The Low Cost of Money for NNN Investments

Mar 4, 2021

If you have been unsure about commercial real estate (CRE) as an investment in the current economic climate, you may be surprised to learn NNN lease properties are one of the most reliable, income-generating CRE investments in any economy. Now, with the low cost of money, you have the opportunity to create additional wealth with NNN investments.

Financial institutions are eager to lend for these “essential” business properties. Historically low interest rates are creating an interest-to-yield rate spread that pays down the loan and, on occasion, creates an increasing cash-on-cash (CoC) return with positive leverage, while providing significant passive income for up to 15 years.

“We have closed many NNN deals for clients with positive leverage driving actual cash-on-cash returns that are significantly higher than the cap rates when purchased.” – Phil Bundren, Westwood Associate Broker

Sealing a deal, Business man and woman handshake to business agreement.

What About Cap Rate Compression?

When it comes to creating wealth from appreciation, you may be wondering about the recent news of cap rate compression. There is good news here too. Though the majority of NNN lease property investments are in even higher demand than before the pandemic, creating a limited supply and compressed cap rates, these properties still offer higher cap rates than most commercial real estate (5.00%-6.50%) and additional investor benefits that other CRE can’t match.

These investor benefits include but are not limited to:

  • A history of stability in any economy.
  • A lower barrier to entry due to price-point and the ability to buy anywhere in the country with very little, if any, landlord responsibility.
  • 10-to-15 year corporate-guaranteed, absolute net leases.
  • They are extremely financeable with competitive terms.
  • An overall internal rate of return of 7–10%.

Figuring cap rate

All-Cash Purchase or Commercial Mortgage for Positive Leverage?

If you were thinking of purchasing a NNN property with all cash, this is one time you may want to reconsider. You could potentially use your cash for more than one property and finance the rest at such a low interest rate, you could potentially have several properties with positive leverage.

Let’s say you obtain debt to purchase a NNN property. Your CoC could end up exceeding the cap rate return of an all-cash purchase. This is known as “positive leverage.” If the combination of cap rate and interest rate terms creates this positive leverage opportunity, it could be beneficial to explore financing your NNN purchase. Positive leverage may also create the opportunity to acquire additional assets due to a lower down payment versus an all-cash purchase.

By the time you factor in the financing, tax advantages, and incremental rent increases over a 10- to 15-year NNN lease term, an advertised 6.00% cap rate on an absolute NNN can ultimately amount to an 7–10% internal rate of return (IRR).

To decide if taking on debt would work best for your goals:

  1. Start by looking at the advertised cap rate for the level of risk associated with the property.
  2. Then determine the NOI (rent received) and divide that by the loan amount you’re seeking (debt yield), and you will get a feel for whether the property is a good investment that fits the lender’s criteria and your objectives.

“The low-interest-rate environment has driven competition among lenders to offer borrowers their most competitive terms.” – Mike Kocur, Westwood Associate Broker

light bulb 3d and hand drawn passive income as concept

NNN Properties Tend to Receive Favorable Financing Terms

As interest rates remain historically low, lenders are eager to provide financing for NNN investments.

Single-tenant, fee-simple, NNN properties with strong tenants such as Dollar General, Walgreens, DaVita, 7-Eleven, KFC, and Firestone, will remain the safest, strongest, and most financeable investments to purchase.

Warehouses and logistic centers and other industrial real estate have also increased in value as they are more essential to business than ever before, and though most are not NNNs, they are still at the top of the list for financing.

“Commercial and multifamily mortgage bankers are expected to close $486 billion of loans in 2021, an 11% increase from 2020’s estimated volume of $440 billion, according to the Mortgage Bankers Association.” – Paul Bubny, Connect CRE National

To Wrap it Up – Today’s Low Cost of Money Makes NNN Investing a Wise Strategy

With our fluctuating economy and volatile stock market, investors are looking toward commercial real estate for secure, long-term investments. NNN properties provide a safe and stable income stream backed by big national brands and investment-grade tenants. If you seek financing for these types of properties, you will garner a better interest rate and terms in comparison to other CRE investments, thereby increasing your income and ultimately, your internal rate of return (IRR).

Today’s low cost of money (which is expected to increase by year’s end) makes exploring NNN lease investments a wise choice for 2021. Contact a Westwood Net Lease buyer’s advisor today for a free consultation – our buyer’s representation is always free. 314-997-5227

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