I am a huge proponent of investing in Double Net and Triple leased properties as a method to invest anywhere in the US. This allows for diversification of asset classes while also providing income diversification.

But just because I am a big fan doesn't mean you should actually be hoping into this niche at this point. I had posted about this during the f pre COVID era when interest rates were at 4-5% and property Cap Rates were still at 6-8%. This allowed an investor to ride that spread which resulted in cash flow.

As more and more money was printed, those Cap Rates got more and more compressed. Where I saw some limited opportunities 18 months ago in the NN world using problem solving to create some commercial flips - I am not even seeing these deals much.

Today a standard triple net lease property has a Cap Rate of about 5-6% (unless you are talking a grade A tenant then they can be as low as 3.7%), and the cost of money is about 7.25%. Where before you were making money on the spread, today you can be losing money on that spread.

Why is this occurring? Much of the cost of money is tied to 5- and 10-year treasury rates. When the US government wasn't spending so incredibly as much as it brings in, the investment spread in T-Bills was only 1-1.5%. Now that spread that investors in T Bills are looking for is 2.25-2.5%. This has kept mortgage rates high too.

I am not sure how you change what the norm is in these spreads. So I can't tell you about the future of mortgage rates or commercial loans. I can only tell you that if planning on checking out that totally passive investment opportunity in NN or NNN lease format, I would rethink that again.

There are still opportunities out there in the commercial world, but I am finding you have to convince these sellers to carry some paper. This can occur but it is easier in the sectors that are getting beat up the most. Around here it is the restaurant sector, but in your home-town it might be different. A small two-person retail operation is who I am haggling with this week. I also have a sheriff sale I am attending next week. Getting to sellers before they list is critical.

Opportunity does exist in your hometown, every day. You have to decide to go find it. How are you reaching to folks?

I had the opportunity to buy a small commercial building. It included a nasty residential unit on the other side of the parking lot.

The owner really wanted me to take the place, it was not in the greatest of shape, but the price was interesting to me.

I backed out even though I knew the current tenant of the commercial side personally. About eight months later that tenant changed companies and moved out. The place sat empty for nearly a year.

Drove by it yesterday and saw that a local real estate company is in there now.

Most likely I should have moved forward on the deal, maybe even getting the owner to hold paper on it.

But the truth is I didn't know as much about all these options as I do now. Given the chance, I would have taken it with that knowledge.

Hi Ray,

As a fellow commercial LL with some NN and hoping to "graduate" to some NNN leases, I second the advice for looking into commercial.

The way to do it today isn't based on CAP Rates and interest spreads. One has to find value where it has been overlooked in the past. Most Mom and Pop residential LLs do not know how to do this, because they've either never been taught or have forgotten the principle of "highest and best use" of real estate. Not surprising since most residential real estate has only one use: a house for someone to live in. That's the start and end of your creativity. At best, maybe you add an AUD or turn an old bungalow from a SFH to a duplex, but this is costly, has problems with zoning, neighbors, and then you're into mutli-fam units, which in my experience bring more hassles than SFH. So... they're the exact opposite of the "mail box money" we seek with commercial rentals.

I haven't bought anything commercial yet this year because I bought a LOT in 2023. Doubled the commercial portfolio from 14 to 29 units. That's been fun getting all online and rocking, and it's moving along nicely now. I cannot over emphasize how much LESS WORK it is to manage 29 commercial units compared to my remaining 25 residential units. It's worth it if you can get the cash flow to make sense.

One of the best things I did was to buy a building with a lot of vacant land with high way commercial zoning, which allows almost any use except heavy industrial manufacturing. The owner just didn't use it for anything at all, other than parking spare junk cars. Those went away when we purchased it, and I'm now generating over $1400 in additional rents just by leasing it out to businesses to store equipment. Cost me $0.00 to do that, and because the owner didn't have any vision for such a simple change, she didn't price it with that income in mind.

And as you know, when you increase the net operating income of commercial property, you also boost the CAP RATE, which in turn boosts the value of the property. My "free" increased rents bumped the value of that place up $65,000.

How many LLs here would enjoy getting $1400 of rent each month and $65,000 of instant value add that costs $0.00 and almost no effort to achieve, other than creating a lease for dirt? Too easy!

Cha-ching #1!

Splitting commercial spaces is next on the list. There's a lot of people out there who just need a room with a desk and a chair where they can work. I have such a place right now with 9 retail units, but one of them is ALREADY subdivided into five separate offices with locking doors, a common bathroom area and waiting area. That unit is presently rented for $950 to an existing tenant from when I purchased, but once that lease is up, I rent the offices to individuals who have relatively "quiet" businesses and charge $400 per month per unit. There's nothing available in that price range anywhere else in town, so I WILL get it. Utilities on my controlled t-stat will be minimal based on past experience: $200 a month, maybe? $2000 rent less $200 = $1800. Common area cleaning at $250/month... I'm at $1550 for a place that used to rent for $950. All I do is add locking doorknobs and contract a cleaner to pop in once a week for an hour.

Cha-ching #2!

And we haven't even mentioned the decreased hassle of screening and managing, plus the fact that most silly Govt regs that apply to Residential do NOT apply to Commercial. It's not a house, and so many LL/T "fairness" laws only apply to houses.

Bottom lines: Try commercial. You might get addicted to it like I am. Don't think I'll ever buy another residential rental to hold. Flips only.

Sid, Is the 9 retail units (I assume under one roof) 9 out of the 29 units you mention?

I am trying to get a clear picture of your descriptions and what these buildings look like. Maybe strip mall?

If you subdivide the units into separate offices, do they (the offices) then get considered as units themselves?

Do you not have to screen your commercial tenants?

1,000 sq/ft home will rent for say $1,000 around here.......but 1,000 sq/ft of commercial space brings much much more than just $1,000 in a month.

I started to get commercial in 2017. Here some of the speed bumps I have ran into:

-commercial real estate, need a good agent. It's like a club. If you are part of it, deals happen with a text or email. Not part of it, looong vacancy.

-maintenance: different than sfh. Metal roofs, asphalt parking lots, fire sprinkler systems, firewalls... Different set of knowledge. Cost more...

-location, this is even more important....

With that said, I'm selling all of my sfh and older multi family and going commercial. Prefer warehouse space. But retail strip mall are good too. Office, still a little rough. People can knock on DG, but rent is always there. I have one that NN and just got one NNN. I know the % like Ray says isn't working well, but when you 1031 and no loans or very small; it's worth the investment.

Still Learning... I rent most of my NN units within days of them coming vacant.

6 x 6... yes, the 9 units are in an "L" shaped strip Mall. The unit that I would subdivide has a central open space that you walk into from outside, kind of like a lobby, and then there are little hallways with private offices off of that main area. There are already locking door knobs there. I forgot they were already there. So yes, I'd just screen my tenants as normal and each tenant gets their own office, plus a central area for people to wait. I'd have to make sure that the different types of businesses didn't interfere with each other.... no dog groomers next to a counseling therapist, for example. Think of all the CPAs, bookkeepers, consultants, counselors, virtual assistants, etc who would like to have a small space outside the home to meet clients, but don't want to shell out $1000 a month. $400 works for those folks.