What am I missing?

[Adam L.]

Hello,

What am I missing. Seems like NNN is a Slam Dunk At 6-7 Cap Rates.

If you can borrow at similar costs to cap rates and put 30-40% Down. Seems like a no brainier.

For Example

$2,000,000 property at 6.75 Cap

20 year corporate tenant . 10% increases every 5 years.

$700k down 1.3m loan at 6.5% amortized over 20 years

You would make $18k a year in Cash flow

Would pay down $31k a year in principal

After the first 5 years. The property value would increase 200k in theory because rents went up 10%.

just looking 5 years out

90k in cash flow

155k in principal pay down

200k in appropriation

446K gain in 5 years.

What am I missing? Wouldn't buying 1 every year or two make sense if you can come up with the down payment?

Obviously the quality of the tenant is paramount . Math looks horrible if they leave after 6 months.

[Joe Villeneuve]

Who is the tenant?  Is the lease guaranteed by anyone?  If this is a franchise of some type, then it's usually guaranteed by the corporation, so if the tenant leaves, the corp takes over responsibility.

It will take you 18 years to recover your cost of $700k.

The property can appreciate all it wants, but unless you sell the property, or refi (which will probably kill your cash flow), that appreciation is just window dressing.  Remember, you own the property, but the property owns the equity.  Not the same thing.

[Adam L.]

Say something like this 

https://www.loopnet.com/Listing/1247-Portola-Ave-Livermore-C...

I am originally from SF Bay Area . Have like a dozen houses. All paid off. Probably getting 1-2 cap if that . Some I haven’t raised rents in 10 years . Look more as a retirement play . Don’t need any monthly Cashflow . 

I am a small business owner with like a dozen employees . I have plenty of stress  and headaches doing that . At my daily job , I try to make enough to pay all my family’s bills , pay down 1k debt a day and save 1k a day in savings . That’s why the houses all got paid off .

[Henry Clark]

1.  Your interest rate seems low 6.5% for commercial.  Plus, no 5-year balloon?

2.  Your cash flow, is it all net after income taxes?

3. Do your cash flow projections include set asides for CAPEX?

4.  As Joe mentioned, quality and length of contract.

5.  Cost of not being rented for 12 months?

6.  Cost to rehab for next tenant?

7. Does your Cash flow projections include any assumptions on Property tax level after purchase and Insurance rates. Even if NNN, someone has to factor in and pay.

8.  "Wouldn't buying one every year or two make sense xxxxxxxx?"  You need to look at your personal risk/reward factor.  Compare against other types of investments.

9.  Not all cap rates of the same number, example 7; are the same type of investment quality.  Plus who gave you the Cap rate?

If you asked each person on this forum if they got $700k cash every year to invest, how many would do the deal above.  With the open questions noted.

[Michael K Gallagher]

as has somewhat been brought up already, if the building only has a year left on the lease term thats much less attractive than 25 years.  

Also the understanding of what filling the building again and any TIA that will be required for that lease up needs to be considered.