All these names have a couple of things in common if purchased correctly, net cash flow derived when the investor, owner of real estate income property, from a tenant leasing space in their investment property.
Net Cash Income is the bottom line
Whether the real estate is retail, office, warehouses, medical, storage, the tenant renting space is paying the landlord enough rent to allow a net cash income after all expenses a positive return on equity that is worth the risk of purchasing. Cap rates, whether low or high, representing the interest return on the equity placed into a commercial real estate transaction determines the percentage cash flow return.
Lower cap rates translate to lower net returns indicating most likely less risk with higher quality investments, while higher cap rate purchases indicate income property investments with less credit tenants, possible inferior locations or shorter term leases. Today the range in cap rates is generally between 4 percent to 8 representing the wide range of risk reward investment properties offered.
The best cap rate depends on how much risk you’re willing to take
Which one for you is based on the responsibility you want placed on your shoulders for not only risk taken but time spent on managing the properties ranging from almost nothing to do with Triple Net properties verse gross lease investments like office buildings.
NNN or Net Net Net income property places the burden on the tenant to pay for all expenses when renting and full service rentals on you, the landlord. Triple net usually has a lower cap rate expected while full service investment properties higher cap rates.
Look for a return on equity without loss of your principal investment
The easy to understand summary of investing in commercial real estate is the following: The investor is looking for a nice return on equity (cash flow) invested without worrying that their principal invested will not be lost in the holding period but actually appreciate over time with tax advantages thrown into the mix. Time and effort can be determined from the beginning by selecting which property group you intend to invest in.
What types of properties are the riskiest?
Apartments and office usually the most and retail triple nets and warehouse the least. Location and quality of the tenants will most likely result in the final outcome of appreciation and steady cash flow derived from the investment.
Purchasing in high growth areas with stronger credit tenants may insure a better outcome but possible lower initial cash on cash returns for lower cap rates that usually associate with quality.
