Inflation concerns with commercial

[Matthew Packard]

Is anyone else concerned about upcoming inflation with regards to commercial properties? For example, if interest rates substantially increase over the next 5 years, a typical commercial balloon loan may need to be refinanced at a much higher rate. If you're locked into a lease with a single tenant, rent would not substantially increase. Conversely with a multi-family, rent may be easier to increase (multiple one-year leases) to keep pace with increased interest rates. I'm curious what happened during the 1960s/1970s periods of high inflation.

[Joel Owens]

NNN also depends on the client I have.

Usually a different conversation with a client that owned say multifamily or single family and has 100k to 200k income a year from job or business. Now their net worth has moved into the millions and they want to get away from headache investing and go into single tenant NNN. With lower income levels they want max yield with the NNN as they had that big pop of equity increase to get them financially free.

You have that scenario versus a doctor of other high income professional making typically 600k to over 1 million a year income. Their goal often is to keep buying more NNN to eventually replace most of their income so they can retire or sell off the business eventually if they own their business or practice.

You have wealth building, wealth stabilizing, and wealth preservation phases. Someone can have all or some of their holdings in NNN and blend the portfolio average. They can also only own NNN but have stabilized with national tenants directly and also invest in NNN turn around properties for more upside.

Debt is one of those items I feel is not discussed enough and how to position loans. Some NNN might have flat rental increase but comes with tons of tax harvesting and accelerated equity build up. Some high income earners don't really want a bunch of extra cash today especially if the environment is not tax friendly. They want to punt that into future years.

Especially if you have real estate professional status the tax benefits can be big.

Over time if someone has 5,10,50 million dollars etc. they are economically free unless they spend insane amounts of money on dumb stuff. At that point they can invest in ultra safe investments that give total IRR of 10% a year and outpace inflation by about 3 times.

How much is enough? I know some people with 10 million and they are happy. I know others at 100 million still pushing hard. Both want to grow money to outpace inflation but the drive can change to more auto pilot for some. I have talked to thousands of investors over the years and how they view and define life, wealth, money is different. I personally value time more than money. Once you have so much money the time is what you treasure most especially as the years go by in the life span.

The laughs, the conversations, the victories, the memories is where the magic is at. Money is a nice byproduct of that. I got away from asset types in real estate I wasn't passionate about long ago. Hyper inflation is coming in my view from what I am seeing. Right now it's Corona effect inflation more than long term inflation. Now that Corona is waning more and more and policies from the past are wearing off to juice the economy I see a down turn around 2023. I do not know for sure or have a crystal ball. I am investing today over the next 2 years to position myself in a strong stance. 

When economy goes sideways and you can model out NNN returns and know what you are getting it can be pretty powerful. I think other asset types that have more variable expenses can be better at the start of a recovery because you have more room for upside. Right now when lots of asset classes are peaking and trading at crazy price levels the upside seems low and the risk seems high.