NNN deals for retirement?

Question

Why wouldn’t everyone just try and secure NNN deals with their capital they saved and continue to slowly build their portfolio with more until they decide an amount to retire?

John McKee · Answer

Matt,

That's exactly what I have done.  I have enough NNN properties to live on, but there are some risks as Austin mentioned.  I"m very careful to buy assets that are easy to rent out to other tenants.  The longest vacancy I had was about 1.5 years (during covid) and i had another one that was about a year which was poorly marketed by the broker.  Just like a shopping plaza your always going to have some vacancies, but if you leveraged things correctly and have some diversification then you should be just fine.

Austin Johnson · Answer

because that NNN has an ending date. I see it a lot as an appraiser. the tenant vacates and suddenly the building is sitting vacant for years. 25 years seems like a long time.
business can also go under. when this depression hits i predict several businesses will go under and those investors holding the NNN will be SOL paying the property tax, insurance, etc. on that building. you cant get money from a company that went under.

Joel Owens · Answer

The Walgreens can stay vacant a couple of years if the tenant is still paying rent. Walgreens can also sublease for the remainder of the primary term until they can get out from under it.

Another reason it can sit there is the owner paid too much for it when they bought and the developer had overinflated rents to cover excessive TI when developed. Now the property owner has a high basis with the loan into the property and the market rents do not support the per foot to make it work.

It's all about buying right and knowing the exits.

Joel Owens · Answer

All my clients tenants during corona paid the rent like clockwork.

Buyers go searching for higher yields and often give up location, quality of tenant, remaining lease term trying to achieve that. They insert a ton of downside risk for a perceived few more percent of cash on cash return.

My clients buy investment grade credit. Most of these businesses in the space 50 to 100 years. They have seen many cycles so know how to run their businesses in virtually any environment and be profitable.

If you buy in the right spot the LAND is what holds the value with air and density rights over time not the building typically.

Why do people want to buy NNN all day long? They do not want a headache anymore and want passive yield for mailbox money with NNN and not the volatility of the stock market. Once you have tens of millions of dollars you do NOT NEED MAX YIELD. The investors trying to make their first million often do not understand this as they are at a different point in their life and investing journey.

If I am worth 20 million I can take 10 million cash and buy larger properties for better cap rate and usually achieve 6% or better cash on cash and with mortgage paydown hit double digit annual returns and do nothing but collect a check.

As for someone not renewing after 25 years then great if rents are below market upside for me and land likely worth a ton more than 25 years ago and traffic counts much higher. Most of my clients might hold 5 years they do not hold 15 to 20 years. 15 to 20 year lease cap rates are crazy like 4 cap or so with almost all cash deal. 8 to 12 years tends to be the sweet spot with good lender terms and still enough time for extra pay down if you want before renewal comes up.

Ronald Rohde · Answer

You still need to distinguish between freestanding, absolute NNN deals that are built to suit for a specific user. NNN can be an industrial building in DFW. If any of my tenants move out, I can find a replacement in 6 months. I can float carry costs and TI, its not that big of a deal if you prepare for it.

John McKee · Answer

Not only does location matter but the size and layout of your building matter.  I've seen a wallgreens in my neighborhood stay vacant for a couple of years.  It's a corner lot on a busy highway.  I think it's 14,000 square feet.  It takes a special user to occupy that kind of space so it will take longer than you think.  They made these stores way too big and they are hard to retrofit unless you throw a lot of TI at it.

Isaac S. · Answer

@Joel Owens speaks the truth!

being about 10 years away from retirement and not quite at the networth where the easy NNN money works perfectly for me to have cash flow and capital preservation, I am still actively managing and growing my apartment portfolio, in hopes of shifting gears in the future retirement to that "mailbox money"....

NNN is the most passive type of RE I would feel comfortable with, as opposed to DST's, REITS, syndications, TIC, etc.

In regards to NNN, there are hundreds of business in my city that have been around for my entire life, and others that may close/retenat after 20-30 years, but as Joel said, if the underlying commercial RE fundamentals are solid, you will have a new tenant or be able to exit, with appreciation, easily.

The only catch is that, you need to be high enough networth to be able to acquire that type of premium commercial asset and  to carry the 12- 18 months of vacancy(if necessary) and  go without the cash flow(if necessary) during that time.

I am not quite there yet, but, It's the type of rich people's problems, I look forward to having, especially after half of a lifetime of Tenants, Toilets, Trash, and Termites!!!

Thanks Joel for being a BP contributor that adds tons of value and for the consistent and solid information that you share freely.

NNN deals for retirement?

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