NNN lease opportunities offered today are too low

[Jerald U.]

I have been considering various NNN lease opportunities. In my area the cap rates are 3 to 4.5%. This seems very low to me. In the future interest rates probably will exceed this cap rate. There are the advantages of tax write-offs and property price appreciation. On the other hand, there is some real estate risk being assumed by the owner: building deterioration, earthquake retrofit, key tenant bankruptcy or relocating, etc. Is anyone investing in such a low cap rate environment today?? If so, what is your motivation?

[Joel Owens]

Jerald,

By what you are describing sounds like you are in CA. NNN is my specialty and I have lot's of clients from CA. Most of my clients with NNN do not have to be local to the asset. The local thing is likely more of something you have decided fits your comfort level.

In CA for STNL price points tend to be higher along with lower cap rates. The lower the cap rate the more down you need to make numbers work with a loan. Example a 4 to 5 cap property with a loan if you go lower down payment such as 35%  likely generating 2% cash on cash. To get 4 to 5% cash on those low cap deals generally putting 60% or more down.

Anything in the 2 million and under range in price a majority is usually being bought all cash by retirees today. They buy a 5 cap at 2 million cash and have 100k annual income with rental increases. They live off the money and then give to kids in the estate when they pass away. Enjoying their golden years they usually travel and see friends and family and want passive income that is headache free and avoiding worrying about (active tenants, toilets, and termites). For those benefits people are willing to take a much lower return.

Now as you head into 4,5,6 million dollar STNL properties sometimes you can land properties in the 6 cap plus range in other states. In CA I have seen a mid 5 plus cap before. If you go into retail strip centers maybe a 6 cap. In other states cap rates can be higher. The key is to have a great commercial retail NNN broker with a great network to scan for properties that might work. There are lot's of clients that owned houses or multifamily in CA and are tired of it and come to me wanting to buy NNN. They have made a big equity jump and now want to outpace index funds and paltry returns in savings and CD's in the banks.

Most of my clients tend to want to invest in warm belt states in areas with good growth and higher median incomes. It is not just the tenant it is the location as well. Sometimes buyers will purchase in CA for lower STNL properties on ground leases or NNN. Example a tenant has been there 20 years and option is coming up and says tenant pays market. If you buy 4 cap or 5 cap and tenant does not renew and rents are half of market then you can look to increase rents for next tenant and have a higher cap rate with valuable dirt. If existing tenant loves the location and wants to stay they pay the money. So there are various value add deals. I look at about 1,000 properties a week nationally and tend to work more exclusively on the buyer side. Individual commercial brokerages tend to just push their listing inventory whereas I search through my whole network trying to find the diamonds for my buyers to purchase.

I could keep writing on here but generally people jump on a call with me as there are high level details that would take a very long time to type out. Hope it helps.