Would you go with a 6 CAP NNN or 8 CAP B+ MF?

Question

Joel Owens · Answer

The reality is if true larger B class assets for MF are out there at 8 caps I know REIT'S that will buy them all day long for cash.

So a seller will not spend time on a financed deal when another purchaser has all cash at the same cap rate offer.

They will only do that when the offer is less of a cap rate and puts more money in their pocket.

I am an investor and commercial real estate developer myself in the retail space.

These 8 caps for MF tend to be 6.5 caps when under written properly and C class at best.

Joel Owens · Answer

In most markets looking for a B class multifamily at a true 8 cap at this point in the cycle is an absolute pipe dream.

I used to focus on larger multifamily 4 to 5 years ago when coming off of the bottom. A to B assets were trading at 8 to 9 caps in great locations.

Today sellers are keeping those properties or selling off to foreign investors or 1031 exchange buyers at low cap rates. With multifamily the current concerns are a peak of rent growth compared to tenants income levels and the raising of property taxes by the counties and cities across the country. Additionally some utility companies are raising water and sewer per gallon usage rates. Sellers are touting 30% opex expenses,3% vacancy etc. so there 6.5 cap they want is really a 5 something. You do not get reimbursed by tenants with expenses with multifamily like you do with NNN.

The 6 cap NNN I would have to look at the dirt location, what rent per sq ft they are starting at, and early termination clauses in primary lease term, the blended cap rate over time with rental increases etc.

All I do day in and out is NNN commercial retail across the country for clients. I look at typically 500 to 1,000 flyers and OM's a  week. There are other options with NNN such as a 3 to 4 unit strip centers with national tenants at say 6.5 to 7 cap. Then you get into mixed retail centers with national,regional, and some local tenants for up to 8 caps or higher.

Everyone's situation is different. Without talking to you on the phone about your specific situation it would be difficult to give further constructive information.

Account Closed · Answer

I would take the NNN over the multi family property.

Luke Grogan · Answer

@Joseph Gozlan @Joel Owens

I appreciate the comments. I agree that 8 CAP MF is difficult, but they are out there and my underwriting is more conservative than brokers! While I'll always make an incorrect estimation on expenses, I work hard to make sure I'm over estimating and not underestimating, but true replacement reserves and CapEx is hard to estimate. Likewise, rising costs associated with both SFR and MF is hard to model as well, but we do know costs go up.

I'm looking for relatively safe cashflow, so it's probably a combination of wealth preservation with an inflation protected asset and inflation protected cashflow, and growing my cashflow. I did this with SFR as we came out of the bottom and it's increasingly difficult for me to find a good rental without a lot of work to get them rent ready and then the rental rate vs total investment is around 8% or less.

This has led me to look more closely at MF, which with a back of the envelope 50% costs vs potential rent, there are some good B class MF assets. The problem I see is the potential for higher tenant turnover and the cost of turning a unit and lost rent can be tough to estimate correctly. The places I'm looking at are older, so 10% repairs, 8% vacancy and 3% replacement reserves is just an estimation and I've been around long enough to know that when you start fixing issues in older buildings, they seem to get bigger as you go...

Good points on the dirt under the asset. This particular deal is a single tenant, national chain quick serve restaurant. It's got a good track record in this location, but if/when it becomes vacant, there will be some challenges to finding the next standalone tenant.

Joel, I appreciate the offer to chat on the phone. I'll take you up on it after I put a little more effort into DD on this place specifically.

Kelvin B. · Answer

I would take the NNN over the later.  but my Goals are long term  cashflow at this time.

Joseph Gozlan · Answer

I'm going to put aside the possibility of 8 cap B class and just try to address your question.

The key to answer your question is not financial. It's goal oriented.

What is your goal in this investment? Wealth building? wealth preservation? cashflow?

Getting a MF property will mean more involvement (unless you join as a passive investor), more headaches and more susceptibility to markets cycle (for better or worse). It also means, for the most part, you can always find renters and buyers for the property.

Getting a NNN could mean cruise control for 10/15/25 years but then you could find yourself someday with a specialized asset an no tenant for a while. Ever seen a former location of a Walmart? That's a hard property to find a tenant for.

There are ways to mitigate both strategies. As @Joel Owens said, you haven't to compare the actual deals to make an informed decision. This has to be beyond the hypothetical discussion of A vs. B

Bob Mason · Answer

You are going to get a more secure deal with the NNN deal. But you potentially have more upside with forced appreciation with a "properly bought" Class B apartment building. Very subjective call here...

Would you go with a 6 CAP NNN or 8 CAP B+ MF?

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