Recently I was asked by a New York City property owner why so many of our clients sell their New York apartment buildings and buy triple net (NNN) properties? While I encounter individuals who would never make this transition, for those that do, there are consistent patterns in their thinking. They want the same things: less complexity, more free time, and increased cash flow.
What we are really looking at here is something called the “return on equity” (ROE). Simply defined, your return on equity can be found by dividing your net cash flow – (net of all expenses and mortgage payments) – by your current equity in the property. For example: (note All examples for this article assume no mortgages.)
What is your return on equity? For many long-term owners, their first answer to this question is “infinite!” They recount the price they paid for the building, compared to what it is worth today is so low, that the building has paid for itself several times owner over. Yes the building may have appreciated, which is terrific, however if the cash flow has not kept up with the appreciation, its worth taking a look at the numbers.
When we look at the return on equity based on today’s (increased) value, sometimes the return is much less. Let’s assume the above property’s value has increased to 10 million, but the cash flow has not. In that case, the current return on equity is no longer 10%, but only 1%.
So, who would hold onto an investment that was only making them 1%? Not many, and that is why investors are looking for future alternatives. Again, the three common objectives are:
1. Less complexity (The regulations and operations of NYC properties have become more complicated.)
2. Increased free time (less day-to-day management)
3. Increased cash flow.
Using the property above, what would the numbers look like if the owner sold and bought a NNN property producing a 5% return?
Over the past 15 years, we have developed a proprietary process, called the equity transformer to assist owners with this transition. It instructs, educates, and lays out the steps to make the transition from management intensive, multi family real estate, to Management free, triple net (NNN) assets. For some it is an elegant solution providing the increased freedom and cash flow they desire.
I wish you the best of luck on all your investment choices. For any further questions, I can be reached at 212-430-5114.
Peter Von Der Ahe