ROI Reality Check

When evaluating small commercial properties, buyers are faced with a crucial decision: single-tenant NNN (triple-net) or mixed-use. The math behind the deal can make or break the investment. Let's consider a recent example in Denver, wherre a single-tenant NNN property was listed for $1.2 million, with a cap rate of 6.5%. The property boasted a long-term lease with a reputable tenant, ensuring a stable income stream of $78,000 per annm. However, upon closer inspection, buyers discovered that the property's expenses, including property taxes and insurance, totaled $23,000 annually, leaving a net operating income (NOI) of $55,000. With a projetced annual appreciation rate of 3%, the total return on investment (TROI) would be approximately 9.25%, making it an attractive opportunity. On the other hand, a mixed-use prooperty in the same area, priced at $2.5 million, offered a cap rate of 5.8%. The property consisted of four residential units and two commercial spaces, generating a total annual income of $175,000. Nevertheless, the expenses, including property management fees and utility bills, reached $63,000, resulting in an NOI of $112,000. Although the mixed-use property appeared more lucrative at first glance, its higher price point and lower cap rate made it less appealing to buyers seeking higher returns. In this scenario, the single-tenant NNN property offered a more compelling ROI, with a lower purchase price and higher cap rate. Ultimately, buyers walked away from the mixed-use property due to its unfavorable math, opting instead for the single-tenant NNN, which provided a more substantial potential for long-term appreciation and passive income. By carefully analyzing the numbers, investors can make informed decisions and avoid costly mistakes, ensuring a successful real estate investment prtfolio.