A most attractive real estate investment is triple net (NNN) properties because they offer low risk, few landlord responsibilities, and a steady passive income for several years. This step-by-step guide will give you all the information you need to enter this profitable real estate market.
Introduction: What Is A Triple Net Lease?
A triple net (NNN) lease is a commercial real estate lease that shifts most responsibilities to the tenant or lessee. These responsibilities may include building maintenance, insurance, property taxes, and other rental expenses of the business or service operated by the tenant or lessee. In a triple net lease arrangement, the tenant or lessee would pay the landlord the additional costs and a rental amount each month.
What Are The Different Types of Net Leases?
Net leases typically come in one of four different types. They are:
Single Net
A single net lease requires the tenant to pay monthly property taxes and base rent.
Double Net
In a double net lease, the tenant pays a monthly rent, property taxes, and building insurance.
Triple Net
In a triple net lease, the tenant is responsible for monthly rent, property taxes, building insurance, and standard area maintenance costs, including outdoor parking lots or stalls.
Absolute Net
All responsibilities shift to the tenant in an absolute lease, including building maintenance from repairs and replacing fixtures such as lighting and windows. The landlord has no responsibility.
Why There Are Different Types of Net Leases
Not all landlords/tenants use the triple net model despite the multiple lease types available. Because most rental responsibilities rest with the tenant, a triple net lease is more attractive to landlords. However, in some instances, tenants will renegotiate terms to reduce their rental burden and move to a double or single net lease. As a result, this is common in casual landlord/tenant relationships and less common in professional associations.
Why This Is A Good Time To Invest In NNN Properties As A Franchise Owner
There are many advantages to NNN lease investments. In addition to the long-term, reliable cash flow, reduced landlord responsibilities, and low risk noted above, a triple net lease offers investors the potential to increase their equity, less tenant turnover, tax benefits, and a helpful investment strategy anywhere in the US.
There are far fewer disadvantages to NNN leases, including the risk of higher vacancy if the property is location-specific and limited investment returns within the structure of the lease. With the pros outnumbering the cons, this is an excellent time to add NNN investments to your portfolio. To learn more about purchasing a Walgreens as a franchise, please visit Pharma Property Group.
The Step-By-Step Guide To Investing In NNN Properties
So you have decided to add diversity to your investment portfolio with NNN properties. Here is a simple guide on how to do that.
Step 1 – Define What Kind of Investment Return You Would Like
Returns differ with NNN leases with several impacting factors, such as the site location, type of tenant, building age, responsibilities of both parties in the lease, remaining lease time, and other considerations. Before you invest in a NNN lease property, you will want to define the type of return you are after and use that criterion as your template.
Step 2 – Seek An Advisor With Experience In NNN Leases
Not all commercial real estate brokers or brokerages have experience with triple-net investments. You will want to interview potential advisors to determine who does and which broker or firm is the best match for your investment goals. Residential real estate agents will have less experience in NNN properties, so that you can rule them out.
Step 3 – Establish What Tenants and Terms You Prefer
Tenants come in all shapes and sizes. They have different credit ratings, some have several locations, and there are also other types of businesses and industries. You must have your preferred type of tenant and term in place before you begin your search to narrow down your potential choices. It will save you much time having your targets in place beforehand.
Step 4 – Choosing The Best Lending Partner For The Task
It is wise to start the lending conversation early to understand the position of your debt terms. The local bank you already deal with is an excellent place to begin simply because you already have an established relationship. They may know where you can go if they cannot provide what you need. Knowing your debt terms will assist in the underwriting process allowing you to act fast when you find a NNN investment that meets your predetermined requirements.
Step 5 – Analyze The Choices Through a Simple Comparison
Soon you will have a shortlist of potential investment choices. Develop a comparison process allowing you to see each property at a glance with pros and cons attached. This comparison will help you to track the opportunities and present them clearly when discussing them with partners, your investment advisor, or your bank. Through a simple process of elimination, it should be easy to make a final selection from the list of potential investments. Once you have settled on one, now is the time to draft a letter of intent to purchase. Your investment advisor can do that.
Step 6 – Examine The Asset, The Tenant, and All Particulars
After accepting your offer, it is time to do some investigative work. The first step is to get the site inspected with a condition report sent to you. The next item is reviewing the current lease with the assistance of a lawyer. You must perform these tasks before closing on the deal. Once closed, the property becomes part of your investment portfolio.
Final Thoughts
Lease properties are attractive assets for investors. Although there are different net leases, a triple net term is the most attractive as it reduces the landlord’s responsibilities and provides a long-term, stable passive income. By following the steps noted above, diversifying your portfolio with lease properties is easy and earns you a steady income.