Using one Triple Net property to finance another
Midlothian, VA · Member since 2013 · 130 posts · 17 votes
Using one Triple Net property to finance another
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Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes
5yPatrick,
2 main types of retail properties. Value add and then investment grade credit jewelry box.
So my clients buy the properties putting 30 to 35% down for NNN and get maybe 6 to 7% cash on cash going in and then with mortgage paydown hit 10% or more annual IRR. This is more for properties in the 5 million and under space. You get into larger STNL and cap rate can rise some.
If an investor already has millions or makes 500k to 1 million a year as a doctor etc. they do not need massive cash flow. If inflation runs 1 to 3% annually and the total return passively outpaces inflation by a factor of 3 to 4 times with an investment grade tenant then the buyer does not need to invest in riskier stuff with supposedly higher returns.
On the flip side I am a sponsor on retail value add deals where investors invest with me passively but need to be accredited. These are heavy stabilization smaller type deals with usually good upside.
Benefit of retail value add is when lease is created the new value is usually obtained all at once and can exit in a few years time with STNL. That versus apartment buildings where they might have a 10 year outlook to double equity.
Each investor is different. I have talked to thousands of investors over the years. STNL is a more passive investment and not active. Active you are working for yield. Different Universe.
7 Replies
- Real Estate Agent · Indianapolis, IN · Member since 2020 · 103 posts · 112 votes5y
In my experience, the lowest down I have seen on a zero cash flow deal was 10% but at the same time, I have seen a zero cash flow deal that was sold by assuming the loan which is theoretically less. On a typical investment deal, it is usually 25% down minimum with slight opportunities to ever get 20% down for high net worth and credit worthy buyers.
James Storey, CCIM
- Midlothian, VA · Member since 2013 · 130 posts · 17 votes5y
Thanks for the reply, James. I was just on a Marcus & Millichap broker site and pretty much all of the ZCF deals they had listed were with assumable, non-recourse loans that you were REQUIRED to assume, if I read it right.
I don't expect FHA 3.5% downs on these properties, but when you start talking 33-50% down the ROI just seems too low to bother with (unless you are already wealthy and just trying to park your money). Am I missing something?
What are your thoughts on ZCF vs standard cash-flowing deals? Which do you prefer?
- 5yKevin SellersPro MemberLender · Charleston, SC MSA · Member since 2018 · 52 posts · 29 votes
Patrick. Let me try to answer your questions. If you have equity in an existing property, you can convert the equity to cash by either selling the property or doing a cash-out refinance (which may or not make sense depending on how much equity you have and the rate/term of your existing loan). You cannot pledge the equity of the existing property to obtain a new loan on another property you acquire with the possible exception if you use the same lender for both properties. Lenders are typically requiring 30-35% down on STNL properties with remaining lease term of at least 8 years and in decent locations with good demographics. Amortization schedules are generally 25-30 years. ZCFs are potentially available for properties with public company tenants that have investment grade bond ratings and long term leases. The required down payment becomes a math equation with the variables being amount of rent, interest rate on the loan and the remaining lease term. Other things equal, the longer the remaining lease, the lower the down payment. Unless you have a very long term lease, the required down payment is higher for ZCFs than traditional financing structure because ZCF lenders want the loan to be amortized to zero or perhaps a very small balloon balance by the date of lease expiration. Hope this helps!
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes5y
Patrick,
2 main types of retail properties. Value add and then investment grade credit jewelry box.
So my clients buy the properties putting 30 to 35% down for NNN and get maybe 6 to 7% cash on cash going in and then with mortgage paydown hit 10% or more annual IRR. This is more for properties in the 5 million and under space. You get into larger STNL and cap rate can rise some.
If an investor already has millions or makes 500k to 1 million a year as a doctor etc. they do not need massive cash flow. If inflation runs 1 to 3% annually and the total return passively outpaces inflation by a factor of 3 to 4 times with an investment grade tenant then the buyer does not need to invest in riskier stuff with supposedly higher returns.
On the flip side I am a sponsor on retail value add deals where investors invest with me passively but need to be accredited. These are heavy stabilization smaller type deals with usually good upside.
Benefit of retail value add is when lease is created the new value is usually obtained all at once and can exit in a few years time with STNL. That versus apartment buildings where they might have a 10 year outlook to double equity.
Each investor is different. I have talked to thousands of investors over the years. STNL is a more passive investment and not active. Active you are working for yield. Different Universe.
- Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes5y
Originally posted by @Joel Owens:
Patrick,
Each investor is different. I have talked to thousands of investor over the years. STNL is a more passive investment and not active. Active you are working for yield. Different universe.
Excellent point. I feel like most investments as you grow your portfolio you are adding a bit more work for yourself. From an hour a month to 20 hours a month. But when it comes to NNN STNL you accept the lower return and don't have to move a finger for years..
- Specialist · Toronto, Ontario · Member since 2012 · 2k+ posts · 891 votes5y
Originally posted by @Joel Owens:
Patrick,
2 main types of retail properties. Value add and then investment grade credit jewelry box.
So my clients buy the properties putting 30 to 35% down for NNN and get maybe 6 to 7% cash on cash going in and then with mortgage paydown hit 10% or more annual IRR. This more for properties in the 5 million and under space. You get into larger STNL and cap rate can rise some.
If an investor already has millions or makes 500k to 1 million a year as a doctor etc. they do not need massive cash flow. If inflation runs 1 to 3% annually and the total return passively outpaces inflation by a factor of 3 to 4 time with an investment grade tenant then the buyer does not to invest in riskier stuff with supposedly higher returns.
On the flip side I am a sponsor on retail value add deals where investors invest with me passively but need to be accredited. These are heavy stabilization smaller type deals with usually good upside.
Benefit of retail value add is when lease is created the new value is usually obtained all at once and can exit in a few years time with STNL. That versus apartment buildings where they might have a 10 year outlook to double equity.
Each investor is different. I have talked to thousands of investor over the years. STNL is a more passive investment and not active. Active you are working for yield. Different universe.
I was looking at a brand new built Chase Bank building in Atlanta and wonder why it didn't sell sitting for 6 months already. Cap is 4%.. are they asking too low of a cap? I think its reasonable..
- Real Estate Broker · Canton, GA · Member since 2010 · 15k+ posts · 11k+ votes5y
I am sure there is a a reason. it might not be obvious at first. I have to look at the OM or flyer and do research. They often leave details out or incorrect information in.
4.0 cap rate is low for the Atlanta market. I have to look at length of primary lease term, if bank discloses deposit levels for that branch ( I know they are national but still good to know how they are doing at that location ). If they are doing really well then less likelihood of leaving, trying to renegotiate lease in primary term, or when the options come up.
The property could have sold but the listing broker or seller did not update the information. Some brokerages know a property is under contract or sold but they leave it out there as bait knowing it's a 1 in 1,000 property to lure in buyers to boost their marketing list. Then they try to sell the buyer on less quality stuff or junk the seller is having a hard time selling.
That is why buyers that have money but are not experts or have deep knowledge of the space need someone on their side guiding them through the process. Most buyer clients I take on are pretty smart and realize they are great at their job or business but also know when to use experts in other fields to help with their goals.
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