Every so often we update the Best States for NNN Investing blog based on the different states’ tax changes and economic growth. In this blog, we thought we would shine a light on the often-overlooked states and locations for NNN investing and why they are just as profitable as the more popular and obvious locations. We’ll also share more details about the tax implications based on location, how location affects cap rates, and more.
What Does NNN Property “Location” Mean?
Everyone knows location is a key qualifier for a great commercial real estate (CRE) investment. But what does “location” mean? It is more than just a US state or street address. Location includes:
- Daily traffic count
- Local and outlying area population
- Planned population and economic growth
- Type of parcel (corner lot, side street, strip mall)
- Nearby essential businesses (grocery, gas, pharmacy, fast-food, etc.)
- Whether it is primary, secondary, or tertiary
- Transportation links
- Nearby attractions, campuses, activities, sports, amenities
As a NNN investor, you will realize the greatest benefit from looking at properties that align with your financial and lifestyle objectives first, then consider the geographical area that fits your goals AND the market in which the tenant thrives.
For example, if you are uncomfortable with a property that you can’t keep an eye on, then you’ll want to look for one near where you live and/or work. If you feel confident in the tenant’s ability to care for your property without your observation, then expanding your scope to search in other communities or taking advantage of the nationwide inventory may be an option.
Which Locations are Best for Profitable NNN Investing?
When asked which states or locations are best for profitable NNN investing, Phil Bundren, Westwood Net Lease Advisor, explained, “There isn’t really a ‘best’ state or area for triple net investing. No matter where you buy, any triple net lease property will likely operate on a long-term lease, offer stable monthly income, and come with other ownership benefits that aren’t completely dependent on the location.
“In some states, there isn’t an income tax levied, so it is important to talk to your CPA about how that might impact your strategy. Even if you own a triple net property in Florida, which doesn’t impose an income tax, you may still be required to pay tax on the rental income in the state where you reside. Or vice versa – if you live in Texas, which doesn’t levy an income tax, but own a triple net investment in Michigan where there is state income tax, you will most likely have to pay some rental income tax in Michigan.”
The tax situation can be complex – be sure to work with your certified public accountant or other tax professional to learn the tax implications before you decide where to invest. If you don’t have a CPA or real estate tax specialist, Westwood Net Lease Advisors can refer you to a reputable resource in our professional network.
Bundren added, “It comes as a surprise to many commercial real estate investors that some of the best places to invest are in unknown, growing areas throughout the Midwest, like in Indiana, Iowa, Missouri, and Kansas. There is also growth on the southeast coast, in towns and communities in Virginia, Georgia, and North and South Carolina. The bottom line is that is impossible to know where to invest without an expert advisor who knows the market well and can help investors choose high-credit tenants in areas where they feel most at ease investing.”
“If you want a low-risk, long-term, guaranteed monthly income and a tangible asset for leverage, there is no downside to triple net investing in any growing community across the US.” – Phil Bundren, Westwood Net Lease Advisor
Does NNN Property Location Influence the Cap Rate & IRR?
Location does influence cap rate and internal rate of return (IRR). You will see all types of commercial real estate, including single-tenant NNN properties, listed for sale with an advertised cap rate, which is the level of equity return on your investment for a single year. A higher cap rate indicates more risk. A lower cap rate correlates to lower risk.
Class A or “prime” properties will usually offer a lower cap rate because there is less risk than buying Class B or C real estate.
- High-credit tenants operate in prime locations
- Prime locations command higher rents
- Businesses tend to thrive in busy locations
- There is less risk of vacancy
- If a vacancy occurs, they are easier to re-tenant
Triple net lease properties are most often in prime locations near other consumer staples or in high-performing locations for their business (Dollar General thrives in outlying and rural areas). They are most often tenanted by investment-grade, multi-billion dollar corporations that guarantee the lease for 10, 15, and sometimes 20 years or more. For these reasons and more, triple net investments carry a lower cap rate than gross lease, multi-tenant real estate.
Why Purchase a NNN In a Prime Location If It Comes With a Lower Cap Rate?
A lower cap rate does not necessarily mean less profitability. In fact, when tax opportunities and other deductions, such as cost segregation depreciation (CSD), are utilized, your internal rate of return (IRR) could be higher and in line with other types of investments at a potential 7–10%. High-maintenance, gross lease commercial real estate may advertise a 10% cap rate, but once adjusted for vacancies and the high cost of maintaining and managing the property, that number falls to a comparable IRR.
Triple Net Cap Rates by Location
Purchasing a new Dollar General in a fly-over state like Iowa or Nebraska will usually provide a higher cap rate than a Dollar General in Florida or Tennessee because the higher-demand, more highly populated states are considered less risky.
However, if a new fast-food restaurant, dollar store, drug store, auto parts store, or gas station/convenience store in a growing community has a higher cap rate, that does not necessarily equate to more direct investor risk if the property is an absolute triple net lease property. When you purchase an absolute NNN property tenanted by an investment-grade corporation, you will have the same income guarantee anywhere in America. Buying in a location with a higher cap rate when cap rates are compressed is a wise strategy to earn the highest possible income.
To Wrap it Up – Overlooked NNN Locations Offer Stability & Profitability
The quality of real estate is essential to a stable, profitable, successful NNN investment. When searching for your first or next property, know your risk tolerance, choose a property that makes sense for you, and look for a prime location in any community. If the location is in a secondary or less populated market, assess whether it’s prominent, easily re-tenantable when the lease expires, and near other essential businesses or attractions.
If you want to buy a property in a state that doesn’t levy an income tax, that does not mean you won’t pay that tax if you live in a state that does. Plus, you may be sacrificing a higher cap rate and return on investment to purchase in a more popular area. Working with a reputable NNN buyer’s advisor and tax specialist will help you understand your options before you purchase.
Finding the right NNN investment in a prime location on your own can be a challenge. These properties often sell before they ever hit the open market.
Westwood Net Lease Advisors can help! We have decades of market experience and help investors, like you, invest in the right property in the best location for your goals. We get to know you and become your personal representative in the transaction from the property search to close – all at no cost. If you’re ready to buy your next NNN investment or if you’re just starting out, contact us today for your no-obligation, free consultation, and bolster your portfolio with confidence. 314-997-5227