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Investors interested in acquiring net lease assets quickly discover that it is a broad category that comes with diverse choices, and navigating the busy marketplace can be a time-consuming endeavor. So, where to start to find a property that is the right fit for you? Here are five tips to help you get started on the path to net lease investing.
1. Define your investment goals and objectives: Goals need to go beyond the obvious – making money. Individuals often have different objectives that can shape buying decisions. For example, an individual may be looking to buy a net lease property that will deliver steady, predictable cash flow to provide passive income or for retirement without the headaches of hands-on management responsibilities. Others may want to buy a property for estate planning purposes that they can eventually pass on to children or grandchildren.
2. Understand the breadth of options: The common theme among net lease investment properties is that they share similar structure. In a triple net lease (NNN), tenants are responsible for paying real estate taxes, insurance, utilities and taking care of day-to-day maintenance and operating costs. Oftentimes, it is exactly those “hands-off” qualities that attract investors in the first place. However, there are many different types of properties that use the net lease structure. Those buying options include national restaurant chains, drug stores, banks and medical buildings all the way up to large distribution centers and industrial buildings.
3. Narrow your shopping list: There are a variety of ways to trim that list of options. 1) Know your budget and target price range. The purchase price for a Taco Bell or 7-Eleven is going to be vastly different than buying a Trader Joe’s grocery store or FedEx distribution facility. 2) Figure out what types of properties and brands you like and don’t like. There is no-on-size-fits all to investing. Some buyers are very comfortable sticking to what they know, which might lead them to a specific category, such as a fast food restaurant or medical facility, or a particular brand name within a category, such as a McDonald’s or Aspen Dental.
4. Know your risk tolerance: Risk often goes hand-in-hand with return. The greater the risk, the greater the return. For example, an “A” rated credit tenant, such as McDonald’s, is typically viewed as low risk and is priced accordingly with a very low cap rate (relatively higher price). In comparison, smaller Quick Service Restaurant concepts such as a Zaxby’s or Whataburger have less stellar credit and would be viewed as higher risk and priced with higher cap rates (relatively lower price). Although high returns are always attractive, investors also need to sleep at night. So, understand the risks that you are comfortable taking, and make sure that the projected return will adequately compensate you for that risk.
5. Determine your exit strategy & investment timeline: Do you want to buy and sell an asset within a short window, such as within 3 to 5 years, or are you comfortable holding the asset for 10-15 years or longer? The exit strategy can influence the investment criteria and buying decision. For example, you can consider acquiring a quality real estate asset with a short lease term (higher yield, higher risk) and capitalizing on the upside exit after restructuring or extending the lease with the existing tenant. You can also potentially magnify the exit ROI by finding a new tenant when the current lease expires and securing a long-term lease. As it relates to ROI you should consider your options over the near-term, mid-term or long-term horizon with any investment property.
Certainly, it is important to take a thoughtful approach to any investment decision to reach your goals and ultimately enjoy your freedom. These five steps are meant to provide preliminary guidance to help shape your net lease investment strategy and narrow the menu of different possibilities. The best advice is to work with an experienced advisor who can help provide additional insight into the nuances of the industry. For more information on net lease investments and whether this sector could be the right fit for your investment and lifestyle goals, please contact Andrew Vu at 415-539-1120, or andrew@tcpre.com for a complimentary strategy consultation.