Posted by ray@lcorn on September 14, 2006 at 14:11:14:
Michael,
See the post above… the direct URL is:
http://www.creonline.com/commercial-real-estate/wwwboard5/messages/21048.html
ray
Trying to Acquire 1st NNN property - Posted by Robert
Posted by Robert on September 07, 2006 at 10:21:39:
Hi,
I?m looking to purchase my first Triple Net property. I have 200k to put down. After doing my due diligence on the numbers, it doesn?t seem like I would be having very much cash flow on a $1,500,000 property. Is there a particular type of commercial property or investment I should be looking for that will cash flow at least $2000-$3000 a month? I wanted a property like this to help build my foundation. I would greatly appreciate your thoughts.
Thanks,
Robert
Re: Trying to Acquire 1st NNN property - Posted by john
Posted by john on September 09, 2006 at 14:40:29:
Robert,
You and I are in the same boat. I too am looking for NNN lease properties. However I’m finding there is not much out there. You might have to wait it out another 6 months before cap rates start to rise. You also might want to consider NN leases or more responsbility to get more return.
Here is My criteria:
*NNN lease at 7% cap.
*Major tenant with long term lease with raises in rent that get the cap up to near 10% or better at the end of lease.
*Building must be around 3,000 square feet with a basic reusable structure, so another tenant can use the space in case the current tenant leaves. Building must be in fair condition.
*Location must be surrounded by other commercial properties or at least have the growth potential. It’s great if you own a major chain, but if they are in the middle of no where you might have a tough time selling it someday.
Re: Trying to Acquire 1st NNN property - Posted by Robert
Posted by Robert on September 08, 2006 at 11:59:55:
Thanks for you response guys!
Re: Trying to Acquire 1st NNN property - Posted by ray@lcorn
Posted by ray@lcorn on September 08, 2006 at 11:36:52:
Robert,
A $2000 per month cash flow is a 12% return on the $200,000 equity.
For discussion sake, assume the property qualifies for loan terms of 80% LTV, 6.75%, 25-year amortization.
Using the derivative cap rate formula (see http://www.creonline.com/articles/art-216.html), those debt and equity terms would require a minimum 9.03% cap rate.
Here’s the math (see article link above for further expanation):
(Equity % x Return) + (LTV% x loan constant) = cap rate
(.20 x .12) + (.80 x .08291) = .090328, or 9.03%
A $3000 per month cash flow is an 18% return on $200,000 equity. Using the same loan terms, that would require a minimum acquisition cap rate of 10.23%.
You can change the loan terms or the minimum equity return and change the cap rate. I find it is helpful to play around with different terms just to help me structure deals.
In this case, retail property types with triple-net leases to credit-tenants are ranging from 6%-7% asking caps. Given that these are the current hot product everyone is chasing, it will be difficult if not impossible to find one that meets your requirements. I built a number of these leading up to the rise in values, but a year or so ago I moved to other property types because the field just got too crowded. It’s hard to make money standing in line.
For example, those caps (9%-10%) are very doable in office and office/warehouse property types. In many areas, those property types with credit tenants usually begin around 8%, and for local companies (no credit rating) start at 9% or so.
But beyond the general property type, it’s important to understand the risk factors that are present in any investment. You should understand the market where the property is located and how it fits into the competitive landscape. And it is equally important to understand the tenant’s business model. Once you get comfortable with both, you’re on the way to a profitable investment.
ray
Re: Trying to Acquire 1st NNN property - Posted by Doug O
Posted by Doug O on September 07, 2006 at 13:28:29:
As Patrick mentioned, most of the single tenant triple net tenants are going to be priced accordingly if they carry strong credit.
There are properties out there that cash flow as you desire.
Case in point, I found a commercial property asking less than $1mm for the property, with current cash flow $12,100 / mo. Triple net, with multiple tenants. Trouble is, the major tenant is on a 90 day revolving lease, so the term is a bit frightening. Hence why the cap rate is so high - even figuring 20% down, you’re looking at upwards of 16% return, and cash flow being close to $2000 / mo … Just a matter of being willing to take the plunge on properties outside your home region (I’m on the east coast, and this property is in the bible belt), and being comfortable with the risks of having a tenant leave and having to find a replacement.
Re: Trying to Acquire 1st NNN property - Posted by Patrick S. Lawson
Posted by Patrick S. Lawson on September 07, 2006 at 11:12:09:
Most NNN properties are single tenant and the tenants tend to be “credit tenants”. The rub is that you receive a lower ROI in exchange for minimal management and decreased risk of tenant default.
Find a property with multiple tenants who are not “credit tenants” and you should be able to hit your cash flow projections depending on your market.
Re: Trying to Acquire 1st NNN property - Posted by david cech
Posted by david cech on September 14, 2006 at 01:22:56:
Ray , I am also curious what property types you have moved to since I have noticed after this boom certain segments of realestate seem not to have as high a ROI as they did 3 to 5 years ago. Maybe I need to get out more and beat a few more bushes.
Re: Trying to Acquire 1st NNN property - Posted by Michael Dolan
Posted by Michael Dolan on September 08, 2006 at 12:52:01:
What property types have you moved into, Ray?
Thanks
Re: Trying to Acquire 1st NNN property - Posted by Robert
Posted by Robert on September 08, 2006 at 11:59:24:
Thank you very much Ray. This is going to help me very much in analyzing the property.
Re: Trying to Acquire 1st NNN property - Posted by ray@lcorn
Posted by ray@lcorn on September 14, 2006 at 14:08:58:
david,
As the old saying goes, it’s hard to make money standing in line. You’re right that ComRE returns are down in some sectors, most notably in retail and multi-family.
But for us (two of my brothers are my partners) that just means we have to look in the not-yet-popular areas?markets and property types?to acquire or develop deals that meet our criteria. We have long experience in riding the waves that ebb and flow through all property types and markets, and over the years have developed a “go where they ain’t” approach to choosing what and where we will be active.
Our business model is focused on anticipating local market trends (not to be confused with market-timing, no one can do that IMHO), to sell and develop into strength, and acquiring against weakness where conditions are poised for a rebound.
The decision as to property types is also driven by market conditions. We own various types, including office, hospitality and retail, but we concentrate our immediate efforts on those we feel have potential for above-trend performance over a three- to five-year event window in any particular market.
That usually means we make different decisions in different markets, and the only property type we won’t consider are multi-family and industrial. The former is a lifestyle/management choice, and the latter because we have little experience in a fast-changing and highly competitive sector.
For example, in one of our markets we started acquiring office buildings in 2004, added to the portfolio in 2005, and have one more teed up for acquisition this year. That decision was driven by what we gauged in that particular market to be a rising demand (as indicated by employment, income and population growth data) and static supply. So far it?s been a successful strategy, with about 92% overall occupancy and increasing rents and NOI, but we won?t really know if it will pay off as we think until 2008 when we plan to sell the portfolio.
In another market where we have several retail and hospitality properties, office buildings are terribly overbuilt, demand is flat, and absorption of new space has been very slow. Retail in that market is coming off a building boom (which we helped create), and there are the usual late-to-the-party straggler projects coming online in the next year with a lot of space still uncommitted. Hotels are also saturated, so here we are going to sit tight and hold what we’ve got until absorption turns positive.
And as a final example, I looked at a potential development project earlier this week in yet a third market that has also had a ton of retail and residential development in the last few years, but lagged in sectors that traditionally don?t flourish until the people are in place. Here our hospitality development experience could prove to be the winning formula.
That combined approach serves to keep us about as busy as we want to be. We’re also taking advantage of the continued liquidity and competition in the capital markets to access and re-deploy equity to improve our overall ROE, which is the measure we use to grade the validity of our overall performance and strategies.
ray