Investigating the Benefits of a Zero Cash Flow Property Investment

Putting capital resources into real estate can be exceptionally rewarding for people searching for long haul, generally safe venture choices. In contrast to real estate, however, putting resources into commercial real estate (CRE) can seem mind-boggling at times. It requires a decent comprehension of the business and its administering laws and best practices so as to boost the advantages that such a venture could bring. One triple net lease venture that is complex to new investors is the “zero cash flow” model. 

What Is a Zero Cash Flow Property?

Before going further discussing zero cash flow real estate, let’s understand the type of investments that would fall under this classification. Zero cash flow properties usually have established tenants with a credit rating of at least BBB. In addition, the term of the lease should be at least 20 years long. Because of the tenant’s credibility, lenders typically finance as much as 90% of the LTV. This results in the entire net operating income needed to cover the loan payments owed to the lender, rendering the property as a “zero cash flow”. This well-leveraged asset usually has in-place, assumable, fixed-rate, long-term financing (typically 15-25 year lease terms) backed by an absolute net lease guaranteed by an investment-grade credit. The high leverage nature is such that all NOI goes directly to servicing the debt service. These well-named “zeros” are commercial properties that produce no cash flow to the owner.

Why invest in a Zero Cash Flow Investment?

  • No management – like triple net leases (NNN or NNN property), zero cash flow properties allow individuals to invest in real estate without having to provide property management services. The occupant is responsible for the management and cost of any maintenance and repair needed.
  • High credit tenants – since zero cash flow transactions have tenants with a good credit rating, bankruptcy or other conditions that may cause you to lose a tenant are quite low. Walmart, Acme, CVS, Walgreen, and Aldi are examples of very desirable tenants in zero cash flow deals. Keep in mind these high credit tenants also have long lease terms. 
  • Less down payment – zero cash flow properties can be purchased for as little as 10% down, with the balance being financed by a lender. This is a low-cost way to own low-risk real estate with with long term ROI potential. 
  • Long lease terms create passive income – with zero cash flow real estate, the lease generally outlives the loan. After the loan is repaid, there is monthly cash flow coming in to the owner for at the very least, the length of the remaining lease term. 
  • 1031 exchanges – zero cash flow investment properties can be utilized with 1031 exchanges. Tax code section 1031 allows investors to defer taxation on capital gains and depreciation recapture from the sale of investment real estate by reinvesting in a “replacement” or “like-kind” property. Additionally, the loan for the replacement property can be structured to match the exact equity and debt requirements of the exchange. 
  • Tax benefits – owning zero cash flow real estate has many tax benefits. Investment properties decrease in value over time due to everyday use, and this depreciation, along with interest expense can be claimed as taxable losses. In a larger real estate investment portfolio, this is helpful in offsetting taxable income generated by other properties. Keep in mind that zero cash flow real estate can generate “phantom income.” This happens when the taxes owed on the principal reduction of the loan become higher than the depreciation and interest cost write-off.

If you have any questions regarding the real estate investing industry, the team at First National Realty Partners is just a phone call away. We’re here to answer your questions and provide guidance about your investment opportunities. If you would like to know more about the benefits of private equity commercial real estate investing, please don’t hesitate to reach out. Our team is built with the best industry leaders, utilizing proven strategies that create great investment opportunities for you. Contact us any time when you are ready to learn more about the possibilities of investing in commercial real estate.

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