If you’re a real estate investor, then the chances are that you’ve heard of triple net leases (NNN) and how they can be beneficial to your investment portfolio. Triple net lease properties have become extremely popular for their stability and lucrative cash flow potential in the last few years.
Suppose you’re currently looking for new ways to invest your money. In that case, the following discusses the meaning and types of ‘NNN lease’, its pros and cons, reasons to invest in a triple net lease, the potential business types of triple net properties, and how to invest in them.
What Is NNN Lease?
NNN is an acronym for ‘triple net lease.’ It’s a commercial property lease agreement where the tenant agrees to a gross annual rent that includes the base rental rate and the building’s operating expenses. A triple net lease involves the ‘three nets’ or operating expenses (op/ex).
The landlord usually covers the building expenses, but the tenant takes on the expense in a triple net lease instead.
NNN is a good investment vehicle because it’s a source of passive income with minimal responsibilities for the landlord. Tenants also benefit from a lower base rental rate than a gross lease agreement.
What Is a Net Lease Investment?
Have you ever sought a simple answer to the question “what is a net lease investment?” A net lease investment is an agreement that involves the tenant taking an expense in addition to the base rental rate.
In the absence of a net lease, the property owner is responsible for repairing, utility and operation, building insurance, real estate taxes, and maintenance. These expenses are grouped into ‘nets’ – real estate taxes, building insurance and maintenance.
However, in a net lease, a tenant takes some or all of the responsibilities in a net lease, compared to a gross lease; they pay a fraction or all of the op/ex.
Different Types of Net Leases
We’ll be looking at the three major types of net leases, including the triple net lease:
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Single Net Lease
The tenant is responsible for payment of the real estate taxes in addition to their base rental rent. The landlord, on the other hand, shoulders the building insurance and any maintenance cost.
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Double Net Lease
In this type of lease, the tenant must pay the tax and insurance fees incurred by the property.
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Triple Net Lease
This net lease (also referred to as NNN or sometimes written as triple-N) is a structure where the tenant agrees to pay the real estate taxes, insurance and fees incurred from the maintenance of the building.
A NNN is sometimes leased to a single-tenant, making it a single tenant triple net lease (STNL).
Is NNN Property a Good Investment?
Investing in triple net leases is profitable because the property owner (that is, the landlord) is relieved of responsibilities that cost more money. While this type of net lease is a good bargain, it also involves risks like every other investment.
For example, after a natural disaster, who is required to pay the expense? Whether NNN is a good investment boils down to an individual’s risk management skills and insight.
If a natural disaster occurs, an absolute triple net lease relieves the property owner from incurring expenses because a tenant cannot terminate the contract under any circumstances. This condition mitigates the risk incurred by the property owner.
Many real estate investors have found reasons to invest in a triple net lease. Its success, however, depends on a good sense of judgment and clarity.
Triple Net Lease Pros and Cons
A triple net lease offers a passive and steady income flow with minimum responsibilities for the property owner. Other benefits of a triple net lease include:
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Lower Operation Costs
The responsibilities of a property owner become lesser.
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Long-term Tenancy
A lease contract often varies from 7-11 years.
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Low-Risk Investments
Since properties are leased to reliable tenants with a good profile, risk investments incidences are reduced.
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Tax Benefits
The tax rewards from investing in triple net leases are many.
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Flexible Investment Opportunities
NNN properties can be invested in any part of the country.
However, NNN also has some cons. Some of them include:
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Bankruptcy
A tenant can suddenly go bankrupt, thereby incurring debt for the property owner.
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High Vacancy Rates
These rates are high because of the responsibilities involved in a NNN lease.
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Lower Base Rental Rate
A tenant stands to gain a lower base rental rate from the landlord because of the tenant’s responsibilities. If the NNN contract is leased to two or more tenants, the NNN charge will be shared amongst them, making each tenant have fewer charges while enjoying a low base rental fee.
High Potential Business Types of Triple Net Properties
Despite the risk involved, NNN has grown to become a reliable source of income for investors over the years. However, to achieve success, an investor must know the properties and business types to bring in the highest ROI (Return on Investment).
Here’s a list of some high potential business types for NNN properties in 2021:
- Fast-food companies
- Dental clinics
- Grocery stores
- Dollar stores
The Best NNN Tenants
As earlier mentioned, a property can be leased out to single or multiple tenants.
In a single tenant triple net lease, the building is leased out to a single tenant, who will take care of the responsibilities like taxes, insurance or building maintenance. In such an agreement, the landlord has little or no duties, yet the tenant receives a constant base rental rate.
A multiple tenant NNN, on the other hand, involves more than one tenant. The property could be a rental office space, residential or business building. The responsibilities, however, are shared between the tenants.
Some argue that single NNN tenants (STNL) bring in a wider profit margin. It is wise to bear in mind that each NNN contract is unique. You can only determine the scalability of a tenant by determining what will work best for you.
Although the opportunities in STNLs are growing, there’s a flip side. The value of a property can be demeaned under the use of one tenant. Financial downturns can also throw the property owner into an un-bargained debt (controllable with multiple tenants). A clear understanding of your property and market is what determines the best NNN tenant for you.
How Do I Invest in Triple Net Properties?
Before you have a reason to invest in a triple net lease, there are several steps to get the best Return on Investment on each property. It boils down to clarity and definition. You need to be clear on what you want and define who your property will serve.
Here are some proven ways to know the best NNN investment to opt for:
1. Find a Triple Net Lease Advisor
This individual or company is a real estate broker with broad knowledge in NNN investments. Their task involves finding a good investment for you, giving you valuable advice, and helping you get the best out of your investment.
Opening up to an NNN investment expert is advisable if you have no experience in NNN investments. You need to be careful when choosing a triple net lease advisor. Ensure you ask how much experience and knowledge they have.
There are many commercial NNN investment rallies, and it’s possible to fall into the wrong hands without a knowledgeable triple net lease advisor.
2. Find a Good Location
The success of your NNN investment depends on the location of your property. When searching for a property, determine its scalability by scanning the immediate environment and geographical location.
Is the property located in an urban or remote area? Is it located near a famous center or crowded by the business of the town? Does the population rise or fall yearly?
Several considerations should go into the location of a property. A property located in an urban area is likely to be a better investment.
Properties near a famous spot or in an area with a high populace will attract profitable tenants.
3. Set Your Tenant and Term Criteria
In a NNN investment, knowing your tenant-type will open doors to new opportunities. There are different types of tenants: restaurants, franchise names, other property owners, or businesses.
Understanding who you want your property to serve, your reason to invest in a triple net lease, and how it’ll serve your tenants will set your NNN property apart.
FAQs About NNN
What Is NNN investment?
A NNN investment is a commercial real estate contract where the tenant agrees to a gross annual rent that includes the base rental rate and the building’s operating expenses.
Who Is a Triple Net Lease Advisor?
A triple net lease advisor is a real estate broker with more enlightenment in NNN investments and will find a good investment for you, find your best fit, give you valuable advice, and help you get the best out of your investment.
Are Triple Net Properties a Good Investment?
A triple net lease is a good investment wheel because it provides steady and predictable returns over time with minimal risk involved.
How Do I Find Triple Net Properties for Sale?
You, however, need to be careful when choosing a property online. A Google search will bring up results on different NNN properties for sale. It’s advisable to contact your NNN advisor before making any decision. You can also find NNN properties for sale here.
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.
We hope our compelling reasons have convinced you to investigate further into making this smart decision today!