Triple Net Lease (NNN)
If you’re a real estate investor, you may have heard the term “NNN investments” or “triple net lease.” Although these investments may seem foreign, they’re strong options for the right investor.
These investments come with plenty of advantages. They offer reliable income from reliable tenants, maintain value through various economic cycles, and give you the opportunity to take a hands-off approach to your real estate investment.
On the other hand, there are also some drawbacks to consider before you buy NNN properties. Read on to learn more about what these investments are and the pros and cons of taking advantage of them.
What Is a Triple Net Lease Investment?
A triple net lease is a unique type of lease that takes much of the burden of real estate investing off of your shoulders. All leases outline tenant and owner responsibilities. For example, in most cases, you’re responsible for things like maintenance, insurance, and other costs associated with keeping your real estate in good working order. A triple net lease puts the vast majority (or all) of the responsibility on the tenant. Tenants pay their base rent on top of covering costs like:
- General Maintenance: The tenant pays for things like pressure washing, landscaping, and other general maintenance tasks.
- Insurance: The tenant is responsible for purchasing insurance for the real estate against financial loss due to damages.
- Property Tax: The tenant is typically responsible for paying all property taxes associated with the property. This can be a significant expense, primarily if the property is located in a high-tax area.
- Operating Expenses: The tenant is also responsible for any expense associated with operating the property. This may include parking lot cleanings, utilities, and other services necessary to keep the property in good working order.
With these unique stipulations, NNN investments offer the most hands-off option for investors. Moreover, the tenants of NNN properties are typically publicly traded companies with long-term leases. That means they provide stable income from tenants that are highly likely to pay their bills on time.
Are NNN Investments Smart?
NNN investments are a smart option for the right investor, especially if you’re interested in taking a passive approach with your real estate investments. That’s because, while NNN investments are the most hands-off commercial real estate investments, they’re also known to be the most stable and secure.
On the other hand, when you invest in a triple net lease, it’s important to pay close attention to the tenant and the term left on the lease. Look for tenants like Walgreens, Dollar General, and other publicly traded companies that are likely to pay their rent on time for the entire duration of the lease.
It’s also wise to consider the current lease. The length of the lease will often have a major effect on the rate of return to investors.
Keep in mind that if your tenant doesn’t renew the lease, the cost to find a new NNN tenant can be significant. That being said, most tenants must inform owners 6 months prior to the end of the current lease term if they do not plan to renew the lease. Most leases renew in 5-year increments.
NNN Investment Pros & Cons
No matter what type of investment you’re considering making, there are always pros and cons to consider. Find the pros and cons of NNN investments below.
Some of the biggest benefits of triple net property investments include:
- Passive Nature: Tenants of NNN properties are responsible for the maintenance of the property. They also source and pay for insurance and handle all operations of the property. As such, these are the most hands-off CRE investment you can make.
- Stability: Most companies that are interested in triple net leases are publicly traded companies with a significant level of stability. As such, these tenants are highly likely to pay their bills on time, offering you stable cash flow. Additionally, most leases will have a ‘corporate guarantee’ - meaning that the tenant is obligated to pay the rent whether they occupy the building or not.
- Financing: Lenders would rather fund the purchase of a triple net lease property with a lease in hand than any other type of commercial real estate. That’s because they know their loans are being used to purchase low-risk investments and there’s a high probability that they’ll get paid back. Because of this, it’s typically easier to get your hands on financing for these investments than other commercial real estate investments.
- Long-Term Income: NNN leases typically range in terms from 10 years to 30 years. When you make your investment, you can expect to generate at least a decade of cash flow from your first tenant.
The biggest drawback to an NNN investment is the potential for a lease not to be renewed upon maturity. If that’s the case, you could face significant expenses as you work to get a new NNN tenant in the building. They’re also less prone to growth than other types of real estate.
Things to Consider
NNN investing is an attractive option for most real estate investors. It gives you a way to let your money work for you in the real estate sector without you being required to take an active role in the investment. On the other hand, pay close attention to the length of the lease remaining when you purchase one of these properties to avoid the significant cost of having to find a new tenant early on.
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