When it comes to commercial real estate (CRE) investments, it’s essential to understand the types of risk involved and your capacity for those risks. Keep in mind – the risk isn’t just about the type of property you buy, it’s as much or more about the tenant(s) you lease to and their creditworthiness. So, what types of CRE investments are risky business and how do you decide where your risk tolerance lies?
Investment Property Risk Factors
Tenant Credit. The number one risk factor when buying a property is the credit strength of the tenant. Is the tenant backed by a corporate lease or is it a single unit, a small franchisee with 1-3 stores? A single-unit franchise won’t have the credit strength an investment-grade corporation like Dollar General or McDonald’s has, which poses a high-risk investment. Even if the franchise is a nationally known brand like Panda Express, Sonic, or Freddie’s, that does not guarantee creditworthiness. The independent owner of each location is solely responsible for the revenue of that store and if it hits on hard times, is mismanaged, or in a poor location, it can be unpredictable.
Location. Another big risk factor is the location. Location can be affected by shifting housing trends, the other businesses around the property, changes in the economy, or it may just be a strange location. If a single-unit fast-food restaurant with an experienced franchisee and good credit history is being sold and you think it may be due to location, beware. Ask for sales history, forecasts, and utilize lease clauses to require regular financial reporting so you can keep a close eye on the performance. Or skip it altogether if the risk doesn’t fit your tolerance level.
Scope and Use. Other red flags include a business with a limited market share and product scope and the nature of the building. If a property was built for a specific use or concept with unusual fixtures, rooms, and equipment, it becomes difficult to re-tenant without large capital expenditures by you – the property’s owner. This means capital goes out with none coming in until it’s re-tenanted.
As any investor knows, there is no such thing as a “risk-free” investment. However, there are those that add more risk than necessary and need diligent consideration before buying. If you’re someone who wants a passive investment with steady monthly income and no responsibility, then a NNN lease property may be for you.Take a look at the following NNN advantages:
- Reliable, low-risk, near recession-proof investment
- Corporate-backed lease guarantee
- Capital-expenditure-free ownership with long-term monthly income
- Prime location for steady sales and ease of re-tenanting
- 10- to a 20-year lease with periodic rent increases
- Nationwide investment options due to passive nature of investment
Conduct a Risk Tolerance Assessment First
A thorough evaluation of your risk tolerance and financial situation, along with lifestyle and wealth objectives, is an important first step before you start your property search. This information will ensure you spend your valuable time looking at the right properties for your goals. These are a few things to think about before you move forward:
- Are you investing a portion of your wealth to build a portfolio or spending your entire 401k and living on the income?
- Do you need to borrow money to make it happen?
- How much monthly income do you need?
- How much do have available for unexpected expenses?
- Are you going to manage the property yourself or pay someone to do it for you?
- Would you prefer a hands-off, responsibility-free NNN property?
A Buyer’s Advisor Minimizes Risks
No matter what type of real estate investment you’re considering, going it alone or using a seller’s agent presents a much higher risk with a less-than-ideal outcome. That’s why we can’t stress enough how important it is to partner with your own buyer’s advisor – this is a person who solely represents you and your best interests – from the beginning of the process to closing. And at no cost to you.
At Westwood Net Lease Advisors, the buyer-advisor relationship starts with us getting to know you and your goals. Then we help you find a CRE investment (or two) that fits your criteria, including some you may not have considered. Our elite advisory is unique as we primarily represent buyers and provide the following for our clients:
- Objective advice, education, knowledge, and advocacy
- In-depth evaluation and a risk tolerance assessment
- Thorough financial analysis
- Explore best price/cap rates and different classes of investments
- Nationwide database/industry connections; locate a customized inventory of properties, including those not on the open market
- Evaluate tenant financials and credit ratings
- Draft and present a Letter of Intent (LOI)
- Price and lease term negotiations
- Maximize financial and tax considerations, like 1031 exchanges and cost segregation depreciation
- Provide a reputable network of resources, e.g., financial, closing agents, title companies, legal counsel
To Wrap It Up – Know Your Tolerance for Risky Business & Choose NNN
To secure the ideal investment property for your financial and lifestyle goals, it’s essential to know your risk tolerance, as well as which properties and tenants are risky business. NNN lease properties are a great choice if you are a high net worth investor who prefers a low-risk, dependable investment that increases wealth with stability and provides reliable monthly income. Before you begin, be sure to reach out to an experienced Westwood Net Lease Advisor and start the investment property process with ease and efficiency. Contact us today for a no-obligation, free consultation, 314-997-5227.