Today we will discuss everything you should know about the triple net (NNN) lease. Gross and net lease arrangements are the two most common types of commercial real estate leases. In a gross lease, the tenant is responsible for paying the base rental sum, but the property owner is responsible for all running expenses.
As a result, the rental rate is usually greater for the owner to recoup some of their contribution to operational costs. A Full-Service Gross Lease or a Modified Gross Lease are two of the most frequent Gross lease structures.
The net lease is the opposite of a traditional lease. Depending on the parameters of the net lease arrangement, the tenant is responsible for a base rental payment as well as a share of the property’s running expenses.
The renter pays rent and property taxes under a single-net lease. The renter is responsible for the base rent, property taxes, and insurance in a double-net lease. Then there’s the triple-net lease, which is popular with a certain type of investor.
TRIPLE NET LEASE
The tenant is responsible for paying their base rent, as well as property taxes, building insurance, and common area maintenance, in a triple net lease. Absolute net leases shift all duties to the tenant, including structural building maintenance, leaving the landlord with nothing save the responsibility of cashing the checks.
Triple net leases are significantly more appealing to landlords because they will have fewer duties and will be able to pass all costs on to the tenant. That implies a renter can negotiate down from a triple net lease to a single or double net lease, however, these forms of net leases are more frequent among landlords and tenants with little experience.
HOW YOU CAN INVEST IN TRIPLE NET LEASE?
There are many steps to invest in Triple Net Lease. Here are some basic and important steps to start investing in Triple Net Lease:
- Figure out what kind of investment returns you want
Depending on the tenant, location, remaining lease term, landlord duties, year of construction, and other factors, triple net lease investments can and will yield a wide range of returns. As a result, two ventures with the same tenant and guarantor could have drastically different cap rates.
You should do your market study to discover where cap rates are landing before calling a specialist to assist you in finding an investment.
- Find an Advisor of Triple Net Lease
Once you have a broad concept of what you want, talk to triple net leasing experts to discover who would be the greatest fit for you and your team. A triple net lease advisor is a commercial real estate broker or firm with NNN investing experience.
- Fix your tenant and terms criteria
Not all triple net leases or renters are made equal. Some NNN investment prospects may appear to have a very good cap rate, but as you dive deeper into the property, you discover the existing lease only has three years left.
Every tenant has a different credit rating based on their financial health, the number of locations they have, the sort of business or industry they are in, and other factors. You must specify your tenant and term criteria upfront so that you can focus your search.
- Find the Right lending Partner
While triple net investments might be enticing all-cash bargains, it’s a good idea to start talking to lenders as soon as possible to assess where your loan terms will wind up.
Because you can discover equally appealing investments in Nevada and Georgia, you’ll need a lender that can go with you across the country. If your local bank is willing to help, it could be a nice option.
- Examine your options and make a proposal
It’s a good idea to keep a Google Drive or Dropbox folder with information on the many sites you’re underwriting once you’ve begun receiving prospective investment opportunities.
You won’t be able to keep up with every property, especially since you won’t be touring them in person, but having everything in one spot where you can quickly examine it if you’re discussing a project with your team, partners, or investment advisor is helpful.
- Conduct a thorough due diligence investigation on the asset and the tenant
It’s time to do your due diligence on the asset and the renter after your offer has been accepted. You’ll want to find a good local inspector to assess the property and create a report for your evaluation because you won’t be physically present (unless, of course, you opt to travel out and see the property).
- Take a seat and wait for the checks to come in
The most effort you’ll have to do after you’ve closed on the property is to cash those cheques. The advantage of NNN investing is that you have little to no obligation aside from collecting rent and projecting tenant vacancies. Your tenant will continue to make monthly payments toward your mortgage, increasing your equity in the property, while you pocket the profits.
ADVANTAGES OF TRIPLE NET LEASE
- Landlord responsibilities are limited: Apart from the structural components, landlords are often not obligated to maintain or care for the property.
- Lower likelihood of turnover: Many renters who lease these types of residences aim to stay for an extended period.
- Potentially perfect location: These tenants want to be where their customers will find them, therefore it may be easier for you to discover them.
- Because they are frequently leased by investment-grade tenants, they are a low-risk investment. Rent and expenditures are paid every month, ensuring a consistent cash stream.
- Long-term tenancy: NNN tenants frequently sign seven- to ten-year leases.
- Due to the extended period of the leases and the landlord’s modest financial responsibility, there is the potential to generate equity.
DISADVANTAGES OF TRIPLE NET LEASE
- Returns on investment are capped: Because there is usually no room to increase value in some shape or manner during the initial term, your returns are set by the lease.
- Higher vacancy risk: Because these buildings are sometimes built with a single tenant in mind or a certain location, re-leasing them can be difficult or costly.
CONCLUSION
The greatest triple-net investments are those that meet your requirements. That’s why it’s crucial to do your homework on the various tenants and lease agreements available so you know what you’re getting yourself into.
About Author
A good writer is known for his or her work so is Rachel Maisen. Rachel Maisen is an author, known for her amazing articles regarding Real Estate World. She outreaches information on Real Estate Investment, methods, business and many more. She wrote many articles for a better understanding of beginners as well as investors. Her main focus is to provide information to the readers about Real Estate Investment in the simplest way even a beginner can understand very well. By reading her articles one can understand how to invest, where to invest and when to invest in Real Estate.
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