One of the most attractive characteristics of real estate investing is that triple net properties provide low risk, low maintenance, and long-term income.
Here’s all you need to know about triple net leases to decide if they’re right for you.
A Triple Net Lease
Triple Net lease for sale, often known as NNN leases, are a form of commercial real estate lease in which the tenant or lessee pays for standard area maintenance, property taxes, and building insurance.
Each of the three “nets” includes these extra fees, usually paid monthly with the rent.
These leases are more common in retail buildings but are becoming more common in office and industrial buildings. They occur in many formats, with varied tenant responsibilities for property costs.
Types Of Net Leases
Triple net properties are appealing real estate investments for several reasons, including low risk, minimum landlord obligations, and long-term passive income.
Today, we’ll discuss all you need to know about triple net leases to decide if they’re right for you.
What Is A NNN Lease?
This type of business lease arrangement places the burden for additional rent expenditures such as standard area upkeep, property taxes, and building insurance on the tenant or lessee.
The three “nets” are usually paid monthly to the landlord together with the base rent.
In addition to retail, these leases are becoming widespread in office and industrial sites. As a result, the renter is responsible for paying property taxes, insurance, and maintenance costs.
Net Lease Types
Net leases are classified as follows:
- Single Net
- Double Net
- Triple Net
- And Absolute Net
In a single net lease, the tenant is responsible for both the basic rent and the property taxes due on the property.
In a double net lease, the tenant is responsible for the payment of their basic rent and the amount of property taxes, and the cost of building insurance.
In a triple net lease, the tenant is responsible for the payment of their basic rent and the amount of property taxes, building insurance, and general care of the common areas.
Absentee-only net leases transfer all tenants’ duties, including structural building upkeep, leaving the landlord with no responsibilities other than to deposit the tenant’s checks.
|Single Net||Double Net||Triple Net||Absolute Net|
|Common Area Maintenance||No||No||Yes||Yes|
|Structural Building Maintenance||No||No||No||Yes|
What’s the Difference?
A property’s Lease may be single, double, or triple net for several reasons.
Triple net leases appeal to landlords since they have fewer obligations and may pass all expenses on to tenants.
A renter can negotiate a single or double net lease instead of a triple net lease, albeit this is more common among inexperienced landlords and renters.
Triple Net Lease Pros And Cons
|Low-Risk Investment||The Lease caps investment Returns|
|Reliable Income Stream||Higher Vacancy Risk|
|Guaranteed, Long Term Tenancy|
|Potential to Build up Equity|
|Minimal Landlord Responsibilities|
|Lower Chance for Turnover|
|Potentially Ideal Location|
|As is the case with all commercial properties, Tax Benefits|
Investments in triple net leases offer several advantages that might appeal to a wide range of investors, but they can also have several disadvantages.
The following are some advantages of making NNN investments:
Since investment-grade tenants frequently rent these properties, they provide a low-risk investment.
- Predictable income, thanks to rent and other monthly costs paid by the renters.
- NNN renters have the assurance of a long-term lease because they sign agreements for seven to ten years or more.
- Possibility of accumulating equity because of the long leases and the landlord’s limited financial responsibility
- Only the structural components of the property are required to be maintained or cared for by the landlord.
- Tenants that rent these sorts of houses expect to stay for an extended period. Hence turnover is less likely.
- These renters prefer to be near their customers, so it may be simpler for you to locate a new tenant once they move out.
- A NNN investment may be made almost anywhere in the country because the owner has practically little liability.
- Tax advantages come with commercial real estate, as they do with all of them.
The following are the drawbacks of making a NNN investment.
- Returns on investments are limited because there isn’t much ability to build value during the first period. Therefore the Lease sets your returns.
- In addition to the higher vacancy risk, these buildings may be highly customized for a particular tenant or location, making it difficult or expensive to re-lease once the first tenant vacates.
As you can see, investing in NNN properties has considerably more benefits than drawbacks. However, these drawbacks raise the investment’s risk. When it comes to active real estate investors who want to work on the investment to increase their profits, NNN investments may not be an attractive option because of the capped returns. NNN projects are perfect for the investor who prefers a hands-off approach to investing in commercial real estate.
Investment in triple net properties: What You Need To Know
When investing in NNN properties, there are several measures to consider.
Our clients who have invested in triple net investments around the country have found the following most efficient:
1. Identify Your Investment Return Goals
Returns on triple net lease investments vary depending on the tenant, location, lease length left, landlord duties, year of construction, and more.
Two investments with the same tenant and guarantee might have vastly different cap rates.
As an investor, you should decide what return is best for you and stick to it. If you want a 5.5 percent cap rate, don’t settle for a 5 percent cap; there should be many alternative chances in your price range if you do your homework.
Before consulting a specialist to assist you in selecting an investment, perform your market study.
2. Find A Triple Net Lease Expert
Once you know what you want, talk to triple net lease advisers to discover the most excellent fit for you and your team.
You need a triple net lease advisor to discover the suitable investment, do your due investigation, and set yourself up for success.
Inquire about the broker’s experience with these sorts of assets while interviewing possible advisors. Residential real estate agents and commercial brokers are unlikely to have this level of expertise.
There are many complexities to commercial real estate investing that can trip you up or create lost opportunities, so having an experienced and informed adviser is critical.
3. Set Tenant And Term Criteria
Not all tenants or triple net leases are made equal.
Some NNN investment prospects may appear to have a low cap rate, but upon closer inspection, the existing Lease only has three years remaining.
Each renter gets a unique credit score based on their financial soundness, number of sites, business or sector, and more.
If you receive a corporate guarantee, a tenant with seven sites in Tennessee is riskier than one with hundreds nationally.
Some leases are backed by the firm, while others are supported by a new franchisee, who may or may not pay the rent if their site fails.
Set your tenant and term requirements upfront so you can focus your search.
4. Find A Lending Partner
While triple net investments might be enticing all-cash offers, you should start talking about debt early on.
Because attractive investments may be found in both Nevada and Georgia, you’ll need a lender that can travel with you nationally. If your local bank is willing, you may use their services or hire a mortgage broker to do the job for you.
Having those financing conditions upfront (or at least 30,000 feet) can help you underwrite projects faster when you find anything that meets your requirements.
5. Compare Offers And Make A Decision
You should keep a Google Drive or Dropbox folder containing information on the many sites you’re insuring. Given that you won’t be visiting every property in person, it’s helpful to store everything in one place so you can quickly examine it when discussing a project with your team, partners, or investment adviser.
I have a spreadsheet that examines the merits and downsides of each NNN investment, but do what works for you.
Once you’ve chosen a home, have your broker or financial adviser create a purchase agreement!
6. Due Diligence on the Asset And Tenant
After your offer is approved, you must investigate the asset and the renter. Since you won’t be physically there (unless you travel out to visit the property), hire a local inspector to check the property and provide a report for your consideration. The present Lease should be reviewed next.
Even though my asset manager and I will evaluate the Lease, I will still send it to my lawyers for their consideration. You’re buying the Lease and the revenue it generates, after all. So, have your lawyers look at the paperwork.
Other areas of due diligence are more “standard” in commercial real estate
7. Relax And Collect Your Checks
Then all you have to do is cash the cheques!
The advantage of NNN investments is that you are just responsible for collecting rent and predicting vacancies.
Your renter will keep paying down your mortgage, increasing your equity in the property, while you keep the earnings.
How Do I Find Triple Net lease Properties For Sale?
You may locate triple net lease properties for sale through a commercial real estate broker (or investment adviser) or via web listings.
Unfortunately, you won’t have too many alternatives for identifying and exploring excellent prospects outside of employing a seasoned triple net investing broker.
You can’t just drive by a property and chat to the owner or get fortunate off writing letters straight to the ownership. These investments are advertised to a specialized audience, generally other brokers and renowned NNN investment organizations.
Are you interested in finding triple net investments? The Cauble Group has worked with investors from all around the country and is delighted to help you with your subsequent acquisition.
Precisely How Do You Calculate An NNN Rental?
Due to how triple net leases are constructed, figuring out the total monthly payment is a snap.
You’ll pay your basic rent, which is usually expressed as a price per square foot (e.g., $20/sq.ft.) or monthly rate (e.g., $10,000 per month), as well as your supplementary rent, which includes the three nets: standard area upkeep, property taxes, and building insurance
The base rent is designed for payment directly to the landlord to cover mortgages and profit. In contrast, the additional rent is only intended to cover the operational costs of the property.
NNN leases are reported as “$20.00 per square foot, NNN, plus $5.00 per square foot in pass-throughs.” Expenses that are passed on to the renter are called “pass-throughs.”
All of the typical area maintenance costs for the year plus property taxes and building insurance go into calculating your extra or NNN rent costs. Once you get the price per square foot, divide it by the property’s total square footage.
Consider the following scenario: If you have a 10,000-square-foot home and spend $20,000 on CAM and $12,000 in property taxes, you’ll have a triple-digit net expenditure of $3.60 per square foot.