There are a number of specific questions that an investor should ask when analyzing net leased properties for purchase. We have narrowed the focus to five key items, which will be addressed in the following two-part blog.
What is the future rental upside potential?
Begin your decision making process with rent analysis. It’s easy to fall in love with the current tenant or location as you search for a property. Thorough rent analysis provides clarity and helps you determine the potential of the property as a site for future tenants should the current tenant ever vacate. Identifying an asset with replaceable rental income is invaluable.
A property that currently generates high rent is very attractive to your bottom line, but proceed with extreme caution if that rental rate is not replaceable. For example, you may find a property that generates $100,000 in rent annually. However your rent analysis may reveal that if the current tenant leaves, the surrounding market will only support $50,000 in rent each year.
Many savvy investors specifically target triple net leased properties with a tenant paying below market rent. In the right market and location, the lower rent property creates tremendous future opportunities for an increased return on investment.
How much emphasis should I place on the credit worthiness of the tenant?
A location with a tenant that has investment grade credit is a good place to begin, but you will need to look beyond credit alone when analyzing a single tenant net leased (STNL) property. You may identify a location with a well known, highly rated retailer with solid lease term remaining, but always dig deeper.
The location may be in a less desirable market without much value other than the recognizable name. Oftentimes the actual structure is nothing more than a rectangular metal box. If the tenant were to ever leave, you could be stuck with an un-leasable asset in a tertiary market. Consider whether other tenants would be interested in the property based on the structure, location, and the surrounding businesses.
Owning a NNN leased property with a highly rated tenant is excellent, but the real estate is more important than the tenant. The last few years have shown that no business is invincible and seemingly strong companies can struggle and even disappear. Buying an asset in a small, tertiary market with a highly rated tenant on a long term lease may seem attractive, but always consider the worst case scenario. Ask “What could I do with this property if it was vacant?”
How well do I know the market?
Having a thorough knowledge of the specific market being targeted is a key success factor. That’s why it is always preferable for investors to focus on familiar markets rather than taking the risk of an unknown. Invest in an area you know and are comfortable with.
Your market analysis should include demographic data, traffic counts, projected population growth, and any other factors that will indicate growth or potential challenges.
When examining an asset in a market that you are familiar with, you are more likely to uncover opportunities that are primed for an increase in value that other less knowledgeable buyers may overlook. Revitalized areas in the early stages of demographic shifts and recovery will only be known by investors that have a pulse on the market.
In terms of market analysis, it is always better to have too much information. Gather details from local business organizations and professionals as well as media, including the local business journal and other reputable publications, to help make your decision.
Contact HighStreet Net Lease Group, the Experts in Net Leased Properties
For expert assistance with your market analysis and property brokerage, contact HighStreet Net Lease Group. Based in Houston, Texas, we provide highly specialized net lease investment property services across the country.