BEGINNER'S GUIDE TO TRIPLE NET LEASE (NNN) INVESTING
Have you been considering investing in Triple Net (NNN) leases but don’t know if it is a wise financial decision? Well, you’ve come to the right place to learn and put your worries at ease. Several different components must be considered when it comes to Triple Net leases, from term definitions and acronyms to benefits and drawbacks, and the various responsibilities that need to be handled by the multiple parties involved in such investments. All of these components will be touched upon in this article, so keep reading to determine whether or not investing in Triple Net leases is a good financial decision for you.
What Does NNN Mean?
NNN is an abbreviation for “Net, Net, Net,” which is derived from the difference between gross income and net income. When you net the expenses out, you get a Triple Net lease, or NNN lease — also sometimes called a Net Lease. Each of those “Nets” stands for specific expenses that are paid by the tenant, rather than the investor. The acronym TIM can be used to remember what NNN stands for:
T stands for taxes — more specifically, the real estate taxes that the tenant pays for the NNN property. I stands for insurance; it includes the property insurance for the building and liability insurance for the entire property. Finally, M stands for maintenance; the tenant pays to maintain and repair the building and facilities. This is why, as opposed to a gross lease, you have “Net, Net, Net,” meaning nothing but net income.
How NNN Investing Works
NNN (Triple Net) investing works by an individual investor going out to find and buy a commercial real estate property that only one tenant typically occupies. Once you’ve decided what kind of property you want and the location you desire, you also need to determine the type of industry or business sector you like and the tenant’s financial creditworthiness. You need to decide on an industry sector that you believe will be around for a long time because Triple Net leases are long-term investments.
For example, if you were thinking about buying a McDonald’s, you might go looking for one in a specific area (fast food chains, sometimes called Quick Service Restaurants or QSRs, make up the largest component of Triple Net leases on the market). The good thing about Triple Net investing, though, is that you aren’t required to only buy in your surrounding area. Because McDonald’s is an international company, you can buy one anywhere in the country, or even around the world. Specialized “Net Lease” real estate brokers can assist you with finding properties that are available for sale. After finding a few McDonald’s deals to choose from, you then make an offer and purchase that property. Since the lease agreement is already signed and in place, you will immediately begin receiving monthly rental income while only having to do a minimal amount of administrative work, not having to worry about active building operations or tenant management.
The difference between NNN and, say, buying an apartment building, is that you would be responsible for either managing or hiring a manager to care for the apartment building. With multifamily apartment buildings, you are responsible for tenant complaints, toilets and termites. But with a Triple Net lease, you aren’t required to deal with all of that. And, if you have financial strength on the lease, like McDonald’s corporation credit, you have Mail Box Money! Sometimes you don’t even need to go to the mailbox because large corporations will deposit the money directly into your account using what is known as an Automated Clearing House (ACH) payment. This way, you will not have to worry about knocking on doors to collect a tenant’s rent.
NNN investments are pretty easy to manage once you own your property. The key is making sure you do your market research, review the outlook for industry sectors, select top-performing tenant business models, check tenant credit profiles and review the terms of leases. You can go about this process yourself, or you can invest with Net Lease industry experts, like Liberty Real Estate Fund who has created a diverse portfolio of NNN properties leased to essential business tenants in high-growth markets.
How Common are Triple Net Leases?
Triple Net leases are very common and can be found within several different industries. Net Lease properties involve a wide variety of buildings types, including office buildings, warehouses and even factories. Some casinos and hotels in Las Vegas are also on Triple Net leases, like Caesars Palace and the MGM Grand Hotel. A developer builds the building then leases it to a casino on a long-term lease where the casino is responsible for all maintenance, operating expenses and management of the building. Once the lease is signed, the developer then sells the NNN building to investors who will enjoy monthly payments from the casino at regular intervals.
In Triple Net leases, the tenant must pay for all maintenance and necessary repairs of the property. Tenants are likely to treat the property as if it is their own because many will actively be doing business out of them, wanting the net lease building open, working and in good condition.
When is it Practical to Use Triple Net Leases?
Many tenants want to commit to long-term leases while maintaining control of the location to set up and operate their businesses. However, setup is expensive and tenants who plan to expand their businesses also don’t want to tie up their capital in the expense of building out the real estate. enter investors who buy the Triple Net properties. Now, the tenant can manage the single NNN location without moving or dealing with everything that comes with owning a location while the investor sits back and collects their regular monthly check and doesn’t have to deal with the expenses of upkeep.
What are the Benefits of NNN Leases for Real Estate Investors?
The benefits of NNN leases for real estate investors are numerous. Triple Net investments provide investors with a dependable income stream and cash flow without having to deal with expenses since the tenant covers them. Investors also get the predictability and stability that comes with long-term leases; you do not have to worry that the tenant will suddenly vacate the property and leave you stuck with redoing the space while having to find another tenant quickly. NNN leases usually last 10, 15, or even 25 to 50 years. This means that you can depend on the passive income for the entire period of the net lease. As long as the tenant remains financially stable over the lease term, you can have a secure investment for years. Not only that, but if you are working with a strong creditworthy tenant, they will typically either send you a check 5 to 10 days before the first of every month or deposit the money directly into your account through autopay.
Do you want to learn about the investment opportunities open to you and how you can set yourself up for a good financial future? Reach out to the experts at Liberty Real Estate Fund to learn more.
Are There Any Disadvantages of NNN Leases for Real Estate Investors?
For all the benefits of Triple Net lease properties, some disadvantages need to be considered before choosing to invest. Sometimes NNN buyers may get stuck with a fixed rent that ends up being relatively low compared to market rates over time. For example, say an investor signs a 15-year lease with limited or no rent escalations; this means they could be losing money toward the end of the term from inflation. But, investors can avoid this situation by setting up the net leases with rent escalations. Some leases escalate in rent every year, some every five years, but the key is to have rent escalations in all your long-term leases.
Another possible downside of NNN leases is entering into a deal with financially unstable tenants. If the tenant goes into bankruptcy, the investor also needs to hire a bankruptcy attorney to work everything out. Make sure to research the credit ratings of tenants and companies, find out what the property will be used for and select strong, creditworthy tenants that will consistently rent on time. Investors should also research the kinds of facilities that the tenant needs as part of the property and related trends. Think about drive-thrus for fast food chains; any inline stores like restaurants that are usually surrounded by a shopping center or other stores are now looking for standalone, single-tenant buildings where they can add drive-thru windows. You need to be aware of industry trends for the property so you do not end up with tenants becoming functionally obsolescent at the end of lease, losing some value to your investment.
A few more blocks in the net lease road could sometimes slow down investors including perceptions of internal rates of return (IRRs), “pops” in rent growth and value-add projects for properties. Sometimes investors think lower projected IRRs are uncompetitive but ignore or don’t know about the lower risk that comes with them. When investors also aren’t educated on the industry trends of an NNN property, like rent growth, and only stay accustomed to other real estate investment opportunities, they don’t know how to determine where the market is heading and plan accordingly. With value-add Triple Net investment projects, like apartment buildings and shopping centers, investors are used to seeing ongoing rent growth and higher tenant turnover, with capital raises that lead to “pops” in value when the asset is sold. With Triple Net deals, you don’t generally see that kind of wealth creation, but investors also don’t have to deal with market fluctuations. Other asset classes can completely destroy not only their returns but their equity, especially with unexpected economic downturns. Instead of high IRRs with massive amounts of risk, net lease investments provide investors with fixed income from regular monthly rent checks and long-term leases that have strong wealth preservation.
What Are The Responsibilities Under An NNN Lease?
One of the biggest advantages as the landlord of a Triple Net lease property is your limited management responsibilities. Going back to the three Ns of net leases, it is the tenant’s job to maintain and care for the property; landlords leave the termites, taxes and toilets. But as a sophisticated property owner, there are other responsibilities that you need to address. For example, you must make sure that tenants are paying rent on time every month and that your tenant is properly maintaining the property. For this reason, landlords should visit their properties at least once or twice per year to check on the condition and overall state of repair of the buildings. These visits should include making sure the tenant maintains the heating, air conditioning and proper roof maintenance, which should all be described in a maintenance contract between you and your tenant. Additionally, the insurance should be listed under your name as the building owner.
Tenants of Triple Net properties must fulfill several different responsibilities, such as bookkeeping, building maintenance (heating, air conditioning and roof repairs), property upkeep, including the parking lot (like snow removal) and landscaping. The tenant should also have you listed as an additional insured party on their insurance so that you do not get sued as the property owner if someone were to become injured on site. Tenants are also responsible for indemnifying the property owner, paying real estate taxes and maintaining liability and building insurance.
How Do You Calculate NNN Expenses?
Although tenants are responsible for all expenses of Triple Net properties, prior to moving in or signing a lease, it is commonplace to estimate what the expenses are to the prospective tenant so they can budget accordingly. These numbers are estimated based on historical and projected property taxes, insurance maintenance expenses and other expenses, like snow clearance. While a landlord might provide estimates and historical data on file, responsibility for verification of these expenses is the burden of the tenant since they will be paying them once the lease is signed.
Should You Invest In NNN Properties?
Triple Net properties have primarily been a great secret within the real estate investment world until relatively recently; not many people know just how beneficial they are for willing investors. NNN properties have prospered into a thriving industry, with price transparency and the amount of information available to investors so they can ensure they make profitable decisions that lead to reliable fixed income. Choosing to take on a Triple Net lease is one of the most beneficial things you can do as an investor to establish a stable, consistent monthly payment that will last the lifetime of the lease. It is also one of the best tax-efficient ways to invest your money if you are looking to produce a robust yield. Triple Net properties are a great option for those investors looking to earn a regular monthly cash flow without taking on all the various hassles and responsibilities that come with being a traditional landlord.
Have you been thinking about entering the wide world of opportunity that comes with investing in Triple Net leases but aren’t sure if it is the right decision for you? Reach out to Liberty Real Estate Fund and learn about how their top tier services and qualified experts can help.