Whether you are a new or a savvy commercial real estate investor, there are 6 Tips to NNN Investing Success that every triple-net lease investor should know. Following these six tips will help you feel confident in your investment decision and provide you with important information, so you buy the right single-tenant, NNN property for your financial and lifestyle goals.
Tip 1 to NNN Success – Assess Your Reasons for Buying a NNN Property
Why are you considering NNN lease property investing? If you answer yes to any of the following reasons, then you’ve taken the first step in recognizing if a NNN property is for you.
Do you wish to:
- Preserve capital?
- Build wealth while you work?
- Increase your monthly income?
- Add stability to your investment portfolio?
- Sell a high-maintenance or underperforming property and reinvest in a NNN?
- Develop a growth-based, relatively low-risk real estate empire?
- Leave NNN assets to heirs with tax advantages?
- Enjoy the freedom of a healthy income with little or no landlord responsibility?
Triple-nets are a great fit if you are a high net-worth investor who wants a passive, relatively low-risk investment that builds wealth and provides reliable monthly income. Owning NNN properties is an excellent way to create a conservative yet growth-based portfolio.
Tip 2 to NNN Success – Know Your Investment Risk Tolerance
Any investor knows, there is no such thing as a “risk-free” investment. However, there is a way to aim for the least amount of risk possible. Understanding the NNN investment risks and your capacity for those risks is an important step before you start the property search.
To learn your risk tolerance, answer these questions.
- Are you investing a portion of your wealth or spending your entire 401k?
- Will you be living on the income?
- How much monthly income do you need?
- 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 yourself 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?
Once you’ve addressed your risk tolerance, it will be easier to search for a property/tenant that fits your needs and finances. But don’t start searching just yet – there are a few more tips that will streamline the process even more and get you on that road to success.
Tip 3 to NNN Success – Understand the Financials & NNN Tax Opportunities
There are many ways to invest your capital in a NNN property. You can pay all cash, take out a commercial mortgage, and/or utilize a combination of tax strategies, including a 1031 exchange and different types of depreciation. To get a handle on which investment strategy will work best with your goals, here are a few details.
If you are considering a mortgage on the property, to be a candidate for financing, you typically need a net worth of $1 million or greater and liquidity in your asset portfolio above the required 30-40% down payment.
NNN investment financing options and down-payment requirements are calculated on a case-by-case basis depending on your portfolio and the creditworthiness of the tenant, length of lease, location, and other factors.
How you decide to purchase will affect your cash-flow, financial leverage, and overall rate of return (IRR), so this is a very important step and one that should be fully evaluated before any steps to purchase are taken.
As you consider NNN investing, it is also important to understand the many tax advantages and how they may preserve capital and increase the overall internal rate of return (IRR) of your investment. The right financing and tax opportunities can take an advertised cap rate of 5.0%–7.0% to an 8.0%–10.0% IRR.
1031 exchange allows you to invest profits from the sale of one or more commercial properties into similar or “like-kind” (and often more valuable) properties within 180 days and defer the capital gains tax on those profits.
Cost segregation depreciation allows some nonstructural improvements such as indoor/outdoor lighting, heating/cooling systems, and parking lot and landscaping to be depreciated over five, seven, or 15 years, versus 39 years. CSD helps preserve capital, provide immediate cash flow, and achieve significant tax relief on new and existing buildings.
Depreciation recapture is another possible benefit of a 1031 exchange. Not only can you defer the capital gains tax, but you may also defer the depreciation recapture tax, which can provide an additional savings of up to 25%.
States with no income tax include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee also have more reasonable dividend taxes. This can be a savings of up to 9.9%, depending on the state. And, since absolute NNN properties are maintenance-free, it is easy to own a property in any state, no matter where you reside.
Up to this point, you have identified your reasons for buying, assessed your risk tolerance, and have a handle on the financials, tax opportunities, and the buying options that are best suited to your objectives. All combined, this will lead to a strong investment and exit strategy, and hone your search to properties that match your short-term and long-term financial goals. Now, you’re ready to start looking for properties!
Tip 4 to NNN Success – Look for a Creditworthy Tenant
The creditworthiness of the tenant is the #1 NNN investment success factor. The amount of leverage a bank or credit union is willing to lend is invariably tied to the tenant’s creditworthiness. The stronger the tenant, the higher the leverage. Tenant creditworthiness also influences the long-term reliability of the investment.
When it comes to procuring a commercial mortgage, the goal is to secure the best financing terms to earn the highest cash-on-cash return (CoC) and return on investment (ROI). Therefore, you want to look for an investment-grade NNN tenant with an S&P rating of a BBB or better, such as Walgreens or Dollar General.
As for reliability, the model tenant is not only creditworthy, but also offers essential products or services, and a has history of profitability in all economic climates.
A great example is Dollar General. This tenant supplies affordable, recession-proof consumer staples and the company continues to grow in strong and faltering economies, like right now. Currently, it is easy to see how important needs-based products and services are to consumers and how that benefits these types of tenants and their landlords.
Other businesses that do well in any economy include convenience stores such as 7-Eleven, medical centers such as DaVita or Fresenius, and auto parts stores such as O’Reilly Auto Parts.
NNN lease properties with creditworthy tenants are a “must” for the most reliable NNN investment opportunity. When these properties arise, they do not stay on the market long. In fact, over 50% of high-credit tenant NNN properties are never advertised on the open market, which limits your ability to perform a thorough search on your own.
That’s where a Westwood Net Lease Advisor can help. Our advisors have decades of industry knowledge and contacts with whom we collaborate daily to find exactly what our clients are looking for, which streamlines the buying process and helps with negotiations.
Tip 5 to NNN Success – Choose a Prime Location
Next, look at the location of each property. The combination of the right tenant and the right location has a significant impact on whether your investment remains a good one. Location is equally as important as the tenant.
Choose properties in highly visible, prime locations near main retail arteries and highways, and near other consumer staples like a pharmacy, grocery store, gas station, and fast-food restaurants. A prime location can also be where the tenant is typically most successful. For example, 75% of Dollar General stores are in rural communities, which is its niche market and one that typically includes very little competition.
Location can be the first clue to a strong potential investment – you’ll rarely find blue-chip companies in underperforming locations. However, the reliability and creditworthiness of the tenant go hand in hand with the location as a success factor. Therefore, the combination of the right tenant and the right location has a significant impact on whether your NNN investment remains a good one.
Tip 6 to NNN Success – Engage a Buyer’s Advisor Right Away
The first thing many potential buyers do when they decide to search for a NNN lease property investment is turn to the internet. However, entrusting your wealth to a DIY approach or using the listing agent to buy a property could be problematic, as the listing agent’s fiduciary duty is to the seller.
Not using a buyer’s advisor as your personal representative could mean:
- Limited ability to perform due diligence on the property you’re interested in.
- Innumerable complications, undisclosed details, and hidden lease responsibilities.
- Added stress, time, and costly expenses that detract from your wealth and financial goals and possibly create a long-term financial burden.
When you engage a Westwood Net Lease Advisor to personally represent you, there is no cost to you. Your advisor will:
- Get to know you and your goals.
- Assist with your risk tolerance and financial assessments.
- Conduct due diligence.
- Find the exact NNN property you’re looking for.
- Negotiate a realistic sale price and cap rate on your behalf.
- Make sure there are no unidentified costs.
- Review and explain the lease.
- Provide professional resources.
- Confirm that the property you’re buying is the right investment for you.
From the early stages of the investment process to closing, and often thereafter, your Westwood advisor is your advocate, helping to make the process enjoyable and profitable.
To Wrap it Up – 6 Tips to a Successful NNN Investment
Whether you are a new or a seasoned investor, investing large sums of money in commercial real estate is an important decision that requires planning. By following these six NNN investment tips to optimize your success, you could own a responsibility-free NNN lease property that provides long-term income and fulfills your financial goals with a stable return and lifestyle freedom.
If you would like to learn more, contact Westwood Net Lease Advisors today for your no-obligation consultation and let us help you take these six steps to success. 314-997-5227.