What is the Smallest NNN Investment Opportunity? The Largest?

Jul 15, 2021 | Blog, Investment Properties, Triple Net - NNN or Net Net Net

One unique attribute of investing in triple net (NNN) lease properties versus other commercial real estate is the low barrier to entry. For as little as $1.3 million, you can own a property tenanted by a major brand and receive guaranteed income with very few or no landlord costs for as many as 15 years.

Though $1.3 million isn’t the smallest NNN investment opportunity, and the sky’s the limit when it comes to the largest NNN investment opportunity, there is a median range for high-quality triple net investments with pricing options based on a few key factors.

Low-Cost NNN Properties

In most cases, NNN lease properties start around $1,000,000. The most common low-cost NNN investment and frankly, the best option for staying around the $1–2 million mark, is Dollar General.

The average Dollar General is around $1.3 million with a cap rate between 5.00–6.50%. This is for a property with a full-term or near-full-term lease. Properties with lower price points do exist, but they usually have short-term leases and may include landlord expenses of roof, parking lot, and structure. Typically, lower-priced, higher-cap-rate, shorter-term lease properties carry more risk. Generally, it is also more difficult to finance higher-risk properties.

Other NNN Property Investments with Lower Price Points:

Dollar Store with shrubbery

Which NNN Properties Cost the Most?

Though most NNN investors would not be searching for the highest-cost investment, if you are trying to satisfy a 1031 exchange requirement and must spend a certain amount of money to avoid paying capital gains taxes, then a higher-priced triple net lease property may be on your radar.

As you will notice on our Sold Properties page, very few NNN and NN+ properties go above $5 million. Occasionally, there will be an opportunity for a large retailer or restaurant, such as Walmart, Schnuck’s, or Buffalo Wild Wings, that will fall in the $7–$15 million range, or a higher-priced sale-leaseback opportunity, such as Legacy Pharmaceutical Packaging.

The price range is limitless. However, to satisfy most NNN investor’s goals where the landlord has very few, if any, responsibilities, the most common median price range is $1.3–$3 million. Of course, there are exceptions and sometimes great deals to be had if you work with an experienced NNN buyer’s advisor who can perform due diligence on the property and the lease to make sure the deal is sound and in your best interests.

Bank in a section of a city with glass buildings around it

NNN Purchase Price & Financing

If you are an all-cash buyer and come upon a Dollar General that’s listed for, let’s say $850,000 with six years remaining on the lease, and four 5-year extension options, each with a 5% increase in rent, this may be in your comfort zone and worth the investment. When it comes to paying all cash, what you purchase depends on you and your goals.

Conversely, when it comes to financing, there are several criteria you must meet to not only be a candidate for financing but to make the investment worthwhile.

When obtaining a commercial mortgage to buy a property, you need $1 million in net worth and a 35–40% down payment. The purchase should be considered low-risk for the best financing terms, which is typically indicated by the cap rate.

Single-tenant NNN properties differ from other types of real estate in how their loan to value ratio (LTV) is determined. The amount of leverage a bank or credit union is willing to lend is primarily tied to the creditworthiness of the tenant, along with other factors, such as length of lease and location. The better the tenant, the higher the leverage. Look for investment-grade tenants with an S&P of at least a BBB-.

Depending on how you purchase, if you choose a $1.3 million Dollar General, for example, by the time you factor in financing, tax advantages, and incremental rent increases over a 10- to 15-year NNN lease term, an advertised 6.00% cap rate can ultimately amount to a 7–10% internal rate of return (IRR).

Man in a white button-down with P.R.I.C.E. blocks in front of him with a green/red arrow on the last block

A Good NNN Investment Depends on More than Purchase Price

When performing a risk-tolerance assessment for your first or next triple net lease investment, be sure to look beyond what you think is your ideal purchase price. Evaluate such things as:

    • How much monthly income do you need/want?
    • Can you afford the best investment by paying all cash or would financing make more sense?
    • Do you need to borrow money; does the rent need to service the debt or loan?
    • Which lease term suits your goals (10, 15, 20 years)?
    • Do you need depreciation for tax purposes or want other tax write-offs?
    • Hoping for equity and financial leverage?
    • Do you own another property that can be used in a 1031 exchange?

Once you add up all the possibilities, even with a relatively low-priced NNN property, you may discover that financing makes more sense than paying all cash. Financing may allow you to purchase a top-tier property with a longer lease, which should secure a lower interest rate, thereby creating a positive leverage opportunity. Positive leverage may also create the opportunity to acquire additional assets due to a lower down payment versus an all-cash purchase, affecting your cash flow and overall rate of return (IRR).

On the other hand, if you simply want a straightforward transaction with rent as your income, paying all cash for an absolute NNN lease property could be exactly what you need.

Man in a business suit in front of a glass board with Property Investment written on it in white

To Wrap it Up – The Smallest & Largest NNN Investment Opportunities

Most single-tenant NNN investments are considered low-cost when compared to traditional, high-maintenance, multi-tenant gross lease properties. The smallest opportunity could be as low as $500,000 and the highest, well – there really isn’t a gauge for that. However, many NNN investments fall in the $1.3–3 million range, which is ideal for those just entering the market and for experienced investors who want to add low-touch commercial properties to an otherwise high-maintenance CRE portfolio.

If you are interested in learning more or would like to discuss your NNN lease investment options, Westwood Net Lease Advisors’ consultations and buyer representation are free. Contact us today!


 

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