Triple net cap rates, or also referred to as NNN cap rates, are a leading factor when investors are considering which net lease opportunities they are hoping to pursue. Why is this? To best answer, let’s first make sure we understand what a cap rate actually is. The capitalization rate, or most commonly referred to cap rate, is the ratio of the net operating income, divided by the cost/value of the real estate asset. The actual calculation is as follows:
Cap Rate = Annual Net Operating Income (Rent) / Cost (Value of Asset)
So, for a simple example, if a property was listed for $1,000,000 and produced an NOI of $100,000, the resulting cap rate would be $100,000/$1,000,000, or 10%. As you would infer, the lower the cap rate, the higher the sales price and vice versa.
Why are cap rates important? It’s the expected rate of return on a project. It’s a snapshot of the value of a deal. It allows you to compare the relative cost of similar cash-flows in an area or market sector. Cap rates are often misused, and to be able to use it as a true factor in comparing deals, you must ensure NOI is being calculated the same for each transaction, as well as the value (full acquisition cost or current market value). And to take that one step further, you must be looking at cap rates in the same market, as they vary not only as you move across the country, but even within net lease market sectors.
NNN cap rates get misrepresented on a regular basis and it’s important you are able to understand that. Working with an experienced brokerage firm like Avison Young and their talented net lease group, can put your mind at ease as you explore different net lease investment opportunities. Our expert brokers are experienced in identifying opportunities, and excel in setting up guidelines for comparison – taking into account your proforma, enabling you to determine value based upon your criteria. Working with our net lease brokers brokers can look for inflated rents (versus actual vacancies), inclusions/exclusions in calculating NOI, and in general, ensuring you are comparing apples to apples.
So again, although NNN cap rates are a driving force in determining value for net lease investments, they should be used to compare like-kind properties in comparable condition, location and market sector. When you are looking for safe investments, NNN assets are considered one of the safest, almost like real estate wrapped in a bond.
Make sure to reach out to one of us here at Avison Young’s net lease group to help you identify the best net lease opportunities out there, and we’d do all the homework for you in determining which assets will help you best achieve your goals and build your net worth.