I want to go back and capture some learning concepts from experienced investors that replied to my original post. It is worth noting that my original post was intended for novice investors. I want to break down these concepts further, so new investors can digest, understand, and put them into practice.
The first learning concept is “headache rentals” or “headache real estate.” Headache rentals tend to be value-added deals that require additional work. These deals required active management from investors and sometimes involved toilet repairs or other issues. In addition to rehabbing, these deals required marketing for new tenants as they tend to have some level of vacancy since these properties were not fully stabilized.
However, headache rentals provide better yield than net lease (NNN) properties discussed in my original post. There seems to be a significant difference in yield between going passive or dealing with the headaches. Some investors choose to deal with issues to achieve more desirable yields and higher equity multiples.
Here are some of the NNN nuances that were not included in my original post. Acquiring NNN properties is considered passive investing. Some value-add investors get a little bored investing in NNN because of the little or no work required to maintain these properties. As a recap, NNN properties tend to have high credit tenants (Walgreens, Starbucks, and KFC) located in good locations with longer terms (5 year or more). More than often, these assets are used for people to park money (more on passive investment strategy later). On the flip side, NNN properties tend to provide lower returns than headache rentals. Additionally, NNN properties require a large chunk of cash to secure the loan when financing is used.
High network individuals tend to invest in real estate passively. They seem to be very successful at what they do leaving zero or no time to be active real estate investors. Despite that, they want to diversify their portfolios and have exposure to the sector. NNN offers them big incentives where they can grow and protect their money from inflation while taking advantage of tax deductions. High network individuals care less about yield but more on growing their equity position and asset valuation over time. Essentially, they have no problem going alone in a deal and putting down a big down payment to secure a NNN property. Coming with such a large down payment is one of the most difficult parts of the deal, then their work is done. Once the property is secure, all they do is collect a check every month.
For the average investor, the situation is a little different. They tend to have liquidity constraints impeding them to secure the loan due to the large down payment. Value-added or headache real estate deals are more appealing to the average investor since their focus is to achieve the best possible returns instead of protecting their money from inflation. Additionally, they tend to bring other investors to their deals to secure financing. The average investor tends to invest in short terms (3 year or less), return the invested capital, split the cash flows, and exit the investment faster.
Below are some value-added and NNN investments strategies that I extrapolated from previous replies.
Strategy #1: A more affordable way to invest in NNN retails is by searching for condo franchisee tenants suggested by John Mckee. You can acquire ten (10) small rental condos for the same price of a Walgreens with the power of leverage.
Strategy #2: Invest in a value-added deal, rehab it, and turn it into a NNN lease property suggested by John Mckee.
Strategy #3: Not all NNNs are created equal. There is a long spectrum of NNN properties from retail to industrial. While it is nice to own a 12-year NNN Walgreens, a small bay warehouse requires more work; however, it is more affordable and provides the same or better yield suggested by Ronald Rohde.
Strategy #4: Invest in second generation multi-tenant space in secondary markets. These investments are more affordable since they deal with low credit tenants. However, they have the potential for higher yield than a Walgreens located in Main and Main suggested by Jason Hirko.
Strategy #5: Invest with Joel Ownes in his value-added deals where he buys underutilized buildings and re-tenant them within a year. The holding period is typically three year with a potential of 2 times equity multiple.
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