You’ve decided to invest in a triple-net (NNN) lease property. So, how do you find a property that fits your lifestyle, satisfies your financial goals, and balances your portfolio? How do you know which type of NNN property is right for you?
To answer this question, start by performing an evaluation of your risk tolerance and financial situation and define your lifestyle and wealth objectives – before you start looking at properties. The outcomes from these evaluations will set certain NNN property investment parameters, so you spend your valuable time looking at the right properties for your goals and have a dependable guide on your investment journey.
First, Define Your CRE Risk Tolerance & Financial Goals
When investing in commercial real estate (CRE), it is imperative that you understand your capacity for the risks involved and what you need financially going forward.
To define your risk tolerance and create a plan, answer these 13 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 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?
For a printable version of this list, be sure to download our Know Your NNN Risk Tolerance Worksheet.
Now You’re Ready to Begin Your NNN Property Search
Once you’ve answered the risk and financial questions, it becomes easier to search for a NNN property/tenant that fits your needs and finances. Keep in mind, 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 by communicating with developers, builders, other NNN lease owners, 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.
When searching for your ideal NNN lease property, the following factors must be evaluated and present for maximum financial dependability.
Creditworthiness of the NNN Tenant
If you have found a few possible NNN properties that you’re interested in, determine if they are reliable, recession-resistant investments likely to hold strong in any economy by evaluating the tenant.
The model tenant is creditworthy with essential products or services and a history of profitability in all economic climates, thereby lending stability to the investment. Creditworthiness also directly affects financing and interest rates, ultimately influencing your overall return.
For example, Dollar General is a growing, investment-grade corporation that supplies recession-proof consumer staples. Other businesses that also do well in all economies include medical and dental centers, such as DaVita and Aspen Dental; retail pharmacies like Walgreens and CVS; convenience stores, such as 7-Eleven, auto-parts stores like O’Reilly Auto Parts, and most fast-food restaurants.
Creditworthy NNN Tenant in a Prime Location
Once you find a few listed properties with creditworthy tenants, it’s time to look at the location of each property. The combination of the right tenant in the right location has a considerable impact on whether your investment remains lucrative. Location is equally as important as the creditworthiness of the tenant for the longevity of the business and re-tenanting when the lease expires.
In most cases, properties in highly visible, prime locations in high-traffic retail areas and those near highways and other consumer staples like the pharmacy, grocery store, gas station, and fast-food restaurants, are the preferred choice. However, there are some tenants who are most successful in niche markets, such as Dollar General. Seventy-five percent of its stores are in rural communities with minimal competition. Understanding the tenant’s business model helps clarify if the location is right for that business.
Straightforward NNN Lease Information
You have narrowed your selection to a couple of creditworthy tenants in prime locations, but what about their leases? For each, find out if it is a fee-simple property with absolute NNN lease or modified NNN lease, or if it’s a NNN ground lease. Then determine if the lease is guaranteed by an investment-grade corporation or a high-credit company. Also, consider the length of the lease/lease term and lease clauses, and renewal options. Be sure to read the fine print to avoid any hidden clauses that could cause trouble later. As an investor, you want a long-term, corporate-guaranteed lease that’s straightforward, with few, if any, landlord responsibilities and expenses.
The Tax Opportunities
It is also prudent to look at the tax opportunities with each property. Is it in a state with no income tax? Is it eligible for cost-segregation depreciation (CSD)? Can you use a 1031 exchange to purchase the property within the IRS’s strict timeline? Tax advantages can turn an advertised cap rate of 5.00–7.00% into an actual 8.00–12.00% internal rate of return (IRR).
Once you’ve checked all the attributes for a dependable NNN investment that fits your budget and financial goals, you can then make an educated decision about which properties and tenants are ideal for you. So – what do you do now? What’s the next step?
Engage a Reputable Buyer’s Advisor at No Cost
It is time to engage a buyer’s advisor to represent your best interests throughout the buying process. Even if you think you are ready to make an offer or visit a property, it is smart to let your advisor review your risk tolerance, get to know you and your goals, and narrow the search for the properties that fit your objectives. Often, when buyers come to us at Westwood Net Lease Advisors, they think they know which properties they want but we uncover reasons why those may not be the best investment for them or find better options that weren’t available before.
When you work with us, we locate on- and off-market properties that fit your objectives, perform due diligence, review lease clauses in detail and make sure nothing is hidden, and help you negotiate the best possible price. Additionally, Westwood advisors:
- Offer personal representation at no cost.
- Provide in-depth market knowledge.
- Have proprietary tools, technology, and a nationwide market network.
- Help you decode inflated cap rates.
- Structure the deal.
- Negotiate on your behalf.
- Help prevent costly mistakes.
- Provide financing and other resources.
The buyer-advisor relationship is essential for a safe, solid, financially sound investment. Beyond just cost savings, the benefits often equate to a higher return on investment (ROI). And it costs you nothing. In any CRE transaction, the compensation is built into the price of the property and takes nothing away from the buyer.
Westwood Net Lease Advisors are here to make our buyers’ lives easier. We manage all the details of the process and help our clients get to closing quickly with no surprises, while they carry on with their lives without the time investment and stress of managing every detail. – Chris Schellin, President, Westwood Net Lease Advisors
To Wrap it Up – Acquiring the Right NNN Property for You
As you can see, acquiring the right NNN property investment is important to your wealth and lifestyle goals. Whether you are a first-time buyer or a seasoned CRE investor looking to diversify, it is prudent to spend time upfront to assess your risk tolerance and financial situation first, then look for a NNN property in a prime location with a tenant that is creditworthy and reliable and offers a sound, long-term lease without hidden surprises.
If you would like to engage a Westwood Net Lease Advisor to learn more about NNN lease investing or to represent you throughout the process, our no-obligation consultations and buyer’s representation are always free. Contact us today. 314-997-5227