Do I Need A Down Payment for a NNN Investment?

Oct 31, 2019

Wondering if you need a down payment for triple-net (NNN) lease investments? Maybe you’ve seen the clickbait ads claiming, “no money down property financing.” Well, in the triple-net market, there is typically no such thing. If you choose to buy a NNN property and take on debt to do so, a financial institution will most likely require a 30-40% down payment while still maintaining liquidity in your asset portfolio. NNN investment financing options and down payment requirements are calculated on a case-by-case basis depending on the tenant, length of lease, location, and other factors.

The Key Factor to Secure Financing

Single-tenant NNN properties differ from other types of real estate in how their loan to value ratio (LTV) is determined. Several factors play a role in calculating the property’s loan value, including the tenant’s creditworthiness, the length of the lease, rent increases over the term of the lease, and the location. However, the key factor that determines financing terms is tenant creditworthiness.

The amount of leverage a bank or credit union is willing to lend is invariably tied to the creditworthiness of the tenant. The better the tenant, the higher the leverage.

How to Get the Most Favorable Financing Terms

With a NNN investment, the goal is to secure the best financing terms available to earn the highest return on investment (ROI), or Cash-on-Cash Return. To do this, look for investment-grade NNN tenants with an S&P rating of a BBB or better, such as Walgreens or Dollar General. Walgreens, for example, usually earns a higher LTV (up to 70%) and requires less down payment, about 30%. If you’re considering a quick-service restaurant (QSR), like Wendy’s or Burger King, keep in mind the vast majority are leased to franchisees rather than the corporations themselves. If the franchisee is stable with multiple locations and sound company financials, obtaining financing is possible, but you should plan to put about 35-40% down.

The net-lease terms, including periodic rent increases, also influence financing. A lender may be more apt to offer a lower interest rate and longer term on a property leased to a high-credit tenant with a fifteen or twenty-year lease, with periodic rent increases that are commensurate with inflation, and the option to extend. A shorter lease, say 5 to 8 years, with higher rents might cause the property to be vacant before the debt is serviced. And, higher than market rent may force the tenant to vacate and trigger a delay in re-tenanting. Even when the tenant is investment grade, if the lease isn’t ideal and/or rents are above market, this can raise the down payment, lower the LTV, or possibly negate getting a loan.

Location also matters when it comes to the down payment and LTV. Dollar General stores, though an investment-grade tenant (Baa2) and superb overall NNN investment, tend to be in rural, less populated areas. Lenders may consider this slightly riskier and require a marginally higher down payment (35% instead of 30%). Though location matters when looking at real estate investments – Grade A locations along major retail arteries or near highway exits are considered ideal – Westwood Net Lease Advisors feel Dollar General, DaVita, and other investment-grade tenants with different location types are well worth the slightly higher down payment in exchange for tenant quality and the reliability of the investment.

delay capital gain tax in 1031

The Benefits of Financing

When obtaining debt for a NNN investment, you want to secure the most favorable loan terms and use the benefits of financing to your advantage come tax season. When the many tax advantages and incremental rent increases over a 10- to 20-year lease term are considered, a 6% cap rate can ultimately amount to an 8-10% ROI. There are also the additional benefits of a totally passive, consistent monthly income with no landlord expenses, a tangible asset that offers more buying power, and a higher cash-on-cash return.

Cap rate is the level of risk and equity return and is calculated on an all-cash basis. It compares the purchase price of a property to the income it generates. To calculate, divide net operating income (NOI) by the purchase price to give you a natural rate of return for a single year. The cash-on-cash return is an analysis of your return based on the actual money you put in and is dependent on financing. To calculate, divide the cash flow (after debt service) by the amount of cash initially invested.  

sweat equity partners

To Wrap It Up – A Down Payment is Required for NNN Property Financing

When financing a NNN property, you must have a down payment, typically between 30-40%. To obtain ideal financing for your goals, it’s imperative to buy a property subject to an investment-grade tenant or quality franchisee with a long-term lease guarantee.

Since each NNN investment situation is unique and requires a lot of up-front evaluation, including risk analysis, tenant financials, calculation of the uninflated cap rate, after-tax cash-on-cash return, and the timeline for your ROI, it’s in your best interest to engage with a Westwood Net Lease Advisor. Our buyers’ advisors have decades of experience helping clients navigate the net-lease market and find properties that meet their financial and lifestyle goals. We walk you through the entire process from the property search to financing and closing, and save you time, hassle, and the possibility of making a costly mistake – all at no cost to you. Contact us today for your no-obligation, free consultation and see how NNN investing fits your objectives, 314-997-5227.

Looking To Buy Commercial Property?

Find out why triple-net lease real estate investments should be part of your investment portfolio.