“I Want a 10% Return on a 30-Year Lease”
Many commercial property investors come to us and expect a 10-12% return for 30 years on NNN investments. If they’re used to the stock market with an average ten-year return of 10-12%, they are often surprised that NNN investments offer a more conservative return. However – and this is a big HOWEVER – when adjusted for inflation, stock market returns lose 2-3% annually, providing a realistic 7% to 9% return, which is in-line with stable, income-producing NNN investments.
Most commercial property investors also realize 10-12% cap rates on traditional, non-NNN investments, like apartment complexes and office centers. As with stocks and bonds, these investments often yield a lower rate than stated once taxes, insurance, capital area maintenance (CAM) charges, management fees, capital expenditures, vacancies, and other components are factored in.
What is Cap Rate & How Important is It?
The capitalization rate, or cap rate, is net operating income (NOI) divided by the purchase price for a single year’s natural rate of return (excluding debt on the asset). Cap rate is important to evaluate an investment, though it should not be the sole focus. It is also not the same as the cash-on-cash return, which is pre-tax cash flow divided by the total amount of cash invested.
When NNN property owners consider the many tax advantages and incremental rent increases over the 10- to 20-year lease term, a 5% cap rate can ultimately amount to a 7-8% return. There are also the additional benefits of a totally passive, consistent monthly income with no expenses, a tangible asset that offers more buying power, and a higher cash-on-cash return.
Long-Term Investment Comparisons
Stock Market Vs. NNN Investments Expectations
Savvy investors know the stock market is meant for long-term investing and that its value is at the mercy of economic perceptions, predictions, interest rates, changing laws, and politics. There can be large swings in share value which makes it difficult to rely upon for asset and income preservation. With stocks and bonds, you can lose as much as you gain, with no control over the outcome, and lack the ability to sell at a profit quickly. NNN investments are a perfect investment tool to temper these stock market downsides.
NNN investments are stable and have been for decades. They are not at the mercy of daily economic perceptions, predictions, interest rates, changing laws, and politics. Because most NNN properties are leased by high-credit national corporations that offer needs-based consumer goods and services like those found in dollar stores, pharmacies and healthcare centers, banks, gas and convenience stores, and fast food, they tend to thrive in any economic conditions. Interest rate fluctuations can be favorable or not matter at all, depending on how the buyer invests, and because leases are 10- to 20-years with incremental increases, inflation and any rising costs are covered.
You can realistically expect a 5-7% long-term return with a healthy monthly income and tax benefits that preserve thousands of dollars in capital right away. NNN investments balance the high-risk nature of the stock market and create a dependable wealth strategy.
Net Lease Investments Vs. NNN Properties
Many investors already have commercial properties in their portfolios. Though many commercial properties provide a 10-12% return and feel “safer” than the stock market, they require direct landlord management or contracted management fees of 3-5%, frequent capital expenses, and emergency calls at the most inconvenient times.
These non-NNN properties tend to be single- or multi-tenant leases – apartment complexes, retail centers, office buildings – where the tenants may or may not pay property taxes and insurance premiums. Typically, all exterior maintenance (CAM) and associated Cap Ex, such as HVAC, roofs, and windows, remain the responsibility of the landlord, who pays for them directly. While tenants pay a pro-rata share of expenses, they will not pay for anything above that, so the owner does all the work and gets nothing in return. There is also higher tenant turnover, risk of frequent vacancy, and the possibility of a slower sales cycle should you decide to sell the property.
NNN Investment Benefits
- Low-risk income and asset stability
- Preservation of capital
- A predictable return with periodic rent increases
- A strong corporate-backed lease guarantee
- Consistent monthly income for decades
- No maintenance, operations, or management concerns or costs
- Tax benefits like the 1031 exchange and cost-segregation depreciation
- Tangible asset and financial leverage
- Prime location; easily re-tenantable
- Earn income in retirement or while you work and enjoy life with no landlord worries
Market Shifts & Trajectory
Triple-Net Market Growth & Strong Demand
Despite reports about brick-and-mortar businesses closing, retail sales grew through Q2, with an increase in 12 of 13 categories, and there are still retailers like medical and pharmaceutical, dining, auto, financial institutions, dollar stores, and other companies adding locations and evolving with customer-friendly services like omnichannel distribution. Industrial e-commerce and fulfillment facilities, one of the most desirable niches in the NNN market, are also growing exponentially and in strong demand.
“Everyone knows that retail is evolving. Brick-and-mortar retailers [as well as] food-related retailers with exceptional customer service or experiential offerings will thrive. Contributing to this transformation is the rise in e-commerce. The popularity of e-commerce is not just hype; it is real and only just getting started. Our internal research has found that industrial and logistics is the most attractive sector for real estate investment for three years in a row.” – Forbes
Low Interest Rates & Healthy Lender Appetite
Interest rates were lowered July 31, making an already robust commercial real estate market even better. Low interest rates mean increased leverage and a higher cash-on-cash return. This change also inspires more buyers to enter the market, creating even greater triple-net investor competition. This demand is furthered by 1031 exchange buyers who must buy something to fulfill their exchange and are often willing to pay a premium to lock-up.
Prime triple-net properties are on and off the market before most people even know about them and with the interest rate change, it will be even tighter now. It’s imperative to partner with an expert NNN buyer’s advisor to ensure you secure the right property for your goals or risk not getting one at all.
According to the National Real Estate Investor (NREI), 2019 continues with a healthy lender appetite for net lease assets among local, regional, and national banks. “We’re building significant competition on any transaction that has decent credit with a good lease term and good real estate,” says Richard Katzenstein, Senior VP and National Director, Marcus & Millichap Capital.
To Wrap it Up – Realistic Expectations & Strong NNN Market
We know you want to make money and do so with as little involvement as possible. NNN investment properties will surprise you with healthy, uncomplicated, realistic returns of 5-8%. They preserve cash flow and yield a reliable, passive monthly income with no owner responsibility and very little, if any, risk of loss. A strong economy, stable real estate prices, low interest rates, and long-term, steady cap rates make this one of the best times in history to strengthen your portfolio with triple-net lease investments.
At Westwood Net Lease Advisors, we know that great properties sell fast, which is why we review the national market and connect with colleagues daily to find ideal properties for our clients. When you connect with your Westwood buyer’s advisor, he will do the same for you and evaluate a selection of properties and tenants, examine various factors that determine the real cap rate value, make sure the desired properties align with your goals, and help you with the process from start to close – all at no cost to you. Contact us today for your no-obligation consultation. 314-997-5227