Investors should determine their intended hold period prior to pursuing and purchasing a net lease asset. Investment hold periods should be determined by looking at an investor’s required liquidity and potential life events, the residual property value at different hold timelines, and market trends and projections.
Net lease investors must consider whether they expect to need a substantial amount of cash in the near future prior to the purchase of a commercial real estate property. If the property is a strong investment, an investor should purchase the property with lower leverage when expecting to have short term cash requirements. Using debt to pay for 35-45% of the property value will help ensure the ability to refinance and obtain the required cash. An investor should never “bet the ranch” on any investment.
Residual Property Value
The residual property value is the value of an asset at the end of an investment period. This could be 6 months, 5 years, 15 years, the end of the current lease, or 150 years from now. Your net lease property will have different residual values depending on the lease term remaining, credit of the tenant in place at the time of your exit, and the market conditions.
Net lease properties with strong tenants in place have exponentially more value when sold with 10+ years remaining on the lease. Investors who allow the lease term to drop below 10 years should pay close attention to current market rents and rent growth in the market over the previous decade to ensure that their property maintains its residual value.
Market Trends and Projections
The only variable fully in control of a net lease property owner is the purchase price of the asset. Markets are difficult to predict and investors should avoid trying to time the purchase and sale of a property with fluctuations in the market. Investors may decide to sell the property at any point in time, but preparing to hold the property for generations will allow the owner to handle any issues which arise.