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Risks & rewards of owning triple net investments

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Thursday, July 24, 2014

NNNinvestmentBY CLIFF HOCKLEY | OB GUEST CONTRIBUTOR

As Baby Boomers continue to retire, many are also trying to simplify their real estate investments. These investors are culling their portfolios by selling their labor intensive investments (including apartment, office buildings, mobile home parks, etc.) and finding so called Triple Net or "NNN" investment options.  NNN properties deliver investors one monthly check and minimal maintenance hassles. With the increasing retirements of Baby Boomers, a massive real estate shift has created a significant increase in demand for NNN properties. The result? Increased demand brought higher prices and lower yields.

Nevertheless, NNN properties deliver to owners an easier lifestyle. No apartment units to clean, no commercial tenants to find every three years to tenant improvement expenses. Typically these investments start out at a price tag of over $500,000. This increased appetite for NNN investments has prompted businesses to aggressively expand their national foot prints. Businesses like  McDonalds, Nordstrom’s Rack and others are using this financial energy to help fund their growth. More stores mean better distribution, better purchasing power and more advertising efficiency.

NNN locations typically attract three kinds of tenants:

A.    The corporation directly

B.    Franchisee

C.    A private owner

Now, what should you keep in mind with each of these and how will their industry affect your success? 

Apparel Retail

Boutique shops and second hand retail has been taking the place of many older retail stores due to the rise in online retail. Some stores can handle the physical and digital marketplace but being cautious with this industry is important because of changes brought on by online shopping.

Restaurants and Supermarkets

Food stores have different risks.  Restaurants have to keep being innovative to survive, even fast food restaurants. One way to determine success is to monitor their per-store sales volume.   Supermarkets are finding more success, recently due to the rise in development and population. Both of these business models can be successful but researching the brand, their business plan and past success are vital. 

Discount Stores

Discount “Dollar Store” store businesses face many of the same challenges that restaurants/food stores do. These stores are expanding exponentially recently, capitalizing on the recession economy and the consumer’s need for inexpensive retail options. These stores can offer a range of products at very low prices, usually under a $1. The competition (like Target and Walmart) is taking note and adding sections to their stores to compete. 

Important questions for your NNN Investment

There are a number of questions NNN investors must ask before they close the deal. Here are a few to get you started:

  • What are the market rental rates and the length of the lease term?
  • Does the location work with the business and could different business options be viable?
  • Do you have enough financial backing and a good broker to make sure you can fight through unexpected vacancies?
  •  What are the lease renewal options if the property is NN, NNN or a ground lease and what are your (the landlord’s) obligations? (This is important because each one has a different impact on you bottom line.
  • When are rent increases scheduled and how much will they be raised?

Return on investment

The most important questions with any lease include: can I make money buying the property? Will the property generate enough cash on cash return? What happens if you are not a financial wiz, how do you make the best decision? These questions can all be answered by reading the leases carefully, comparing it to the other similar properties, and having a professional run a financial risk analysis.  

Location, Location, Location

A few years back I tried selling a Burger King location to a client. It was a five year old store and was located in a third tier city on a major artery with lots of traffic.  When the store opened the numbers looked very good, then as the years progressed sales started reducing rather than increasing.  Why?  Because in those five years fresh a Mexican, a Chinese and new burger restaurants opened up.  They absorbed market share in this very small market, making the original deal much less favorable. Beware of the competition that wants a share of the action and might accidentally over serve an area.

Rewards

As you make your final decisions in your search for the perfect NNN tenant, learn about the company, their management and research comparable sales. Each industry holds it own share of risks and rewards, from competition to popularity, so consider your options carefully.  Remember that location, ROI and previous success of the NNN tenant are very important to your decision. With these leases you will be rewarded with a safe long term investment, where the check drops into your bank every month and you can plan your year long trip around the world.


Cliff Hockley is President of Bluestone and Hockley Real Estate Services.

 

 

 
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