SFH Investor Looking to Move to NNN

[Carrie Giordano]

Hello, I've been investing in SFH for the past 10 years. I'm looking to diversify with a NNN. As a newbie to commercial real estate I was looking for some guidance. What type of cap rate would currently be considered average? What is a good rate? What sort of questions should I be asking?

Thanks in advance!

[Joel Owens]

Hi Carrie,

SFH is more active investing and NNN is more passive investing. So in relation to returns they are apples and oranges.

What cap rates NNN trade at has a ton of factors. Location ( urban core, strong suburban, weak suburban, rural), tenant type (mom and pop, regional, national), Credit (private non-rated, rated, investment grade), WHO is backing the lease ( parent corporate investment grade, subsidiary of corporate, large franchisee, small franchisee, independent mom and pop non-branded), area of the country (warm belt state, cold belt state), demographics ( median income average, population level in a 1,3,5 mile radius, daily traffic counts by the site), area surroundings ( example of junior anchors and large anchors to feed cross traffic daily to your site such as Starbucks, Chick Fil A, and large anchors like Wal-mart, Target, Costco, Sam's Club, Lowe's, etc.).

Years remaining of primary guaranteed lease term. Sub- asset class of NNN ( Bank, Auto Store, Medical, Dollar Store, QSR, Sit Down Restaurant, Pharmacy, etc.), price range ( bigger price smaller buyer pool and tends to have better loan terms so get slightly bigger spread between purchase cap rate and debt placed on the property IF quality tenant and lease ). Type of lease ( Absolute NNN, NN ( could be roof, structure, parking lot, utility lines, etc. based on what is in the lease), ground lease, leasehold, Zero Cash Flow)

Commercial is different than residential. Most firms are listing machines for volume. They tend to show buyers only their listings to purchase whether they are good, marginal, or crappy. Often the brokers at my level of experience stay on the listing side as senior directors and have teams of associates and newer agents. They like working with the sellers. The newer agents have low splits. On a 3 or 4 person team they might make 6k to 8k fee out of 100k because the company and senior brokers are getting most of the money. What that means for buyers is often the senior brokers are too busy listing properties so they have buyer leads work with junior agents that tend to be inexperienced and desperate for a sale to pay the bills until next week. So these agents often try to TALK BUYERS INTO purchasing crappy properties with a high risk of loss to down payment capital in the future or the tenant being poor quality and the space going dark.

What buyers need are brokers that are not desperate for a sale but have lot's of experience.

You might do well to work with an experienced NNN broker that is a specialist.

As an example my typical process is buyers contact me. They submit a form from my website and I review the form submitted and then schedule a call to speak with them about their specific situation and time lines. If we are a fit to work together they sign an exclusive agreement to work with me. I work with the buyer through the whole process. I have an extensive network of on and off market properties I have built up over a decade of time. Since I own my company and I am a principal broker I get all the fee. What this means is a typical broker has to do 4 to 10 transactions to make what I do on 1 transaction. So I can take the time to work with a buyer to try and find them the best diamond properties in their price range to purchase. I like to take a complete focused approach to helping buyers. More brokers are focused on volume because of their split structure.

Whatever buyer broker you work with make sure they have a network of properties, sources, and that they also know 1031 exchange companies, capital markets mortgage brokers, commercial retail attorneys, retail property management companies, etc.

My mortgage brokers as an example I have used them over and over again through the years because I know they quote and PERFORM.

A NNN broker as a specialist tends to have in depth knowledge from reviewing so many properties. I look at about 1,000 a week for clients nationally and only like about 15 to 20% of the ones I see. The good ones do not last and my clients we often have to put in offers within a few days to market and by a week the properties are under contract and gone. The marginal to crap properties which is a majority of them tend to sit on the market for weeks and months, gets repackaged or relisted, and have price reductions to try and move the junk.

Hope this helps.