If you’re wishing you could invest in commercial real estate (CRE) but assume you need to be worth millions to do so, take heart – you don’t need to be a real estate tycoon to own CRE. Triple net (NNN) lease investments are a great place to start since they have a lower barrier to entry, less landlord responsibility and fewer (if any) costs, and an equally appealing return on investment.
10 Ways to Make Money in Commercial Real Estate When on a Budget
#1. NNN lease investing.
CRE investing on a budget? Consider NNN lease properties, which can start as low as $450,000. If you need financing, obtaining a commercial mortgage for a triple net property is typically easier than a non-net-lease property since these investments are leased by reliable, investment-grade tenants in prime locations. Not sure what a triple net lease property is and why it’s such a great deal? Here’s how it works …
When you purchase a commercial building and/or the land it sits on, and lease it back to a single tenant who agrees to pay net taxes, net insurance, and net property maintenance, as well as rent, utilities, and most other expenses, that is a NNN lease. These creditworthy tenants tend to be essential retailers, dollar stores, fast-food restaurants, gas station c-store combos, drug stores, and medical companies with investment-grade S&P and Moody ratings (Dollar General, Taco Bell, Walgreens, etc.).
Absolute NNN Lease Investment
If you wish to have zero landlord responsibility and open yourself up to buying anywhere in the US without worry, then an absolute NNN lease is the way to go. This is a long-term, corporate-guaranteed lease (10 to 20+ years) between the landlord (you) and a creditworthy tenant who pays all expenses associated with the property. The tenant absorbs all the financial risk, you simply collect rent payments.
Regular NNN Lease Investment
Another type of triple net investment is the regular NNN lease, which has all the characteristics of an absolute NNN but may not include ALL expenses. These corporate-guaranteed leases from companies like Starbucks, Auto Zone, DaVita, and others, may have clauses that require you to cover expenses such as parking lot, roof, and structure, in which case you bear some responsibility, though minimal. A regular NNN is also easy to own anywhere in the country as landlord involvement is rare.
NNN Ground Lease Investment
Then there’s the absolute triple net ground lease. A NNN ground lease is a land-only rental from 20 to 99 years. As the investor, you have fee-simple ownership, holding the title on the property not the structure(s) on the property. Just like with an absolute NNN lease, the tenant is responsible for all expenses related to the development and improvement of the property, taxes, repair and maintenance, insurance, and financing costs.
Triple net lease properties typically have a 7–10% internal rate of return (IRR), which is comparable to the returns on higher-maintenance commercial real estate.
#2. Partner with another investor(s) to buy an absolute NNN lease property.
It is common for triple net lease investors to partner with another person, be it a family member, friend, or business associate, to get started in real estate. Partnering to purchase is a way for all parties to potentially buy a higher-value property or more than one. If you and your investment partner can diversify with NNN lease properties, it offers the best-case scenario because your risk is low and expenses are minimal (or nothing), so you have a straightforward income and fewer accounting hassles.
When partnering to NNN lease invest, it may be wise to set up an investment limited liability corporation (LLC), which offers simplicity, security, protection, and structure. As part of an LLC, you and your partners benefit from personal asset protection. This means if your company is ever sued or pursued by debt collectors, you would only lose what you invested into the LLC. All personal assets are protected.
#3. Purchase a sale-leaseback.
In a sale-leaseback, a corporation or entity sells its property and/or building yet remains the tenant and maintains control of the site and operations. At closing, the corporation will “sell” the property to you, the investor, and leaseback the space with an absolute NNN lease, thereby becoming the tenant. With most sale-leasebacks, the buyer becomes the owner of an already thriving business with a long-term, high-credit tenant, and little-to-no responsibility.
#4. Turn a residential property into a rental, then use the 1031 exchange to trade into a NNN lease property.
If you own a home, then decide to rent it for two years, after the two years and following the 1031 guidelines, you could sell it and use the profits in a 1031 exchange (deferring all capital gains tax) to purchase a commercial NNN property. This allows landlords with residential rentals to become commercial real estate investors who usually realize a much better ROI with fewer expenses and responsibilities.
#5. Buy a pre-foreclosure.
Buy a pre-foreclosure commercial income property; these are properties where the owner is behind several mortgage payments and is about to be foreclosed. Though this sounds callous, the CRE industry continues to see changing patterns, unpredictable closings, foreclosures, and vacancies, which is increasing commercial mortgage defaults. When a bank or lender can get a non-performing loan off their books, they are more apt to be flexible with buyers. In this case, you should be able to negotiate a better purchase price and loan terms.
#6. Buy real-estate-owned properties (REOs).
This is the next step after pre-foreclosure. This is when the bank owns the properties that were taken back in foreclosure. Again, this leaves a lot of room for price and loan-term negotiation. You can find these on bank websites, internet companies that connect buyers with foreclosed properties, such as Auction.com, and REO asset management companies who you can contact to learn more.
#7. Take over the commercial mortgage and lease agreements for a property owner who just wants out.
Often, these types of commercial real estate deals are high-maintenance properties, like apartment complexes and office centers, which we typically do not recommend, especially for first-time buyers. However, at a later date, you could sell the property and re-invest using a 1031 exchange, which defers 100% of the federal capital gains tax and gets you into something more stable, like a NNN property, with little or no maintenance.
#8. Buy properties being auctioned “on the courthouse steps.”
Auctioned properties are also in the process of being foreclosed on, so they are auctioned off to the highest bidder (cash-in-hand). Many auctions take place online, so you may not have to be present. If nobody bids on the properties, they go back to the bank and become REOs.
#9. Buy a small retail store or undeveloped land with good potential.
With consumer needs changing, there are plenty of small retail shops and undeveloped land available for the right investor. If you find a great deal on one of these properties, look at the short- and long-term potential and be sure to perform thorough due diligence.
#10. Look for a seller-financed commercial income property.
Increasingly, commercial property owners are discovering that they can provide financing to buyers to sell their properties faster. This also generates profits from interest income and gives each – the buyer and seller – more control over the process by eliminating the corporate lender.
As a new real estate buyer, owner financing is helpful as you will not have to meet traditional lenders’ requirements so it can be easier to qualify for financing, the close of escrow is often faster, there’s a lack of bank fees and other financing costs, and there can be greater negotiating power when it comes to interest rates, payment due dates, and term of the note. When you find a high-quality opportunity with owner financing, it may be a viable option to get onto the commercial real estate ladder.
Are You Ready to Invest? Answer These Questions First
Before you begin your commercial real estate buying process, do a risk assessment and financial planning first. This will give you a roadmap to what might work best for your goals and be within your budget. Start by answering the following questions:
- Will you be living on the income?
- How much monthly income do you need?
- Are you investing a portion of your wealth or all of it?
- Are you spending your entire 401k?
- Do you need to borrow money to make it happen?
- Does the rent need to service a debt or loan?
- How much do you have available for unexpected expenses?
- Are you going to manage the property or pay someone to do it for you?
- Would you prefer a responsibility-free NNN property?
- What lease term suits your goals (10, 15, 20 years)?
- Do you need depreciation for tax purposes?
- Do you need tax write-offs?
- Do you want equity for collateral or financial leverage?
- Do you own another property that can be used in a 1031 exchange?
- Are you planning on partnering with someone to make it happen?
Once you have this information, it becomes easier to search for a property/tenant that fits your needs and finances. If you’re new to CRE, Westwood Net Lease Advisors strongly recommend you consider absolute NNN lease properties and work with an experienced advisor to find a property that will suit your needs the best.
NNN properties are usually essential businesses that offer dependable monthly income, no or very few landlord responsibilities, a corporate-guaranteed lease, and tax opportunities. Lenders are more apt to finance NNNs due to the investment-grade tenants, prime locations, and long-term leases (10–20 years).
Why Using a Buyer’s Advisor is a Good Idea, Besides the fact that It’s Free
If you’re conducting a property search on your own, those listed on the open market are only a portion of what’s available. If you work with the Westwood Net Lease Advisors’ team, we have industry connections and proprietary tools to help take your search to the next level. We have knowledge of pre-market, off-market, and developing properties, as well as a network of NNN lease sellers and corporations that sell without listing their properties. These tools and connections provide many advantages for finding premium quality investments at the best price with the least amount of risk and competition.
Westwood’s buyer representation starts before the property search begins and goes all the way through closing, and often thereafter. We are your advocate to make sure your best interests are met, and our representation is free of charge. Now that’s how you do CRE on a budget!
No matter where you are on your life journey, whether you’re investing in retirement or still working and planning for your future, you can get into the CRE market on a budget. Our goal is to help you acquire the right investment within your budget and assure the first year of ownership is a smooth endeavor, giving you a truly passive, reliable investment that offers stress-free income and tax opportunities for many years to come. Contact us today for a no-obligation, free consultation. 314-997-5227