Month Seven of Our 1031 Exchange: We're Investing in... Restaurants?

After months of saying “almost,” we are officially under contract on our Brooklyn, New York condo. We got our full asking price ($975,000), plus a lovely down payment, within the first two weeks of being on the market. (Thank you, NYC real estate!)

Of course, it ain’t over until we get our fat check, but we are thrilled to have made it this far, and for the first time in months, the ball is kind of in the buyer’s court to get appraisals and financing—fingers crossed we are all systems go. (And yes, we know it could still go south at this point, but we’re eternally optimistic!)

This is, of course, our first step in a somewhat complicated 1031 exchange—where we are selling the Brooklyn condo we’ve owned for 20 years, making a very large profit (we bought it for $375,000 in 2004), and then rolling over the entirety of that sales price into an investment property, which we hope will net us a big monthly check until the end of time.

With the first part of our exchange underway, we are now reasonably free to focus entirely on the buy side. And we have been busy. As you may remember, we took a quick trip to the Dallas suburbs to look at (and ultimately pass on) a large 13-unit apartment building with a ton of issues we decided we didn’t want to deal with.

Slightly influenced by that, we turned to the other end of the resource-intensive spectrum and focused on hands-off NNN leases. Here are some of the deals we reviewed the last couple of weeks, how we analyzed them, and why we ultimately passed (or didn’t?).

1. An Auto Repair Business in the Northeast

Price: $1.08 million
Cap rate: 7.00%
NOI: $75,600
10 years on primary lease term, with 5% rent increases every 5 years
Four (five-year) renewal options
Corporate guarantee
NN lease: Roof, foundation, and HVAC landlord responsibility

Pass: This is a double net lease (rather than triple net), where too many of the big expenses would be our responsibility.

2. A Popular Restaurant Chain in the Deep South

Price: $1.4 million
Cap rate: 6.25%
NOI: $89,154
2018 construction
15-year absolute NNN
1.5% annual rent increases

Pass: Too expensive. After loans, we’d only net $3,400 a month.

3. Another Popular Restaurant Chain in the Deep South With 8 Years Left on the Lease

Price: $1.2 million
Cap rate: 7.25%
NOI: $90,000
Eight years left on lease, 10% increases every five years
Absolute NNN—zero landlord responsibilities
Popular restaurant chain

Undecided: Price is right, and it nets about $4,800 after debt service, which is good. But we were nervous about the eight years left on the lease. The end of the NNN lease is, of course, where it starts to get very expensive since you can be vacant for a long time. Maybe that’s why the cap rate is higher. We’re having some more conversations with our broker about this next week.

What do you think of the deals we reviewed this month? Did we make the right calls? What would you be looking for, and what would you run from?

Our 1031 Journey So Far:

January: Selling our Condo, the Beginning

February: Getting the sell side situated

March: Is a 1031 Exchange Really Worth It?

April: Finding the Best Deal in the Haystack

May: Final Stretch on the Sell Side

June: Our Condo Is on the Market!

This 1031 diary will be a monthly series through 2024, chronicling our journey to a (hopefully) successful and profitable 1031 exchange, kicking off in May. We’ll share everything—all the numbers, the analysis, the good decisions, what we wish we’d done differently, the big mistakes (hopefully not many), and everything in between.

Have questions? Got advice? What are we missing? Share in the comments below!