419: Investing in Triple Net (NNN) Commercial Properties – Part 2

SHOW NOTES FOR EPISODE 419: INVESTING IN TRIPLE NET (NNN) COMMERCIAL PROPERTIES – PART 2

We continue our information-packed podcast series on Investing in Triple Net Commercial Properties with our Part 2 conclusion.  In this episode, commercial broker and real estate investor Joel Owens shares strategies for investing in single tenant net lease properties for financial independence and offers tips to achieve maximum returns for long-term wealth creation.

What You Will Learn

• The 4 main types of retail lease properties
• How you can invest in the most lowest risk commercial retail properties
• Which type of retail property is the most passive type of investment
• How to avoid the biggest mistakes made by NNN investors
• The types of deals lenders won’t touch
• What are current cap rates for a good retail investment property
• Multifamily Financing vs. Retail Financing
• Retail investments unaffected by Amazon
• Why investors over 55 are attracted to investing in triple net leases

About Our Guest

Joel Owens

Joel Owens, owner at NNN Invest, is a principal commercial real estate broker and investor with a special emphasis on commercial retail Single Tenant and Multi-tenant properties nationwide. He has 16 years of experience and evaluates thousands of properties a week across the country. He enjoys retail because of it’s more passive aspect of ownership and returns versus other types of real estate.

…Continued From Part-One

Biggest Mistake(s)

• The biggest mistake with NNN is that people think it’s like buying a car – you can’t lose with it, anything you can buy is going to be a good investment
• Thinking because it’s cheap it’s a good investment
  • i.e. buying in a rural or cheap area at a good price
  • Is it as good as buying something for $500,000 more in a better area?
• Developers will do tenant improvements at too high a market price
  • They’ll buy the land, do the exterior of the building
  • The architectural cost and style will depend on the city and the county zoning requirements for that area
  • Then, on the interior space, they’ll do tenant improvements, do the build out for the tenant or give the tenants credit to do it themselves
  • With a developer, sometimes they’re asking a higher price per square ft, which may be above market for the tenant improvement and when it comes time to sell, at an inflated ROI, to recoup tenant improvement costs
  • This can be bad for the investor because, if you’re buying an investment-grade tenant, if it’s above market, when the tenant leaves, you may lose the equity because no one will pay above market rates for the place
• “Gotchas” and limits on leases with franchises
  • Corporate guarantee on lease but 5 years into the lease it goes from corporate to franchisee responsibility
  • Lenders don’t want to touch those kinds of deals
  • When someone buys these types of properties, the way the system is designed

Joel’s One Stop Shop

• Joel is a buyer specialist
• He’s there through the whole buying and set-up process
• Not a lot of brokers do that
• He has a 5-Part Triple Net Wealth System
  • Proprietary system for on and off market properties that he has developed over 17 years
• When people work with him exclusively, they have access to his:
  • Extensive database across the country with
    • Commercial retail attorneys
    • 1031 Exchange companies
    • Capital markets mortgage brokers with some of the best lenders
    • Property management companies
    • They don’t have to reinvent the wheel
  • Second set of experienced eyes to review docs, etc.
• Listing brokers are focused on selling as many properties as they can, as fast as they can
• Because he’s a principle broker, he gets to keep all his commissions
  • A commercial firm, if it’s making a listing brokerage $100,000, typically $50K goes to the head brokerage and you’ve got 3 people on the team: the senior agent, the agent and the junior agent.  The senior agent is making $24K, the agent is making $12-13K and the junior agent is making $7K
  • They have to do 6-10 transactions to Joel’s one transaction
• If you’re a buyer and you’re new to the space and you don’t know much of anything, they don’t have the time to talk with you.  Or, if they do talk to you, they’re going to show you what’s in their listing inventory and it could be a bad, mediocre to good property.  They’ll just try to sell you whatever
• Joel isn’t representing the seller, he’s representing the buyer
• Joel will look through his extensive database of thousands of properties to find the “diamonds” out their for his clients, at their price range and that they can afford
• He’s not trying to sell them a piece of junk because he doesn’t represent the seller

BiggerPockets Moderator

• Joel oversees the commercial forums on BiggerPockets.com
• Has over 15,000 posts

Most Passive Retail Properties and Returns

• Most people want passive income
• Retail is more passive than owning a multifamily building, self storage or residential houses
• Retail – From Most Passive to Least Passive
  • Absolute Single Tenant Net Lease (NNN) where you do nothing – Most passive – the Hottest that everyone wants to own! Invest $1 million
  • Two to Four Tenant Retail Center with National Tenants – Cap rate rises a little with the yield.  Tenants like T-Mobile, Starbucks.  10-year fixed leases, newly built, 10% rental increases every five years. $3-5 million purchase price, putting down 30-35% down.  Base rent plus CAM (common area maintenance) charges paid monthly, based on the percentage of space that they occupy within the retail center.  Usually, you have a property management company too.  Usually only requires a half-hour call once a month or so. National tenants pay like clockwork.
  • Two to Four Tenant Retail Center with only one National Tenant
    • One national
    • A regional
    • couple of mom and pop shops
    • More work required
  • Two to Four Tenant Retail Center with no National Tenants
    • No national tenants
    • No or 1 regional
    • Most are mom and pop stores
    • 10-15 tenants in a retail center
    • The most amount of work required to maintain
    • Higher cap rate but least desirable – 10-12% cash-on-cash
• If you’re worth millions, would you rather invest a million and get a 7% return and get no headaches and a mostly passive return?
• Annual cash flow expected on a $2 million investment (if you paid all cash for the property), at a 6-6.25% cap rate – you would generate approximately $120-130K pre-tax
• For purchases of $3 million and below, 75% are cash purchases and 25% use some form of debt
• When you move up to the $4-7 million purchase price range, buyers don’t want to use all their cash.  They want to diversify.  75% are financed and 25% are cash purchases
  • Higher price point, you can generally get a higher cap rate
  • Lower interest rate, 10-15 basis points cheaper
  • This is where you can extract the greatest value – too big for the smaller guys and too small for the REITs, pension funds, insurance companies, who are typically buying $10-20 million properties

Multifamily Financing vs. Retail Financing

• Multifamily generally uses Fannie Mae and Freddie Mac
  • $20-40 million properties
  • 30 year fixed
  • If you buy lots of properties, you can become a “preferred vendor” and, instead of taking 6 months to close, you can close in 3 months
  • Multifamily has changed with compressed cap rates
  • Rent increases are maxing out
    • Once it hits a certain ceiling, they can’t increase rents any more
• Single Tenant Net Lease
  • There are specific lenders within each bank’s lending department
  • Credit unions
  • Local banks
  • Regional banks
  • National banks
  • Lifeco insurance companies
  • Commercial mortgage backed securities lenders
  • Private lenders/family offices
  • Longest term – 10 year fix

The Amazon Factor

• You need to break it down
• There are these stories about the “Amazon Apocalypse”
• The International Council of Shopping Centers is responsible for a lot of the negative stories on Amazon’s impact
• For the last 10 years, certain segments have been dying
  • 60,000 sq ft stores
  • Large malls
  • Apparel Retail
  • Big Box Retai
  • Toys R Us
  • These spaces are being “re-adapted”
    • Put in a Dave & Busters
    • Add a Movie Theater
    • Add a bunch of new restaurants
  • The owners have to make the tough decision of putting a billion dollars into a mall and whether they will get their money back
  • In the old days, the mall owners would give very cheap rent to the big anchor stores like, Macy’s, Sears, etc
    • They would make up the loss of rent by charging more rent for the other smaller stores, boutiques and specialty shops
    • But when the big anchor stores went dark or out-of business, then all the common area costs and maintenance was spread out among these smaller single unit operators.  They couldn’t shoulder the costs
      • The smaller operators would move out of the mall, move into a higher profile location, like a neighborhood retail center that’s on a main road with lots of traffic
        • They paid less rent per sq ft
        • They had less competition
        • Less common area maintenance charges
        • Easy drive-up sales (no big mall parking lots)
  • Malls in high profile locations are being “re-imaged” at ridiculous costs
  • Others are being re-adapted with mix-use – multifamily living up on top, retail below
  • Remote location K-Marts, etc., are better off being leveled to the ground and used for another purpose or get a state grant to re-purpose
• Amazon: Online Sales vs. Brick and Mortar Sales
  • Total online retail sales are currently 15%. They used to be around 5%
    • A big part of the online sales are the brick and mortar companies online sales
  • Most people prefer to go out and experience things
    • They just don’t shop.
    • They eat at restaurants, go to movies, socialize
  • Amazon is moving into brick and mortar
    • “The Last Mile”
    • Buying old Rite-Aide’s
    • Mini warehouse places
  • Neighborhood retail is not suffering, in fact it’s growing
  • It’s the Big Box stores that have been hit the worst

Advice for Old Dawgs Looking at Real Estate Investing to Help in Their Retirement Years

• With CD yields, taxes, etc., your retirement dollars are going to disappear quickly
• Many are wondering if their retirement fund is going to last and what will the quality be of their retirement years
• Medicare?  Social Security?
• Getting into single tenant NNN leases, unlike with stocks, you wouldn’t be worrying about highs and lows because your tenants are locked into long term fixed rents
• When you’re younger, you can make riskier investment choices
• When you’re older, you can’t take the same risks
• But if you have a couple million dollars and you want to generate X returns, do it safely and outpace inflation, you don’t want to make risky investments
• That why people like the single tenant NNN space
  • Security
  • Passive
  • Returns that outpace inflation
  • Still grow your retirement funds – not depleting those funds

Current Business

• A lot of people think that money is the answer
• Joel personally doesn’t feel that the love of money is the answer for anything
• People like money and what it can do for them to free them up to pursue what they are passionate about in life
• Joel’s view is different than a lot of people
  • Growing up, he had a rough childhood because, at 15 years of age, his best friend’s dad, who lived right up the street and who worked for Bell South, was complaining about back pain but never went to the doctor.  When he finally went to the doctor, he found out he had cancer and it had spread everywhere and the doctor said there was nothing they could do for him
  • He saw his friend’s dad go from walking with a cane to totally bed ridden
  • Joel’s dad, who worked for the Atlanta Post Office, was killed in a car accident, driving home from work
  • His best friend’s dad passed away 3-4 weeks later
  • His grandmother also died shortly after
  • Joel had no choice but to grow up quickly
    • Worked 2 jobs to help support family
    • Went to school
    • He experienced at 18-20 years of life what many people usually experience at 50-60 years of age
    • Caused him to truly value time
  • Today, even though he makes lots of money, he values seeing his mom, who just turned 77, and taking her out to lunch
  • He enjoys just:
    • Spending time with friends
    • Taking a vacation
    • Spending time with his 4 month old son
    • Helping his clients meet their investment goals
    • That’s what excites him about his future
• Joel has goals but is not going to work himself into the ground – you can’t take your money with you!
• He wants to have fun – enjoy life, have fond memories
• He’s 45 now
• He’d rather be worth $30 million by the time he’s 60, be able to look back on great memories with pictures and videos, than to work himself into the ground and be unbalanced in every other part of his life
• His estate attorney shared a story of one client he had who worked hard all his life, was worth $150 million, and in his 70s, when he wanted to spend time with his grand kids.  However, his kids wanted nothing to do with him because he wasn’t there for them when they needed him most

Rap-It-Up

• Favorite real estate book: Investing in Retail Properties by Gary Rappaport
• Favorite business book: People Hate to be Sold but They Love to Buy (Sales Bible) by Jeffrey Gitomer
• Most valuable web site for success (other than your own): BiggerPockets.com
• Favorite quote: “Logic will get you from A to B. Imagination will take you everywhere. ” – Albert Einstein
• If you had to start all over, knowing what you know, and you only had $1,000, what would you do to launch your real estate investing business?  I would take that $1,000 and use it for marketing in my business and, when I generate one sale, I would make $100,000.

How to Reach Joel

• Website: www.NNNInvest.com
• Click on the “Get Started” button, fill out a brief form and get a free consultation

DISCLAIMER:  Many of the above strategies take knowledge and have a higher degree of risk.  You need to do your research and/or work with someone who is experienced to reduce your risk.

IF YOU LIKED THIS PODCAST, we would love if you would go to iTunes, Stitcher, GooglePlay, iHeartRADIO and Spotify and Subscribe, Rate & Review our podcast.  This will greatly help in sharing this podcast with others seeking to learn real estate investing as aCBRE means to achieve a successful retirement.

Check out our other podcasts at olddawgsreinetwork.com.

Get a FREE copy of our 3-Minute Rental Property Analyzer at olddawgsreinetwork.com.

Additional Episode Sponsor: Meno Studio – menostudio777@gmail.com