How are Cap Rates Determined for
NNN Properties?
Some of the major considerations when
calculating Cap Rates for NNN Properties are:
- The credit worthiness of the
tenant.
- The length of the lease,
typically 10 to 25 years.
- The type of lease, triple net
(NNN) or double net (NN). See below for definition.
- Type and frequency of bumps or
increases if any in rent.
- Cost of financing
- Strength of the demographics of
the property location
- Nature of the improvements. Are
the improvements easily converted for another tenant or are they special
purpose that would require significant expense and time to convert before
re tenanting?
- Age and condition of the
improvements
The more positive the above factors for NNN
Properties, the lower the Cap Rate or the higher the value of the property
related to its income stream. Conversely if the above factors for NNN
Properties are weak the Cap Rate will be higher and the resulting value will be
lower reflecting the greater risk of the investment.
It is important to remember that markets are
not perfect and low Cap Rate NNN Properties are not necessary a lower risk
investment, they could simply be a bad investment that is over priced. Astute
investors seek NNN Properties that are mispriced in their favor, namely a
higher Cap Rate for a property that has lower risk factors.
J. Michael Sigrist
Compass Investment Properties, Inc.
861 W. Morse Blvd. #250
Winter Park, Fl. 32789
Office 407-647-5111
Fax 407-629-9220
Cell 407-953-2605
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