Saturday, December 4, 2010

NNN Creativity

A simple math lesson in the beginning, but bear with me. Though the numbers in the next paragraph are small, they get more substantial later as the real-life story is laid out.

Okay, to start . . . Did you know that if you put $10,000 down on a $50,000 property the lender will happily lend $40,000 on it. At that moment in time, the lender has four times more money at risk than you do, and you will get a monthly income for the next 27.5 years. Any increase in value over the years and the monthly cash flow is yours. The lender does not participate in the benefits of ownership, yet then have four times more invested than you and the tenants give YOU the money to pay off your loan.

Now, with that said . . . if you buy gold as an investment, can you fill your gas tank with it? How does it throw off money each month to you? Specifically, how do you get to USE your investment while it is invested?

If you choose not to invest at all, whether in commercial/investment real estate or the stock market, you receive a whopping 1.25 percent in some savings account at a local bank.

So what? Well, here is why the lead-in is important. This past week I evaluated a NNN property in northeast Ohio. A fast food restaurant with drive-through in a decent area of town, this was a true Triple-Net opportunity. The tenant, a national company, as in any NNN lease pays everything -- property taxes, insurance, upgrades, exterior upkeep, building maintenance, rehabs, renovation, etc. etc. It is a pure "mailbox-money" opportunity.

I figured the acquisition of a single property (one is listed, a second similar property they would consider selling) putting 20 percent down, financing the balance for 20 years at 6 percent interest. Figuring the principal pay down, this property will throw off a 19.3 percent annual return from a buyer's initial $100,000 out-of-pocket investment. With the bank carrying the balance, it has rent bumps built in every five years for the next 15 years.

With the cash it throws off annually, after a couple short years there will be enough cash built up to use as down payment on another commercial/investment property.

This property I have discussed will likely go into contract this weekend. I ran it by two of my buyers and both passed for different reasons. One had a question on the scheduled rent hikes, a second has made two other large acquisitions in the past 90 days and needs to get those under his belt before taking on more. A third buyer is evaluating the package I put together right now and will let me know within an hour or two. But each buyer agreed that this opportunity is a no brainer.

Let me share how one of the packages I put together was structured. There is a second NNN property in the same vicinity. Same ownership and same tenant. The package I created included both properties, totalling around $1.2 million. The seller wants to close prior to December 31 (thats 17 days away boys and girls). So that makes this an all cash deal since there isn't enough time to close a commercial loan from a bank. The buyer would put down around $400,000, then obtain a 30-60 day hard money loan from a private lender via a third party investment intermediary with whom I have worked in the past. The short term loan gives the buyers an opportunity to get conventional financing but not lose the deal due to the time constraints of the seller.

The point is that anything is possible. This was one of those opportunities that comes along from time to time and you need to act quickly. But if it is not to your comfort level, that is okay too. Still, with risk comes reward (Wendy's Dave Thomas told me that when I interviewed him for a newspaper story back in the 1980s).

As I have noted in previous blog posts this year, the keys to getting deals done in this business climate is to be creative. And you have to be able to make a fast (but smart) decision. The straight purchase -- without some hair on it -- is a rare bird these days. I intend to write more about unusual purchase opportunities in the weeks and months to come. Lots on my mine as we head into the holidays and things slow just a little. It is giving me a chance to think some more on items about which I plan to write in early 2011.

Enjoy your weekend!

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