If an investor makes a serious mistake or miscalculated assumption when first purchasing a Triple Net property or for that matter any investment property, the possible end result years later may become a loss of equity or past cash returns given back!
The various assumptions associated with the Triple Net property purchase that must be considered are:
- The quality of tenant and the industry the tenant is in.
- The specific location of the property and how it is situated on the lot and who the tenant is near
- The building itself
- Size layout and visibility
- The lease that determines the future outcome
- Increases in rents (if any) and who is responsible for capital improvements, tenant or landlord
- Any outs in the lease that the tenant may utilize to break the lease
- Easements or restrictions that may prevent future use by tenancy
- Loan conditions to make sure the property meets the standards for a lender to loan on the property with sensible rates and equity that allow a cash flow
- A Cap Rate that is based on a true rent that is comparable to other rents in the area for the same building conditions
- Various tax and depreciation benefits considered from the standpoint of residential apartments or commercial property and an exit strategy
If the investor is not surrounded by top pros in the field like commercial real estate brokers, real estate attorney and CPA, a mistake can easily be made by the investor not paying attention to every detail in a lease or the tax consequences or the physical or demographics of the location of the investment.
Years later, when selling to a future investor, these elements of the deal can easily change the final outcome from a positive cash flow to a negative IRR in the end.
The length of time of your equity tied up in a commercial income property will determine in the end what truly was given to you, the investor, in the way of cash on cash for your money.
If you make 6% yearly for many years on your equity and lose back a portion in the end based on an error in judgement in the beginning, the end result is that you felt good collecting yearly returns and felt horrible getting a lower price when selling.
Besides your own judgment of the commercial income property conditions, there are economic conditions of the world we live in that affect the final results.
When and if you sell and don’t have the staying power to withstand a down cycle in the economy, leading to lower prices paid for your commercial income property, you may lose a great deal of your equity being forced to sell and even worse your tenant may leave or request better rates or improvements to be made to stay in your building.
Without the proper capital to withstand these conditions, the end results may be a poor investment.