Top 5 Mistakes to Avoid When Buying a NNN Property

Hi, my name is Alex Casablanca, Managing Broker at Casablanca Triple Net Advisors. Today I am going to talk to you about the Top 5 Mistakes to Avoid When Buying a NNN Property.

Buying a NNN Property will be one of the most important financial decisions that you will ever make as an investor. You must feel at peace with the property you chose before you buy, and years after buying it. Therefore it is very important that you choose wisely and avoid some common mistakes that could affect your investment in the future. Let’s get into the Top 5 most common Mistakes to Avoid When Buying a NNN Properties. 

1- Not Having a Buyer’s Broker to represent your interest, and dealing directly with the Seller’s Broker

The number one mistake that I see NNN Buyers making is not having a knowledgeable and experienced Buyer’s Broker that represents them. They usually call the Seller’s Broker directly to inquire about the property and proceeding with the transaction dealing with the Seller’s broker as their broker.

First and foremost, the Seller’s Broker represents the Best Interest of the Seller, not your best interest. The Seller’s Broker will not tell you the red flags and the possible hidden risks on the property they are selling, they represent the Seller, they don’t represent you. If you choose to deal with the Seller’s Broker directly you will be indirectly choosing them as your broker, a broker that does not represent your interest.

The best way to illustrate the importance of having an adequate Buyer’s representation is comparing it with the attorney that you choose to represent you. Would you choose the Seller’s attorney to represent you in the transaction? Even if the Seller’s attorney might offer to represent you for free, most likely you will refuse it and you will hire your own attorney that represents your interests exclusively.

In the same way, you need an experienced and knowledgeable Buyer’s Broker to represent your interests exclusively. Unlike the attorneys that you have to pay them no matter what, a Buyer’s Broker gets paid from the Seller, so you will be getting expert advice at no additional cost to you.  

With the proliferation of online listing platforms it is completely normal that you would want to do some research on your own. If you team up with a knowledgeable and experienced Buyer’s Broker he or she can also help you doing all the inquiries and all the work on behalf of you. 

My Best Advice to You is to make sure that you start the process of Buying a NNN Property by having appropriate Buyer’s Representation, in the same way that you will hire your own attorney to represent you.

2- Focusing only in High Cap Rates Properties ignoring the risks involved

The cap rate is the first focus of attention for every investor, we all want to buy a property at the highest cap rate possible and that’s understandable and perfectly normal. However, it is important to highlight a very basic concept of investment that is: “the higher the yield, the higher the risk; and the lower the yield the lower the risk”. This simple concept applies not only to NNN properties but to any type of investment, whether it’s Real Estate, Bonds, Mutual Funds, among others. 

Every property that it’s being offered at an above average cap rate will come with a higher level risk, whether it is just a few years remaining on the lease, or a substandard location or a weak franchisee, among many others. There is no such thing as a higher cap rate property with a very low risk. However, every investor has a very different risk tolerance profile. Some investors are looking for a more low risk passive income investment, while others are willing to take a higher risk in exchange for a higher cap rate.

As an example, NNN properties with strong investment grade tenants such McDonalds, Chipotle, Chick-Fil-A, Wawa, Walgreens, CVS, among others, will come at a lower cap rate than a property that it’s guaranteed by a small franchisee. 

At the same time, a Walgreens with 15 years remaining on the lease might be at 5% Cap Rate, while the same Walgreens with just 5 years remaining on the lease might be at 6%.  

It is very important for the investor to understand the relationship between risk to reward, and pursuing properties that go according to their risk profile and risk tolerance. 

3- Focusing on Properties that are located close to where you live 

We all like familiarity, we all feel more comfortable buying a property that is close to where we live, and that’s certainly a value added. However, the best property is not the one that is close to where you live, the best property is the one with the best location, the best tenant and the best real estate fundamentals. The property that is closer from where you live could be the worst investment, while a property that is located in another state in a top location might end up being a better investment.

If you can find a property with those characteristics close to where you live that’s great and would be the ideal scenario for you. However, more often than not the best property is not close to where you live, so it is important that you keep your possibilities as open as possible, so you can find the best property for you, no matter where it is located.

4- Submitting offers substantially below the asking price

We all want to buy a property at the lowest price possible and that’s understandable, but submitting offers substantially below asking price will not attract seller’s attention and it will probably be discarded as a low blow offer. But the question that you might have is what could be considered a substantially low offer. As a rule of thumb an offer should not be lower than 10% of the asking price, or no more than half percent above the asking cap rate. 

Generally there is always room for negotiation, however how much room it might be will depend on several factors, such as how many offers the Seller’s have received for the property. If there are other offers close to asking price, then in that situation if you want the property you would have to be closer to asking price to get your offer considered. On the contrary, if there are no other offers, the Seller might be willing to be more flexible in reducing the price.

The key concept is reasonability, if you are selling your own property and you receive an offer 20% under your asking price, chances are that you are not going to consider it either. 

As Your Buyer’s Broker, we are very diligent and assertive in negotiating offers on our Buyer’s behalf and getting inside information about how much room for negotiation is in order to get the best price for you. The Seller’s broker obviously will not tell you that. 

5- Buying or Pretending to Buy a NNN Property with a High Leverage Financing

A Triple Net Investment is passive income investment, in which the cap rate generally does not sustain a high leverage financing structure, and for that reason most NNN acquisitions are all cash. 

Nowadays with the recent increases in interest rates by the Federal Reserve most banks are charging 6% and above for a commercial loan. If you will be getting 5% or even 6% return on a NNN property, it will not be financially feasible to get a mortgage at 7%. Even structures with 50% Loan to Value will put you in a position in which most of your rental income will go towards paying the mortgage, leaving you with not enough net cash flow.

In the current high interest rate environment that we are in, I am not recommending my clients to buy a NNN Property with financing, unless it’s a very low Loan to Value that could make the transaction financially feasible. If you are looking for a truly low risk passive income investment the cap rate will be lower, therefore will not withstand leverage.

In Summary the Top 5 Mistakes to Avoid When Buying a NNN Property Are:

1. Not Having a Buyer’s Broker to represent their interest, and dealing directly with the Seller’s Broker
2. Focusing only on properties with high cap rates ignoring the risks involved
3. Focusing on properties that are close to where you live
4. Submitting offers substantially below asking price
5. Buying or Pretending to Buy a NNN Property with High Leverage Financing

Hiring an experienced and knowledgeable Buyer’s Broker that can assist and guide you will definitely help you to avoid those common mistakes. 

At Casablanca, we specialize in representing NNN Buyers and 1031 Exchange Investors Nationwide USA. We have the knowledge and expertise to guide you along the way from market research, identifying potential properties, submitting offers and negotiating them, due diligence, up to the closing table. We have helped many NNN Buyers and 1031 Exchange Investors in finding and negotiating the best property according to their investment goals and risk tolerance.

Moreover, we represent our Buyer’s for Free since we get paid from the Seller, and we also Pay for our Buyer’s Closing costs up to a maximum of $10k. This incentive will offset or cover completely the major Buyer’s closing costs expenses such as Title Fees, Attorney Fees, Recording Fees, among others. We are the Brokers that give you more in exchange for your trust. 

If you have any questions feel free to contact me directly at 407-205-7570 or you can also email me at [email protected]. Feel free to call me anytime at your convenience, I’m always available for my clients. Thank you very much for watching this video and I’m looking forward to speaking with you.