You have worked your NNN investment exit strategy and stayed the course, now it’s time to sell … or is it? Maybe you see an opportunity to sell a little earlier than planned. How do you know?
In this blog, we cover the main factors that help determine the best time to sell a NNN property investment, including whether you are ready to sell from a financial standpoint, and should you sell because of the unpredictable COVID-19 pandemic and the uncertain economy.
Factors that Help Determine if It’s a Good Time to Sell Your NNN
If your property was recently built-out or improved, the community is growing, your needs-based tenant just signed a new, long-term lease, you don’t need the monthly income, and/or you’ve decided to add more properties to diversify your portfolio, then yes! It could be a great time to sell. Though each person’s financial situation and property have unique characteristics, this list provides a basis to help you decide whether the time is right time for you to sell.
Are the building and grounds in immaculate shape?
Has the tenant done any upgrades? If it is leased by an investment-grade tenant, has the corporation recently remodeled the building and improved the grounds to fit its new brand guidelines? A well-maintained, updated property adds value.
Has the tenant signed a renewed, long-term lease (10+ years)?
When the tenant signs a new, long-term, guaranteed lease of 10 or more years, this could be a good time to sell. The longer the lease term, the more valuable to a new investor. If the tenant only has a few years (or less) left on the original lease, this may not be the best time to sell. The prospect of an upcoming tenant vacancy decreases the value. However, if there are several lease extensions left on the lease and the tenant has recently upgraded the property, this could be favorable.
Is your property in a growing community or revitalized urban area?
If your NNN property is located where there is an increasing population and there are new roadways/highways with other consumer essentials popping up along the main artery, this could be a favorable time to sell. If your NNN property is in a faltering area with decreasing population, it may be time to sell before it gets any worse.
Can you sell-up and diversify?
Has your property increased in value faster than planned? Many investors start with one great NNN investment that increases in value and then decide to use a 1031 exchange to sell it and purchase an even better NNN property or multiple properties with the profits while deferring 100% of the capital gains tax. In doing so, they build and diversify their real estate portfolios while increasing their monthly income and overall internal rate of return (IRR). In this case, selling may make sense, but you must consider the tax implications if you do not reinvest.
Do you still have a mortgage on the property?
Are you thinking of selling but still have a mortgage on the property? This can often be a benefit to the buyer if he or she can assume the mortgage and the interest rate and loan terms are better than they would be when starting over. The mortgage assumption option can add value to your property.
What is happening in the economy?
A volatile economy may or may not lend itself to your investment’s value. If you own a fee-simple, NNN property with an investment-grade tenant that sells necessity-driven goods or services, like Dollar General, CVS, or DaVita, it is more likely that the property will hold its value or even increase in tough economic times. This is happening right now with COVID-19. Essential retailers and service providers are in such demand, it is tightening cap rates and creating an inventory shortage while driving up prices.
In contrast, if you own a property with a non-investment-grade tenant or one that sells non-essential goods, like an independent restaurant or gift shop, these could be subject to slowing sales in an economic downturn and create vacancies. Should you sell or wait? This would be best determined by a full-scale assessment with your experienced Westwood Net Lease Advisor.
We are also facing an uncertain presidential election outcome. The likely winner, President-elect Biden, plans to change many of the tax laws, including capital gains tax rates and possibly, the 1031 exchange. Now would be a great time to assess your investment and exit strategy and consider your options.
How are your financials?
Before you sell, evaluate if you still need the monthly income from your NNN property and annual tax advantages for a few more years. If you would not make the profit you had hoped for by selling, or you still need the income, even though your exit plan states it’s time to sell, reassess your plan and financial goals with your Westwood Net Lease Advisor before making any decisions.
To Wrap it Up – How to Know When to Sell Your NNN Investment
When you decide to sell, you want the best ROI and to do what makes sense for your personal and financial goals. In every one of these instances, there are exceptions, and each person’s financial situation and investment strategy is vastly different, so it is difficult to determine the best time to sell on your own.
If you are thinking of selling your NNN lease investment, especially in a 1031 exchange, contact a Westwood Advisor with decades of experience and a whole team of resources, before you make any decisions.
Our advisors will work with you to consider every factor in the selling/buying scenario, point out the benefits, and just as importantly, explain the drawbacks to selling based on your exact situation, so you can make the right decision for you, now and for the future. If you decide to sell, we can also represent you and your best interests in the transaction, from start to finish.