I would like some opinions on what type of commercial property to buy. I have several residential properties, but would like to convert to doing commercial deals and am wanting to get some ideas/opinions on what to buy. I am sure there are alot of variables...amount of money I can spend for one - but am mainly looking to figure out what the more lucrative properties are based on everyones experience. Thanks in advance.
What are your goals? If you're looking for long term cash flow and as few headaches as possible, I would suggest single tenant NNN properties. Why? There are a number of reasons. First, the tenants are nationally known Fortune 500 companies like AutoZone, CVS, Burger King, Walgreens, Dollar General, etc. These are companies with a proven track record of success. They are high profile companies in high traffic areas, that all of us have given our money to. I’d bet the farm that each person reading this has been a customer at one or more of these establishments. Do you think they’re gonna pay the rent? Of course, they have enough business to cover the rent payments and then some. In some instances the rent is guaranteed by the corporation. Imagine that, a Fortune 500 company guaranteeing to pay you each and every month for the life of the lease. Not bad, huh? In addition to that, the leases are long term. I would only deal with a tenant that has a remaining term on their lease of at least 10 years. Some leases are for 20 years or more. These leases will already be in place when you purchase the property, so you don’t even have to negotiate them. There are also escalations already built into the lease. So your rents are gonna increase automatically. Many of the leases also have options to extend built into them. Let me give you an example. Let’s say the lease is for 20 years, but it has (3) 5-year options to extend the lease built in. That takes your 20-year lease and makes it potentially a 35-year lease. So let’s review, 1) GUARANTEED RENT from a Fortune 500 company. 2) 10-20 year leases. 3) Automatic rent increases. 4) Options to extend your cash flow.
With a NNN property you will have no landlord responsibilities. When a pipe bursts in the bathroom, the tenant is responsible for fixing it. When the flooring gets old, the tenant is responsible. When the paint is peeling and needs replaced, guess who does it? The tenant does it. You do not need to worry about getting calls late at night because of a maintenance problem. Imagine how many fewer headaches you’ll have when you don’t have to worry about maintenance. It’s very simple and very black and white. No responsibilities and no headaches.
When it comes to financing, you do not have to qualify for the mortgage. Your FICO score isn't very important here. You don’t have to deal with Freddie Mac or Fannie Mae. The Fortune 500 investment grade tenant qualifies for the loan based on the strength of their credit and the strength of their long term lease. With an investment grade tenant with a 20 year lease, the lender feels much more secure in lending the money. Also, you will have no management responsibilities and the taxes are also paid by the tenant. This is a pretty good route to go if you want long term cash flow and no headaches. Hope that helps a little.
[ Edited by aguest on Date 05/24/2007 ]
[ Edited by aguest on Date 05/24/2007 ]
Aguest makes several very good points. However, he leaves out one very important point, the cap rate of the type of properties he is referring to, are usually about 5 or 6 percent. So unless you are going to pay cash for this property, it 's not good business to borrow money at 7 percent or higher and get a return of 5 percent. The property won't cash flow, and very few lenders will finance a negative cash flow property. The approach that has worked for me, is find a property that is in a good location, good construction, but is undermanaged. These types of properties can be purchased at a decent cap rate and with improvements, you can upgrade your tenant base. With the tenant upgrades comes the higher rents. An example, I have a 12 unit strip mall purchased for $540,000 and annual rent roll of $48,000.00, with improvements, tenant upgrades, and improved management at a annual rent roll of $112,000, and leases with 3-5 percent annual increases. Of course, this didn't happen overnight, it took 4 years and a good deal of work. But the property nets about 60,000 a year after expenses and loan payments, not bad for a $25,000 down payment with a 15 percent seller 2nd and a 75 percent bank 1st . If you want easy, go the route suggested by Aguest, if you want to make money, roll up your sleeves and look for the diamond in the rough.