Top Mistakes First-Time NNN Investors Make (and How to Avoid Them)

The goal of any investor is to make a profit. Real estate can be a great tool if you know how to use it correctly. Net lease agreements are very popular for a reason. They allow you to earn income without unnecessary hassle. However, this type of lease is not without its risks. Beginning investors often perceive NNN lease as a panacea that allows them to do nothing. We have prepared a triple net beginner guide that will help you avoid rookie mistakes.

Basics

There are three types of net leases. They are easy to distinguish by their names since each has a different number of Ns. In the first type, the tenant pays for the use of the premises and also pays taxes for it. This type of lease is rare. Adding another N to the title also incurs the tenant’s insurance costs. If the title contains three Ns, the tenant is responsible for all the costs associated with the property.

It would seem, why pay more? However, this type of rent is quite profitable because the rent itself is lower. Therefore, the total cost of renting the premises does not increase much. It is also beneficial for the owner of the premises because he is actually freed from numerous payments. In addition, he does not need to monitor the maintenance of the building.

Advantages

For the owner, this type of lease is quite advantageous. Firstly, it practically excludes unexpected expenses. Since the tenant pays for everything, there is no need to urgently look for money for repairs or maintenance. In addition, a precise distribution of areas of responsibility reduces misunderstandings and practically eliminates the ground for conflicts.

The second advantage for the building owner is saving time. Tenants organize all the necessary work themselves, so this type of lease does not require constant monitoring. Of course, you can’t just forget about the building, but there will be significantly less hassle.

For the tenant, this type of lease means more freedom. They can make important decisions themselves and not wait for the owner to do so. In addition, the rent is significantly lower. Thus, the building becomes ideal for a long-term lease.

Disadvantages

Of course, nothing is perfect, so it is necessary to take into account the weaknesses of NNN lease. For the owner, this is the lack of guarantees of the tenants’ responsible attitude toward the premises. Thus, the building may fall into disrepair.

The second disadvantage is low income. In fairness, it should be said that in the long term, they fully justify themselves and can even exceed the profitability of other types of rent. However, if you want to recoup the purchase quickly, then NNN is not for you.

Tenants are at an increased risk of sudden increases in expenses. This is due not only to the condition of the premises but also to rising taxes and insurance premiums. Thus, over time, renting may become unprofitable.

Who Is It Suitable for?

First, let’s look at NNN lease from the perspective of the building owner. It is suitable for conservative investors who are more interested in stable income than quick profits. In addition, this type requires a significant starting capital because you need to buy the building. If you are looking for long-term and stable investments, then this is the ideal type of lease.

From the tenant’s perspective, NNN lease is suitable for those who need freedom in handling the premises. This is an excellent option for a branch of a large chain or a company office. At the same time, the tenant can make any changes to the interior to create a corporate style. In addition, the tenant can guarantee that the premises will always meet the standards of the organization.

Common NNN Lease Mistakes

If you are new to this type of investing, it is difficult to avoid mistakes. That is why we have collected the main ones in one place. Make sure you have everything in mind to avoid them.

Wrong Choice of Building

The first mistake can be made already at the stage of purchasing commercial real estate. Remember that your ultimate goal is to make a profit. Therefore, it is essential to find tenants. If the purchased building is in an unsuccessful area, then this may cause problems. The same applies to the condition of the building. Potential repair and preparation costs can negate any benefit from a low price. Therefore, when choosing potential objects for purchase, be sure to conduct inspections. This is especially important when purchasing real estate in another city.

Errors in Contracts

The preparation of the contract must be taken very seriously. It must cover all possible aspects of your relations with the tenants. Here, it is better to seek help from an experienced lawyer. The fact is that even one unclear aspect can cause losses. For example, stipulate who is responsible for repairing communications. This can be done by the tenant himself or the owner, who then receives reimbursement of expenses from the tenant.

Lack of Control

You have chosen the right building, found tenants, and signed contracts with them. It would seem that you can relax and just get paid. However, it is not that simple. Even if you live in another city, you still need to ensure that tenants conscientiously fulfill their obligations. Otherwise, you may be left with a crumbling building. So make sure to have regular checks.

Ignoring Tenants’ Needs

Tenants are the key to your income. If they insistently ask for something, it is worth listening to them. For example, if taxes or insurance increase significantly, you can review the rent. This is more profitable than losing tenants and being left with no profit at all. In addition, commercial real estate is quite specific, so finding new tenants may not be so easy.

Overconfidence

If you are a beginner, do not overestimate your capabilities. You cannot thoroughly study a topic by reading a couple of books. Therefore, it is essential not to neglect the advice of specialists. Do not try to figure everything out on your own. This will only waste your time and, most likely, money. So, build the cost of a consultant into your investment strategy from the start.

First-Time NNN Investor Tips

NNN lease can be a good deal if you do it right. However, it can be quite a challenge for a newbie to find their way around the many pitfalls. So here are some tips to help you get started:

  • Consider whether you need this type of lease. It is great for investors with a significant starting capital. It is a great way to earn a passive income with relatively low risk. However, you should not expect a quick profit, so this method is more suitable for conservative investors.

  • Assess your risk tolerance. NNN lease is favorable in this regard, but there is still a risk. Assessing your current situation will help you find suitable tenants and establish optimal terms.

  • Understand your tax options. Income tax conditions vary from state to state, so you need to know exactly what to expect. It would be a mistake not to consider taxes when creating a strategy. Only by weighing all the factors can you make a solid investment plan.

  • Choose a building in the most advantageous area. Companies prefer offices in places with easy access. Do not think that many companies will be interested in a building on the outskirts of a disadvantaged area. Remember the rules: the better the location, the easier it is to find good tenants.

  • Choose reliable tenants. Don’t worry. You don’t have to evaluate their human qualities. It’s essential to check their creditworthiness. The more reliable the tenant, the more likely you are to get long-term benefits.

  • Get help from professionals. Without specialized knowledge in a specific area, it is tough to do everything correctly. At first, you will need the services of a lawyer and a commercial real estate consultant. The help of these specialists will save you from errors in documents and will allow you to correctly assess the investment potential of buildings.

These tips may seem too simple but do not neglect them. A DIY approach, in this case, can result in losses. Do not be ashamed to seek advice if you do not know something. People who have extensive experience in this area will be happy to provide you with services.

Conclusion

NNN lease is a popular and convenient type of investment. Your worries end as soon as you find tenants. Of course, this type of lease has its drawbacks and pitfalls. In addition, it is not suitable for everyone. However, knowing the strengths and weaknesses, you can create a reliable strategy that will bring passive income for many years. With a carefully crafted plan and consistent execution, you will have a guaranteed source of income for years to come. Use this guide to avoid mistakes at first. Also, do not hesitate to hire the right specialists.

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