Overview of TICs vs. NNNs vs. Buying Your Own Properties
I am always asked by our 1031 exchange clients what the difference is between buying their own real estate versus buying a tenant-in-common investment property also referred to as TICs versus buying a triple net lease investment property also known as NNN investments.
It dawned on me that a concise overview of the differences would be a great post for our blog, so here is a brief overview for the novice investor to help them understand the basic differences between the various investment options that are available for them, including:
- Buying and Managing Your Own Property
- Investing in a Tenant-In-Common Property
- Investing in a Triple Net Lease Property
Managing Your Own Property
The most common option for most investors is to buy and hold their own property. You work with a real estate agent or broker that specializes in the area and type of property that you are interested in and acquire your own property. You must do your own due diligence and make your own decisions regarding the purchase, so make sure that you have done your homework before you buy. A good real estate agent that has a lot of experience with investment real estate can go a long way.
The novice real estate investor should probably start with smaller rental property such as a single family residence (SFR) or dupex, triplex, or fourplex, until they have more experience with investment real estate. Four units or less is not considered commercial investment property and borrowing is much easier.
You have complete responsibility for the property management, including, collecting the rents, paying the bills, etc. There is no minimum investment; it just depends on what you decide to buy.
Tenant-In-Common Investments (TICs)
Tenant-in-common investment properties or TICs tend to be much larger commercial properties. They can consist of an office building, industrial building, retail property such as a mall, large apartment complexes, student housing project, hotel such as a Courtyard by Marriott, and so forth.
Generally the commercial property is valued well over $10 million, which is why you buy into a fractional interest. It gives those of us that can not afford the $10 million plus price tag individually a way to invest in large commercial properties by buying in with other investors.
The property management is all arranged in advance through a commercial property manager, so you do not have any property management responsibilities. You merely collect your monthly cash flow.
The minimum investment amount can range from $25,000.00 to over $1,000,000.00. The average minimum is $200,000 to $400,000 for most TIC investments. The cash-on-cash return is based on the amount of equity that you invest in the TIC, so if you invest $500,000 into TICs the 6% to 8% returns, which are after expenses and debt service, would be calculated on the $500,000.00 and not the gross amount or puchase price.
TIC investments also provide you with a great way to diversify your investment portfolio. You can place $500,000 into two (2) different TICs instead of just one property. You can diversify by asset class (type of commercial real estate) and by location. It allows you to spread your risk around better than if you invested in your own properties.
Triple Net Lease Properties (NNNs)
These are also large commercial properties, but they are not sold on a fractional interest basis. One investor generally buys the entire investment property and then leases the property on a triple net lease basis to a single tenant like Walgreens, CVS Pharmacy, fast food franchise, Starbucks, and the like.
The property is managed by the tenant since it is a triple net lease property. You have no property management worries. You merely collect your net rent check each month.
The minimum investment amounts are much higher for NNNs since there is only one investor/owner. The cash-on-cash return is generally a little less than TICs because these are also a little safe (less risk) than TICs.
You can certainly sell multiple properties and 1031 exchange into one NNN property, and because you own 100% of the triple net lease property you have complete control over the decisions to buy, sell, refinance and leasing.
Risks
You must remember that all of the above investments are real estate investments and will bear all of the inherent risks associated with real estate ownership, including drop in value, maintenance, deferred maintenance, capital improvements, cash calls if cash flow drops significantly, ability or inability to refinance depending on the capital, credit and real estate markets, etc.
Read Overview of Tenant In Common Investment Properties Interests, including links to other articles, for more complete information regarding the risks involved with TIC investments.
Always assemble your real estate team before proceeding. The one largest mistake that beginners always seem to make is not spend money on advisors when they should. Advisors can keep you out of trouble and is money well spent.
Monday, December 8, 2008 at 06:36AM