How do I identify what type of property / Location is good for me?

Hello Gurus,
I live in Bay Area, CA. I am thinking of buying commercial property and following the loopnet listings for a while. I want properties with least management/time from my side. I am thinking NNN may be better for me as I do not have much time to manage the same.
Main questions I have are
1. Type of Property : What properties are good for new investor like me? I looked at Single Tenant listings/ Fast food restaurant listings and Medical Office which typically offer NNN.
2. Location : What are considerations I do for deciding whether i should look at property close to my home/state or all over US?
3. Cap Rate: What kind of CAP rates I shall expect in this market?
Anything else I should consider before narrowing down the property type and location?
Appreciate your comments.
In Buying Property - Asked by Srini P. - Jul 10, 2010
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Answer(s)

Rob B.
Chandler, AZ

Sirina....
I noted that you had not yet received an answer to a fair multi-layered question. My first thought was to pass it by because to do justice to an answer it would take considerable time. My second thought was that this was probably why others had passed it by. This is not as it should be for you. Therefore, I will take a bit of time and give you my response to your question.
1. It does sound like a NNN property would be good for you. To be prudent a NNN that has safety as well is likely only gong to return a 6 to 7% cap rate for you in California. Most closer to 6.5%. Fast food is good on the lower range and sit-down full-service menu on the higher range of prices. In my judgement, you should try to purchase a corporate guaranteed, national credit-tenant deal. Most often these are for land-leases rather than for building and land. If you accept a land-lease you will miss the tax benefit that comes from depreciation.
I would disagree with your thought that a medical office will be NNN and management free. I suspect in most purchases of medical you will have some work to do with your physician/s? tenants, even though it is advertised as NNN. (Drs. neither understand NNN or like leasing this type of property.)
2, You are likely to find a larger selection and a higher cap-rate with NNN properties out of California. Again in my judgement, following the qualifications set in #1, I don't believe out of state is bad. In fact it may even give you an opportunity to include a bit of vacation each year along with visiting your property.
3. The cap-rates in state 6-7%. Out of state 7-8%
I hope this helps a bit. Good hunting on your search.
Rob Baird (CA RE License #544165 - One of the oldest active liceneses in CA)
951 515-5855

Jul 13, 2010
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sudersan j.
Broker/Agent
Houston, TX

Hello srini,

I try to be brief.
1. NNN properties. Corporate guaranteed, national or regional tenant with good rating.
2. All over US is fine. Lets say you select Houston. Even in Houston, you want to be in certain areas. A decent asset will give you a good exit strategy.
3. Good CAP rate is a draw for risk takers not good investors. You must be realistic about the return on investment, market conditions etc.
I hope this helps. All the best.
Sudersan
832-877-6564

Jul 13, 2010
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WC Equity G.
Owner/Investor
Tampa, FL

Srini,
Congrats on making the decision to invest. Here are some recommendations:
1. Type of Property : What properties are good for new investor like me? I looked at Single Tenant listings/ Fast food restaurant listings and Medical Office which typically offer NNN. Single family, income producing properties are a good starting point. You can acquire assets such as these at low costs with high NOI.
2. Location : What are considerations I do for deciding whether i should look at property close to my home/state or all over US? Consider Tampa, FL; Las Vegas, NV; or Southern California -- these markets have fallen drastically.
3. Cap Rate: What kind of CAP rates I shall expect in this market?
Anything else I should consider before narrowing down the property type and location? Expect cap rates of 6-10%m anything above 12% is considered excellent -- my investment firm specializes in providing real estate opportunities with cap rates as high as 30%.

Jul 14, 2010
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Srini P.
Owner/Investor
Cupertino, CA

Thank you all for you inputs/responses.

Jul 14, 2010
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David C.
Los Angeles, CA

Thank you for your question about what type of commercial property and location may be a good investment for you. I understand that you want to own/manage a property that is 'low maintenance' for you, meaning that you want the tenant to do the upkeep and want the property to compare favorably to other properties in the area based on balance sheet ratios.
There are many options for investment depending on how much you can afford and what you are looking for in terms of return. For example, a coin operated car wash could be a great investment for stable income, while a single tenant property with a long term lease could present a good opportunity for capital appreciation in the right location.

Jul 16, 2010
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NATHAN B.
Broker/Agent
Ontario, CA

Please take a look at the links below, also prior to investing you may want to:
1) Review - Perhaps the first thing to consider is your overall financial plan. Consult with your CPA or Financial Planner and see how real estate would fit into your overall financial plan and tax planning and record keeping considerations involved.
2) Find an expert - Get one or two good commercial broker(s) that specializes in investment real estate, one that you can work with and feel comfortable with. Add him or her to your team of trusted advisors. A doctor once told me the biggest fool is the doctor who is his own patient. A good and very short book to read is the "Richest Man in Babylon" about using experts.
3) Plan - after you determine what your long term goal is and how real estate will help you from a tax and income standpoint, plan out what the ideal type of investment would look like to you and what your strategy will be. A great quote to remember is "Every Battle is Won Before it's Fought" Sun Tzu "the Art of War". Planning is key in purchasing investment Real Estate, too many people rush into it without looking at all the aspects, remember while most brokers are good some are just "pitching" their listings or just looking for commissions.
4) Research - every Commercial Investment has its advantages and disadvantages, it's up to you to ultimately decide your tolerance for the various risks associated with commercial real estate and headaches associated with being a landlord. Sometimes the most management intensive investments yield the highest returns. Research and talk to professionals and other investors who are investing in the types of properties you have the most interest in. Look at every aspect of an investment from all angles, read a few books regarding real estate analysis and ensure you verify all facts yourself. Stated CAP rates should not be trusted and should be examined carefully (see ariticle link attached).
5) Become a student - I would also recommend a property type you understand and feel the most comfortable with, you will probably become well versed in all the aspects of that type of property and you may become an expert and then you can put together partnerships etc. and leverage your knowledge. I have seen many investors do that.
Disclaimer: These are only general guidelines and my opinion only, much more information is needed to make good investment decisions, real estate involves risk and you should consult with your legal and tax advisors prior to making any purchase.
Thank you,
Nathan
(My profile accompanies my reply)

Jul 20, 2010
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Srini P.
Owner/Investor
Cupertino, CA

Thank you Nathan for the detailed response and for the article on the NNN leases.

Jul 21, 2010
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Venkat R.
Broker/Agent
Los Altos, CA

1. Single tenant NNN properties seem like the way to go, but you need to be careful. Quality of tenant (corp guarantee or franchisee), length of lease, sales at that location, etc. because if the location goes dark, your property value plummets. Multi-tenant has slightly lower risk but more management
2. Location of property depends on the amount of management involved and the returns you are willing to accept. I live in the bay area and if you really want a decent property here, it is hard to find something over 5% with reasonably low risk.
3. CAP Rate - This depends on the location and type of property - Bay area cap rates are very low, but if you go elsewhere, you should look at demographics and see whether the population is increasing or decreasing. Walgreens cap rates are around 7%, and Dollar General's are around 9%, and you can see that most Dollar General's are in small towns with not much room for appreciation.
Each property has to be analyzed on it's merits in terms of location, cap rate, appreciation, renewal increases and so on. If you want more help email me at vramasamy@gmail.com

Sep 23, 2010
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