example an absolute NNN in strong suburban might be 2 million plus but a ground lease might be low 1 millions BUT cap rate is usually 5 to 6 with 10% bumps every 5 years and little to no tax benefits.

Have you thought about DST's? You could own part of a 10 or 20 million property in an A location that you might not could afford on your own or want to take debt on to buy. There are downsides to DST's as you do not control the asset or the timing of the exit and fees to buy in are high.

I am just sharing my experience over the decades. Buyers tell me what they want and then I show them the realities of the markets. I try to do the best I can but if the gap is too wide for expectations versus realities then it's a no go.

If you do go for all cash try to see what market rents are and get below market for that area. Personal guarantees even with good net worth for non-investment grade tenant are not worth as much. Tenants can have lenders and landlords chasing them for years in courts with stall tactics. It's better to see business and personal financials and see how they are performing and trending.

At 1.5 to 2 million plus price point there is a chance to find something in a good market. 1 million flat is almost non existent.           

Hi John,

Are you doing a 1031 exchange or is this cash sitting around?

Are you paying all cash or getting some debt?

It's not just about the going in cap rate. Some people dabble in in NNN. I review about 1,000 properties a week nationally for my clients. I am also an investor myself. Some buy STNL single tenant and others like multi tenant properties.

With multi tenant there is work involved. If you get all national tenants in a strong market the work tends to be less than a mix of national to regional tenants. Mom and pop tend to be the most work. You have the starting cap rate and then the blended cap rate over time.

Having an investment grade tenant makes a huge difference with debt. An advance auto for instance with BBB- or better investment grade credit might get close to a 4 percent rate fixed for 10 years currently with 35% down. A more regional brand with no credit or private credit amount down needed could be 45% down and interest rate in the 5's. The amortization could also be shorter.

The high cap rate draws you in but after research you might find the interest rate is much higher and more down is required with a shorter amortization. When you stack that up against an investment grade tenant with say an asking of 6.5 cap that is negotiated close to high 6's and lower amount down and better rate and terms the model tends to look better with less risk.

I hear this all the time when I first have a new client they send me this stuff with higher cap rates as they do not know NNN that well and how the process works. I believe in dirt first with location, tenant grade, and structure of the lease. What you can and cannot buy will depend on what price range you want to stay in and amount down. You have to make sure the rents are at or below market because if tenant goes dark you want a good location you can easily backfill in a short period of time. Tenants look for medium to lower rents in good locations because they do not have to drive top line sales per foot to be profitable usually. The higher rent per sq ft properties that are top market tend to be DIAMOND locations the tenant can't get anywhere else. There is an art and a science to NNN. I have individual clients with net worth from 1 million to over 100 million and 16 years in the business.

Whoever you talk to make sure they have extensive experience and credentials to help you. Your investment decisions can't be decided on a forum as investing is just like taxes every individual situation is different. You need to talk to a few people on the phone to get a clearer direction. You might reinforce NNN is what you want to do or decide it's not for you after all and did not match up to your expectations of what you thought the market was for risk and returns.

I am not generally a fan of single tenant properties but they can be a good investment with the right tenant and property. 

You need to audit the lease carefully especially what happens in a bankruptcy. 

I would also take a close look at the locations and who your potential tenant would be in the event you lose Advance as a tenant

Advance has been around for some time and seems like they will continue to thrive especially in tougher times.