Why are triple net leases a good investment? Because single-tenant triple net (NNN) properties can provide some of the most reliable income streams in the commercial real estate investment industry. NNN properties provide investors with a relatively low-risk (and very low-touch) option for creating a consistent, long-term revenue stream. In a triple net lease, the tenant pays an agreed-upon, monthly rental amount in addition to covering a majority of operational costs associated with the property, such as annual property taxes, insurance, and maintenance costs.
Triple net properties are attractive to many investors because they offer reliable returns over time, with little to no landlord duties since the tenant is typically responsible for costs and responsibilities of successfully operating their business in the location.
THINGS TO CONSIDER BEFORE INVESTING IN A TRIPLE NET LEASE PROPERTY
1. The Creditworthiness of the Tenant.
In the short term, the creditworthiness of the tenant is one of the most important factors when considering whether to purchase a Triple Net Property. When purchasing a Triple Net Property, you are generally purchasing the property for the stream of income generated by the rent under the lease. A creditworthy tenant is more likely to make timely rent payments, ensuring the Property has a constant payment stream.
Generally, publicly traded companies are more likely to be creditworthy tenants than private companies. Nevertheless, publicly traded companies are still susceptible to market conditions, and it is not uncommon for large publicly traded companies to close multiple locations during difficult economic times. Regardless of the tenant, it is important that the letter of intent and purchase and sale agreement for the property include a requirement that the seller provides an operating statement for the Property and any financial statements or other financial information of the tenant that the seller may have in its possession.
2. Term of the Lease.
In the short term, you are buying the Triple Net Property for the income stream generated by the rent from the lease. If the remaining term of the lease is short, your income stream will be short as well. Re-leasing the property is also expensive. If the lease term is short, not only will you have a reduced income stream, but you’ll be required to expend more funds to re-lease the property once the term ends. In order to avoid this situation, consider buying a Triple Net. However, if you like the triple net property as a long-term investment and the lease has a short remaining term, consider requesting a price reduction from the seller to offset some of the costs associated with re-leasing the property.
3. Location of the Property and the Form of Building.
While the creditworthiness of the tenant may be the most important short-term financial consideration of a Triple Net Property, the location of the property and form of the actual building may be the most important long-term consideration. Tenants come and go and as such the Triple Net Property needs to be attractive to other tenants in the event that a tenant ceases operation on the property or the lease terminates.
It is important to find a Triple Net Property that is in a location with easy street access and is clearly visible to those driving by it. It is also important to consider the form and make-up of the building on the property. If the building is fairly specialized it is going to be more difficult and more expensive to lease it once the current tenant leaves. For example, a building occupied by a brewery and designed to house massive fermentation tanks and kegging and bottling machines is going to require serious modifications to be ready for any tenant aside from another brewery.
How To Invest In Triple Net Properties
There are a number of steps to take when deciding to invest in NNN properties and they are;
1. Determine Your Preferred Investment Returns
Triple net lease investments can and will come with a wide variety of returns based upon the tenant, location, term remaining on the lease, landlord responsibilities, year of construction, and so much more.
As an investor, you’ll want to determine what kind of return makes the most sense for you and then stick to that criteria. If you’re looking for a 5.5% cap rate, don’t settle for a 5% cap – there should be plenty of other opportunities out there in your investment range if you’ve researched the market and understand where the current pricing is. Before contacting a professional to help you find an investment, you should do your own market research to see where cap rates are landing.
2. Find A Triple Net Lease Advisor
A triple net lease advisor is a commercial real estate broker or brokerage that has experience in the world of NNN investing, so they’ll be able to help you find an ideal investment, perform your due diligence, and set you up for success.
Once you have a general idea of what you’re interested in, it’s best to open up conversations with triple net lease advisors to see who is the best fit for you. When interviewing potential advisors, you’ll want to ask how much experience the broker has with these types of investments.
3. Set Your Tenant And Term Criteria
Not all tenants or triple net leases are created equally. Some NNN investment opportunities may be offered at a very attractive cap rate, but after digging into the project you realize the current lease only has 3 years remaining.
Every tenant also has a different credit rating, depending on their financial stability, number of locations, type of business or industry, and more. It’s important that you set your tenant and term criteria on the front end so you can narrow in on your search.
4. Perform Thorough Due Diligence On The Asset And Tenant
After your offer has been accepted, it’s time to perform your due diligence on the asset and the tenant. Since you probably won’t be physically onsite (unless, of course, you choose to fly out and see the property), you’ll want to find a good local inspector to review the property and prepare a report for your review.
CONCLUSION
If you’re looking for a way to invest your money with reasonable risk and relative ease, consider investing in a triple net lease property. You might be wondering, “what are NNN properties”? This type of investment typically earns between 4 to 6 percent returns per year on the initial capital invested with little maintenance required by the investor.
The tenant will pay taxes, insurance premiums, water/sewer bills, repairs, or upkeep costs. As long as they have enough income coming in from their job to cover these expenses, there shouldn’t be any significant difference between this form of real estate investment and buying an apartment building outright.
When purchasing a Triple Net Property, you need to be sure that you have sufficient protections under your purchase and sale agreement, you are receiving good title to the property, the property complies with all applicable laws, and there are no environmental issues affecting the property. Purchasing a Triple Net Property with any defects to these items can destroy the value of your investment.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
What is a Triple-Net Lease?
A triple-net lease is a lease agreement in which the tenant is responsible for paying all operating expenses, including property taxes, insurance, and maintenance costs. The tenant also pays a fixed rent, which is typically lower than market rent, making triple-net lease properties an attractive investment option for landlords.
How Does a Triple-Net Lease Differ from Other Commercial Real Estate Investments?
In a triple-net lease, the tenant is responsible for all operating expenses, making it a low-risk investment option for landlords. This is unlike other commercial real estate investments, where the landlord is responsible for operating expenses, which can be unpredictable and fluctuate over time.
