Interest rates are steady, but are more rate hikes to come in 2023?
The US Federal Bank held its key interest rate steady on June 14 but signaled two more increases in 2023 might be likely as officials continue to battle high inflation. That’s more projected hikes than financial markets and many economists anticipated.
June’s meeting was the first meeting since January 2022 at which the Central Bank has not raised its federal funds rate. The Fed may still raise interest rates this year at least one more time to 5.6%.
As a NNN lease investor this new financial news may affect you in some key ways that could impact your investment strategy for 2023. Let’s dive into the specific economic metrics that matter the most.
NNN Market Update by the Numbers
The Fed is trying to maintain a delicate balance. The Fed needs to bring inflation under control sooner rather than later. It wants to avoid the higher prices of long-term inflation but it also doesn’t want to lift interest rates too much, too fast to slow inflation. Doing so too quickly could plunge the economy into an unnecessarily steep slowdown and cost Americans their jobs.
Interest rate fluctuations often do not immediately affect the NNN market as cap rates tend to lag six months or more behind interest rate changes, which may be good news for cash buyers. Higher cap rates and lower sales prices help with supply and demand and may give all-cash buyers an advantage.
Additionally, inflation and economic uncertainty may not negatively impact essential NNN lease retailers. In some cases, sales increase as a result of consumers’ frugality.
How Did Interest Rates Get Here & Are We in a Recession?
Are we in a recession? Ultimately, no. Experts agree that we are not in a recession at this time. The economy is too healthy, with robust consumer spending, job growth, and rising GDP, to be considered in recession. Growing consumer spending is particularly promising for the outlook of the American economy in 2023. Consumer spending makes up roughly 70% of America’s GDP. Consumer spending grew 3.8% in Q1 2023, as families continue to spend savings accrued during the COVID lockdown.
However, long-term, uncontrolled inflation can mean:
- Higher prices for consumers and business
- Demands from workers for bigger annual wage increases
- Firms could push prices up more regularly
What Future Interest Rate Changes Mean for You as a NNN Lease Investor
Your cash-on cash return (CoC) may be affected by a higher interest rate, but this has a lesser effect on an all-cash buyer. NNNs can be one of the lowest-risk investments with the most reliable income and overall return of any investment type.
Overall, NNN properties tend to carry a lower interest rate on properties with credit worthy investment grade tenants such as Walgreens or Dollar General.
Your CoC return is the amount of cash you receive (rent minus debt service) divided by the amount of cash you initially invested. When you take out a commercial loan to finance your triple net property, the interest rate on the debt can affect your cash-on-cash return and the long-term value of your investment.
In general a higher interest rate can lower your CoC return, and a lower interest rate can increase it. For example, if you earn $110,000 in rent on your NNN lease property and your debt service is $60,000, your cash flow is $50,000. If your down payment was $1,000,000, your CoC return would be $50k/$1M = 5% cash-on-cash.
To Wrap It Up: Mid-2023 Market News is Favorable for NNN Cash Investors [H2]
Today’s market still favors the all cash buyer who has benefited from higher cap rates compared to 2022 while not having to worry about rising interest rates a.
Interest Rates & NNN Loans
Interest rates are holding steady for a couple of months, which can crack the window for a possible short-term commercial mortgage on a high-quality NNN property. To purchase your first NNN lease property, you might need to take out a specific NNN loan. These interest rates are roughly 5.5%-6.5% depending on your tenant, length of lease, etc., which is the highest they’ve been since the early aughts, but that doesn’t mean it’s a terrible undertaking. Done correctly, purchasing a NNN lease property with a NNN loan can make sense in the right situation.
1031 Exchange & All-Cash Buyers
1031 exchange and all-cash buyers have the biggest advantage with sellers as they have the most negotiating power. If you have cash after the sale of your business or another property and you need to take advantage of a 1031 property exchange, you shouldn’t hesitate to invest in a NNN property. You’ll have room to negotiate and you may see a 7-10% IRR (Internal Rate of Return) on your investment.
Contact Westwood for a No-Obligation Conversation About NNN Investing in Today’s Market
In any economy, steady NNN lease properties will continue to be a low-risk, financially strong investment option. If you have cash on hand that’s not earning interest, consider NNN lease investing and create an exit plan to maximize your profits.
If you’re looking into a NNN lease mortgage, now may be the time to lock in the current interest rate on a shorter-term loan, but before you do that, crunch the numbers to ensure it makes sense for your goals.
Westwood Net Lease Advisors is here to help you with all of this and more, at no cost to you. We help you find the best triple net property for your financial and lifestyle goals and, most importantly, source reputable lenders with competitive interest rates.