How Do You Finance NNN Properties?
Investing is one of the most common ways to make a profit from real estate. Renting out real estate for commercial purposes is one of the most obvious tactics to drive revenue. While there are different ways to rent your property, NNN is one of the most popular tactics today due to its simplicity.
Triple Net Lease is a rental agreement that frees the owner from many obligations and allows the investor to receive a stable income. For tenants, this is also an attractive type of contract, which is why this type of lease is so attractive for both parties. How do you finance NNN properties? This is one of the common questions, so let’s dwell on it in more detail.
The Features of NNN Investing
When a property owner rents out their property under these terms, the costs of insurance, taxes and maintenance of the building are borne by the tenant. Typically, such an agreement is concluded on a long-term lease for a period of 10 to 15 years. Sometimes the lease term can be up to 25 years. Below are the main benefits of this strategy for the tenant and investor.
Benefits for the Investor
The possibility of obtaining a stable income in the long term.
Real estate prices usually tend to rise constantly. With this type of investment, the costs are minimal.
No questions regarding property management.
Building maintenance costs are absent or minimal.
The possibility of deferring taxes on the sale of such real estate.
Benefits for the Tenant
Lower rent on such terms due to additional costs.
Possibility of business development for the future, as a lease agreement is usually concluded for 10-15 years with a controlled increase in rent.
The ability to make the necessary repairs without depending on the owner of the building.
What Is the NNN Finance Issue?
How do you finance NNN properties? This is a popular question among novices. In simple terms, the lender relies on the solvency of the tenant. The lender will use basic rental income, tax refunds, insurance, and management expenses. Not all lenders can participate in NNN financing. That is, to become an investor, you must have equity capital that is close to or equal to the sum of the value of the property.
NNN Real Estate Financing Issue
The key issue for investors is the issue of financing. This is quite logical since there are several special requirements. One of them is the condition of having a revenue worth $1 million. Such a requirement is a red signal for a small investor.
What is taken into account when calculating the credit value of the real estate?
Duration of the lease.
The creditworthiness of the tenant.
Of all these factors, the tenant’s creditworthiness is the key. If you cooperate with a financially stable tenant, this will be a weighty argument in the eyes of the lender.
For example, if you plan to cooperate with restaurant business representatives who work on a franchise, then there is a pitfall. Since they operate under a franchise, this does not always mean stable income and business attractiveness because the company transfers responsibility to those who acquire the franchise. And cooperation on an NNN contract carries risks for investors.
When financing real estate, you need to understand that a down payment is required. Many have repeatedly heard that contributions are not required. However, this is not the case. Usually, the down payment ranges from 30 to 40%. When buying such a property, it is worth choosing tenants with a high investment level and franchisees with a long-term lease guarantee.
Types of Tenants That You Need to Know
There are different types of tenants which are usually divided into credit and non-credit tenants. Credit tenants should be understood as tenants of a national scale. That is, such tenants have good finance capability and are known throughout the country.
The most notable example is Starbucks. If you want more examples of such tenants, you can check out the S&P or Fitch ratings. The presence of a high rating from such agencies is a sign of minimal risk for the investor. This is a guarantee of a safe and stable income. Of course, this does not exclude all risks, but they are minimal. But it is worth remembering such a pattern as the higher the investment class of the lease, the lower the capitalization rate will be.
When it comes to non-credit tenants, these are representatives of small and private businesses. Such companies do not operate at the national level. For example, it can be family shops and small traders. Many mistakenly believe that these types of tenants are a red flag for investors. However, they also have value for the investor, so they should not be written off.
What Else Do You Need to Understand about NNN Property Financing?
It is important to take into account the current features of the modern real estate market, most of which are the consequences of the pandemic. 2020 has been a turning point for all areas of business and real estate is no exception. The pandemic has created a real boom in NNN property lease, as many tenants have had to suspend their operations and this has strained relations between investors and tenants. Many tenants tried to evade their obligations.
Therefore, when deciding on such investments, it is worth considering the special features that arise as a result of the pandemic. Tenants must be liquid to fulfill the terms of the contract in the event of another lockdown due to a pandemic.
Investing in NNN properties has many features and requires a special study of the issue, especially if you are a beginner. But this is a good way to invest and get a stable income with minimal risk. NNN real estate financing requires an understanding of all the features and professional assistance. For example, you can involve advisers to get a complete understanding of all the features of financing processes.