Beginner questions - NNN

[Raj Patel]

Hello all,

I am looking for the NNN property in Houston area. I am totally newbie.

1. What will be the mortgage rate and term for the NNN loan? For example, Starbucks or some new strong long term tenants.

2. In you all experts' opinion - which works out better? Rental Homes or NNN properties?

Appreciate the feedback in advance.

[Josh Ridpath]

@Raj Patel NNN properties are a completely different investment than a single-family residential home. The most important distinction is that there are very few opportunities to add value to a NNN investment when compared to a single-family home due to the fact that once a tenant is in place, there is very little left to do. Also, NNN properties are traded on a national level. It's not uncommon for an investor from Texas or Florida to purchase a NNN property in a small town thousands of miles away, making the market very efficient (akin to trading a stock or a bond). In my experience (from appraising NNN properties), the most important factors to consider when evaluating NNN investments are as follows:

1. Is the lease corporately backed? Different NNN tenants have different business models. For example, Starbucks are typically corporate owned stores while approximately 97% of Burger Kings are owned an operated by franchisees. If you are interested in a property where the tenant is a franchisee, evaluate the franchisee's track record and financials.
2. How much time is remaining in the initial term of the lease and how does that mesh with your desired holding period? Most NNN leases have a string of renewal options but that does you no good if the tenant decides that your location doesn't work for their needs.
3. How is the reimbursement income structured? I've seen numerous examples where tenants' reimbursement obligation for real estate taxes is capped based on the tax liability at the time when the lease was executed. In states like Ohio where your assessed value is largely determined by your purchase price, is your tenant obligated to reimburse for increases in real estate taxes that resulted from the property transferring? Don't rely on the broker selling the property to tell you.
4. Understand the market in which your tenant operates. NNN money is not guaranteed. For example, Dollar Tree recently purchased Family Dollar and is closing 200 stores across the United States. That's a lot of leases that will not be renewed.
5. Understand who is buying NNN investments in the markets in which you are interested. Does your city have a lot of foreign influence? Market trends in areas like South Florida are highly dependent on events taking place in Central and South America. When a bunch of investors from Venezuela are in a crunch to put cash overseas, its not uncommon for NNN properties to sell at cap rates where you are guaranteed to lose money. For some foreign investors, the prospect of overpaying and losing money is better than loosing all of their money in their home country.

Hope this helps.