Why a Net Lease Property for Your First Commercial Deal?

[Guillermo Matias]

There are numerous ways and strategies to invest in commercial real estate since there are many asset types (office, industrial, multifamily, retail, etc.) in the sector. Investing in commercial real estate is a complex process and for a novice investor there may be hurdles to consider. For example, purchasing a commercial building requires a significant amount of cash either for a downpayment or to pay in full. In addition, investing in commercial real estate carries different risks associated with the specific asset that each investor needs to know, understand, and properly mitigate.

However, I believe the best way to start investing in commercial real estate is by acquiring net lease properties. Investing in net lease properties involves significantly less risk when an appropriate due diligence process is applied, and a tenant background has been thoroughly checked. The details of this process are outside of the scope of this article, so I will not elaborate on it. However, I would recommend reading this article, Triple Net Lease Investing (NNN): The “No Toilet” Method to Real Estate Investing, that explains the mechanics of net leases properties.

Why net lease properties? Net lease properties are easy to manage and require little or no time to maintain. Typically, net lease properties are occupied requiring no marketing effort to attract new tenants. Additionally, they tend to be more stable and less risky since net lease properties are income producing assets. Many investors compare investing in net leases property to purchasing bonds as they both have predictable yields and stable cash flows. On the flip side, they also offer moderate returns and minimal upside. Lastly, they require little or no rehab work. This article highlights the analysis of a retail net lease property and showcases its benefits, Analysis of a Triple Net (NNN) Deal: Is This KFC Building a Good Investment?.

Furthermore, rehabbing, marketing, and managing properties are essential strategies for value-added deals. These strategies add a degree of risk to any transaction and may create distractions for new investors who are trying to get in the game. My advice for new investors is to stay laser focused on developing a strong track record. New investors need to be knowledgeable about a specific property type to have a better chance to be successful. They must also develop credibility and trust to attract capital to fund future deals, as well as, educate and nature others about their product offerings. These skills need to be mastered prior to investing in any deal that requires rehabbing, marketing, or managing. Most likely, it will take one to three deals to establish a solid track record.

Once again, novice investors need to be very intentional about getting the first foot in the door. Essentially, new investors need to shorten the investment cycle by pursuing properties with zero or little rehabbing, marketing, or managing effort. The goal here is to stay focused on the analysis, acquisition, and execution of the deal. In order to accomplish this, new investors need to understand how to generate leads, raise capital, secure financing, conduct due diligence, and negotiate contracts. The key to establishing a solid track record is repetition. Doing as many reps with the learning categories, they will master the investment cycle.

In conclusion, new investors should consider acquiring net lease properties for the first deal because they have less risks than other commercial real estate properties. Also, net lease properties shorten the investment cycle allowing the new investor to repeat the transaction faster. Ultimately, investing in net lease properties will allow new investors to get into the game, gain knowledge, and develop credibility to inspire potential investors to future deals. In other words, new investors will develop a faster track record by focusing on investing in net lease properties first.