One of the reasons the real estate industry is such a profitable market is the diversity of options available. Investors can choose from different real estate asset classes and lease agreements, depending on their strategy, budget, and property management preferences.
That said, the triple net (NNN) lease is one of the most preferred types of contractual agreements in property Investment. NNN properties are typically less demanding to manage, and they generate a more stable income than other types of real estate leases.
If you're considering diving into real estate and are unsure if an NNN lease is the best rental agreement for your property, we've put together this guide for you.
This article will discuss how a triple net lease works and how to increase cash flow with NNN properties.
What Is a Triple Net Lease?
Triple net leases are rental agreements in real estate that require the tenant to handle the operating costs of the building, such as maintenance and repairs, property taxes, and insurance.
On the other hand, the landlord only receives the base rent at the end of every month. NNN investment properties were usually more common in commercial real estate; however, they're quickly becoming a preference for industrial real estate investors, as well.
Why Are NNN Leases More Preferable Among Investors?
NNN leases come with minimal administrative responsibilities. Since the tenant handles all the operating costs of the building, it means the landlord doesn't go through the needless hassle of running around to pay bills.
This element is usually missing in other types of real estate leases, where the property owner handles at least one of the operating costs, such as taxes or insurance. Triple net leases are also long-term contractual agreements and can last as long as 25 years.
As such, you won't find yourself looking for a tenant every few years. Furthermore, NNN leases provide property owners with a reliable income stream. Throughout the lease tenure, the landlord receives a fixed monthly fee from the tenant as base rent.
Unlike with other rental agreements, property owners of NNN leases don't have to spend any part of the rent on operating costs since the tenant bears that responsibility. There are also possibilities of a periodic percentage increase in the base rent in long-term NNN lease Investments.
Are There Any Potential Downsides?
While there are several reasons to buy triple net properties for sale, there are some disadvantages you should consider before making your move.
For example, NNN commercial properties come with earning caps, which means there's a limit to the amount you can receive as base rent. While you can negotiate percentage increases with the tenant in the rental agreement, whatever fee you agree can't exceed the limit.
This factor probably has the most influence on your potential cash flow with NNN properties. Also, it can be challenging to find a new occupant for a triple net lease property.
Most tenants are typically reluctant to take up the responsibility of the operating costs of a building; as such, you may not readily find someone to occupy your property.
Rollover costs in NNN leases are another downside. NNN leases are long-term contractual agreements, and some tenants might not pay attention to the building's maintenance during their stay.
As a result, you may end up spending a fortune fixing up the building for a new tenant once it's vacant.
How to Invest in NNN Lease Properties
You can increase your cash flow with NNN properties. However, like every other type of investment, you need to know the proper steps to take before diving into the market. Briefly, here's our guide on investing in NNN lease properties:
Hire a Triple Net Lease Advisor
Due diligence is a crucial step in every investment move. Before buying NNN properties from a real estate company, such as BuyNNNProperties.com, you'll need a professional to guide you through the process.
A triple net lease advisor is a real estate agent with expertise in NNN leases. Generally, an NNN broker can help find the ideal property, analyze the investment, and assist you in sealing the deal.
However, don't just hire any NNN lease advisor you see; ensure you interview potential candidates and pay attention to the experience and market knowledge they bring to the table. It'd also help if you work with a realtor with expertise across different US cities.
Determine Your Tenant Criteria
Tenants are possibly the most crucial factor in triple net leases, and low-grade tenants could ruin your investment.
Giving your property to an occupant that fails to pay attention to maintenance or ignores paying their utilities could mean you'll face the arduous task of fixing these messes when they leave. Worse off, they may even default on the rent.
As such, you should define the requirements for the kind of tenants you want and conduct due diligence on those that show interest in the property to make sure they match your criteria.
While interviewing tenants, some of the factors you should pay attention to include credit rating, financial stability, type of business, and the number of company locations.
Determine Your Investment Returns
Triple net lease properties come with different cap rates, depending on several factors, such as the years remaining on the lease, type of tenant, and property's location.
However, you should determine the investment return that works for you and stick with it. Don't go beyond your cap rate because you've struggled to find a suitable investment for a while.
The real estate market is vast, and with some market research and the right professional help, you'll find an investment that's right for you.
Perform Due Diligence on the Property
After finding an NNN lease property, you'll still need to perform due diligence to ensure all is in order. Visiting the property physically is the first step to take. If you're out of state, you could hire a property inspector to take a look at the property and prepare a report for you.
However, if traveling to the location is convenient for you, it's the best option. After you've seen the property, you'll also analyze the existing lease. Review the lease with your NNN lease advisor and hire an attorney to go through the document.
The property's lease determines your returns, so you should take it seriously.
NNN leases are an ideal option if you're looking for property investment with minimal risk and responsibility. They also promise you a long-term stable source of income.
Of course, there are downsides, but the benefits outweigh them. Also, with the right strategy, you may not have to deal with any of the disadvantages in NNN lease properties.