Why is a NNN Lease a Good Investment?
An investment decision is always a big deal. You want to be confident about the things you intend to invest in. There might be many limitations when it comes to traditional choices of putting money, but luckily, another win-win option is available – triple net lease investment.
Still, people often get confused with NNN lease-related issues, which prevents them from turning such investments into a goldmine. But do not worry; we will cover everything connected to this investing type today.
So what is an NNN lease, and which benefits does it drive? Why is a NNN lease a good investment? And how to invest appropriately? You will find answers to this and even more valuable info in our article.
Net Leases Types
To fully understand the NNN lease functioning, it is worth reviewing all types of net leases.
According to this agreement, the lessee pays the property taxes apart from the base rental fee. Meanwhile, the lessor is still liable for all the building’s insurance, upkeep, and operating costs.
It stands more popular than the previous one and implies paying property taxes and insurance by lessees added to the assigned rent. In addition, the landlord has to cover CAM, capital expenditures, and other operating expenses here.
With this deal, the renter agrees to be responsible for all taxes, insurance bills, operating costs, CAM, and expenditures while renting.
How to Opt for Good NNN Lease Properties?
New NNN buildings are typically those built by developers hired by a specific corporation. Then the developer sells such properties to a purchaser who agrees on a NNN deal, which commonly lasts from 10 to 15 years.
That way, triple net leased buildings are mostly businesses connected to lifestyle tendencies and social needs rather than the usual economically beneficial properties for the state, like fast food, medical centers, dollar/convenience stores, and gas stations.
So if you doubt what investment property to select, take a closer look at such options as auto part/drug stores, child care/early learning centers, car washes, vet clinics, warehouses, and QSRs. As practice shows, they are recession and pandemic-proof, so the chances of losing income, in this case, are minimal.
Plus, such investment building types meet the most needed criteria – renter creditworthiness, top-notch location, and advantageous lease term. And what is no less critical, they have proven their profitability across tough economic times.
What is a Beneficial NNN Cap Rate?
Frankly speaking, there is no one universal rule. Each NNN deal is unique, but a good cap rate mainly puts between six and seven percent. However, these numbers can vary depending on the property’s location, condition, and lease duration.
For example, if the building is in a high-traffic placement and provides a lasting rent agreement, it will likely bring more gain than a center-remote property with a short lease term.
Reasons to Invest in NNN Properties
NNN lease is a highly advantageous agreement for both parties, the lessees and the lessors. With triple net leases, renters get attractively low base rent compared to other commercial deal types, which incredibly favors them. But why is NNN lease a good investment for lessors? Let’s consider the top reasons to invest in such property.
One of the most appealing things about NNN leases relates to the money matter point. Besides these deals are incredibly low-risk, they enable a stable cash stream even under unfavorable external financial factors. So rest assured, it is a win-win investment scenario since you receive a consistent income stream as long as your lessee continues to rent in compliance with NNN terms.
Another crucial moment is that triple net leases imply a lasting renting term of 10 years and higher. It means that you will get a stable cash flow during that time, as we mentioned above, and a guarantee that this gain will accumulate for this period.
No Expenses Burden
Expenses are always that worry potential investors the most. So naturally, you would like to be aware of the must-cover costs to decide if it makes sense to invest in the property. The excellent news about NNN leased buildings is a liability-free policy for lessors. Therefore, all expenses will become the tenant’s responsibility. It facilitates landlords’ lives to a great extent, as they would have to handle costs on their own in other commercial investment choices.
In addition to no worries of expenses burden, lessors also do not have to trouble about management-related items. Lessees now must deal with all the problems tied to the building’s upkeep. For example, they should perform roof repair, CAM or some renovation in case of emergencies like floods, fire, etc. That way, lessors will have less hassle and more free time, which they may take for making other investing or regulating bookkeeping issues. The only thing landlords can do here is check whether management is going smoothly.
When you choose NNN investment, you will be in control of the high-quality building. It denotes that the triple-net pre-pays for management so that you will invest in the well-maintained and attractively-looking property. So be sure you will never attain a cat in a sack and won’t have to spend a fortune on renovation before leasing the building to tenants.
The ability to transfer the leaseholder is no less appealing perk coming with triple net agreements. It works as follows: you will stay the building owner even if your lessee outgrows this facility. Thus, you can trouble-free acquire new tenants for vacant spaces. Provided your property, it creates endless investment possibilities and income growth opportunities.
High-reliability level puts the first reason why people select investing in NNN facilities. Risks you may face with these agreements are minimum, and all the lessees show incredible creditworthiness. So this is the best way to put your money, especially when you always want a steady passive income. In addition, the lease’s lasting term and tenants’ on-time payments only contribute to capital growth.
Cons of NNN Leases
To make sure your investment choice is right, getting acquainted with NNN deals’ cons is better. Of course, the benefits far outweigh them, but for peace of mind, check the following points:
Losing Earning on Caps
Lessors with long-term agreements miss the opportunity to raise the rental fee when area property values skyrocket. Therefore, it may affect negatively affect profit potential in the long run.
Rollover Expenses and Vacancy Risks
Even subject to the lasting lease and creditworthy lessees, there is still the risk a lessee can fail with rent and upkeep liabilities. So during the period they will strive to fill the vacancy, investors might suffer substantial losses.
Steps to Take for Investing in NNN Facilities
As with any investment decision, you should take proper steps to get the best out of triple net deals. So bring the below pieces of advice to reality for reaching the first-class NNN leased property.
Determine Your Investment Goals
People mostly enter the investment world without a clear understanding and structured plan of what they want to gain. It puts common-wide behavior for novice investors who are extremely eager to start running a business. But, unluckily, it is a totally wrong tactic.
The initial step each investor has to take is defining the reason for investing and the ultimate purpose to achieve. Questions like ‘What may I earn when investing?’ and ‘What prompts me to invest? / What is my investment motivation? should already have clear responses before acting.
Search for a Skilled Triple Net Consultant
Knowing only some things in real estate is quite natural. Even people well-versed in this field seek help from consultants from time to time and so need you as soon as you set out your property purposes. A skilled NNN advisor will give valuable insights and inform you about pitfalls regarding specific investment choices.
Ted Dowding, owner of Net Lease World.Specializes in National Investment Sales. $2B+ In Career CRE Closings. Ted works closely with several large private equity Investors and REITS to help deploy capital for various acquisition needs for new funds across all product types Nationwide. Ted’s expertise is in sourcing large quality off-market deals quickly in any market and any product type. His comprehensive National Database parlayed with his strategic, highly targeted, deal sourcing program helps generate off-market deals specifically tailored for each Equity Group he represents.
Ted also works directly with 1031 exchange investors on a constant revolving basis to identify, negotiate, and secure real estate transactions to meet their 1031 Exchange Deadline. Ted has created a dynamic marketing and lead generation strategy to assure both real-time sales data and generation of a comprehensive buyer/seller database. Because of his approach, Ted can get product exposure in the marketplace more quickly than most competitors and quickly procure offers using his extensive buyer database.Contact Ted Here.
Compare Opportunities Before Submitting an Offer
Once you have started getting potential investment property options, making a Google Drive folder with info on the preferred sites would be perfect. You should keep up with each and every facility, especially if you are going to visit in person.
So such a tactic will help to store everything structured in one place where you can look at it quickly while discussing a project with your partners. Plus, you may keep a spreadsheet with all the pluses and minuses of each NNN property to decide on the appropriate choice faster. Finally, after you have made up your mind, contact your triple net advisor to compose a letter of intent to buy the facility.
Perform Profound the Asset and the Lessee Diligence
Once your offer is accepted, it is time to thoroughly review the asset and lessee. Since you most likely can’t be personally on site, you must find a qualified local inspector to check the building and craft a corresponding report.
The next and most significant point to inspect is the existing lease. It would be ideal if a few specialists might interpret the agreement. Therefore, send it to several attorneys. After their approval, you can make a deal with a clear soul and celebrate a prosperous NNN investment!
We have looked over the most critical moments; however, there are other ways to achieve success. They include crafting terms and conditions, capital involvement, and buying the relevant facilities.