Why are Net Lease Properties Popular with High Net Worth Investors and Family Office Investors?
Net lease, or Triple Net (NNN), properties are a popular form of commercial real estate investment that continue to attract investors of any level because they create reliable cash flow over the length of the lease and have limited management responsibilities for the investors to handle. This article explains the widespread benefits of investing in NNN lease properties, the types of investors who typically favor these types of leases and why they prefer them. Read on to find out if investing in Triple Net lease properties is something you should consider.
Why are Triple Net Leases Popular With Investors?
Triple Net leases are popular with investors for many reasons, but the number one attraction is that they provide investors with passive income. It is one of the only true passive real estate investments that people can get into, but that’s not all.
Triple net leases are also popular with investors because of the consistent, predictable monthly cash flow they can enjoy that extends over the several years of the long-term leases. This means that you know you will be getting reliable high-yield income that you can expect for however many years the lease is set to last. For the most part, investor’s expenses don’t fluctuate with this type of lease, increasing the predictability of the income stream. To quote net lease expert Ralph Cram, Triple Net investments are like “bonds tied to a rock” — they’re secure, stable and aren’t going anywhere any time soon. Net lease investments also generate income that is tax-efficient and tax-sheltered because of their depreciate benefits.
Another popular benefit that investors enjoy with Triple Net leases is their associations with popular brand names. For example, investors who love the Starbucks chain can invest in or buy a Starbucks location. They own the location and building that is operated by Starbucks while enjoying all the benefits of investing in the brand-name tenant and collecting rents from the parent company every month. Imagine that — investing in a Triple Net lease Starbucks location and drive past it every day knowing you’re the owner!
Benefits of Triple Net Leases Over Gross Leases
Triple Net leases offer investors a wide range of benefits that make them preferable over gross leases. A gross net lease is where the investor buys a building and receives monthly rent from the tenant. From that monthly rent, investors must deduct the expenses to pay for the real estate taxes, building maintenance, upkeep, snow removal, property taxes, insurance and more. As the investor, you collect the rent from the tenant but then use that rent to pay for managing everything, including the cost of your building’s overhead, maintenance and repairs.
With a Triple Net lease, investors keep all the monthly rental income from tenants because the tenant pays for the expenses directly. In a Triple Net lease, the tenant pays for the real estate taxes, insurance and maintenance of the building; the only expenses the investor has are the bookkeeping expenses associated with balance sheet, profit and loss statements and tax preparation. Net leases offer hassle-free passive income to investors.
The key factors that make Triple Net leases superior to gross leases are:
- They are considered to be long-term leases that provide passive income, net of all expenses except bookkeeping.
- They provide a consistent, reliable source of predictable cash flow for investors, operating like bonds wrapped in real estate.
- They require little to no management or upkeep by investors because tenants are responsible for the building.
- Tenants are responsible for paying rent as well as all the operating expenses of the property, giving investors a high-yield income stream.
- Tenants are responsible for paying for the building’s insurance, property taxes and building maintenance.
Would you be interested in the opportunity to learn more about net lease properties and what they could mean for your financial future? Contact Liberty Real Estate Fund and find out more.
Types of Real Estate Investors Interested in Triple Net Leases
There are generally five types of investors who have the most interest in Triple Net leases, and each kind of investor gets a different set of benefits that come with the leases.
1. Institutional Investors
The first type of investor is an institutional investor, coming in many forms: an insurance company, a hedge fund, pension funds or a real estate investment trust with publicly traded real estate funds. Institutional investors love net lease properties because they know that they will get regular monthly income consistently. They also know that they will have a tenant there for a considerable period because triple net lease terms are long, ranging anywhere from 5 to 50 years.
2. 1031 Exchange Buyers
The next most common NNN investors are 1031 exchange buyers. A 1031 buyer is somebody who has owned property — often, an apartment building — for a considerable amount of time and has built up its equity. As 1031 exchange buyers, investors can do a tax-free exchange for another property. 1031 exchanges allow a property owner to sell one property and defer any capital gains tax due on the sale by transferring all proceeds from the sale into another property. Though there are some changes proposed by the current presidential administration that may limit the use of this tax benefit, 1031s remain a popular tool for real estate investors looking to mitigate their capital gains exposure when selling a property that has done a full development cycle.
The reason apartment investors using 1031 exchanges love Triple Net investments is that they allow them to trade their gains from assets they have to actively manage, like apartment buildings, and move into truly passive real estate investing. Compared to apartment buildings with tenants who are effectively paying ‘gross’ rents, exchanging them for Triple Net deals allows investors to get rid of all the hassle that comes with tenants, the need to pay real estate taxes and other expenses. For these investors, triple net leases become, in essence, a ‘bond’ wrapped in real estate — buy the property and passively collect the rent.
3. Merchant Builders
The next type of investor is known as a merchant builder. These investors physically build out locations from the ground-up, typically having a relationship with the larger tenant chains. For example, they may have a longstanding relationship with a restaurant chain where their role is to develop land and pads that either they or their chain store partner locates to. Merchant builders often will take ownership of a location, develop the building to their chain store partner’s specifications and lease the property to the chain once complete. They then might either keep the property as their own Triple Net investment or sell to a third-party investor as a brand new Triple Net location.
These investors enjoy the benefits of earning income from profits made developing the buildings, fees, rental income (once built) and/or profits selling the Triple Net lease location they just built and leased out.
4. Single-Tenant Users
Another type of investor often interested in Triple Net lease properties is the single-tenant user. This tenant could be operating as a restaurant, manufacturer or wholesaling business in need of a warehouse. They may initially buy their own property but might find they want to free up that capital later, executing a sale-leaseback with an investor. This means that single-tenant users sell the property to an investor and then immediately lease it back, converting it from an owner-operated location to a Triple Net lease location.
5. Family Offices
Triple Net leases are also growingly popular with family offices because of the reliable cash flow that they create and the bond-like characteristics of the investments. They like the regularity of cash distributions with high-yield income, the preservation of capital, the stability and security of NNN investments. Family offices are attracted to Triple Net leases because they are the least risky, highest occupancy investments that an investor can make.
What Stage in Life are These Investors In?
What Kind of Net Lease Strategies are There?
There are several ways to approach net lease investing; the first step involves doing research and going out to find particular buildings or products that you want to invest in. There are many options to choose from, including fast food franchises, cell tower properties, gas station convenience stores, warehousing, offices and even casinos in Las Vegas — the options are almost as endless as the list of real estate property types and asset classes.
Investors can choose successful Triple Net investments located in a specific geographical location or anywhere across the United States. This allows for investment diversification across regions of the country where concentrations in specific areas may increase risk.
Investors can also try the strategy of “bankable takeouts,” which is when an investor pairs up with a merchant developer and agrees to purchase the property that the developer is working on, so long as it meets a set of agreed-upon standards and expectations. That way, the merchant developer only needs to get a construction loan, negotiating better terms on that loan by demonstrating that they have an investor waiting to buy the property once completed.
Triple Net lease properties are incredibly popular among a wide range of investors because they generate a reliable cash flow with limited management responsibilities. If you are wondering whether or not Triple Net lease investing is a wise financial decision for you, reach out to the experts at Liberty Real Estate Fund and learn what they can do for your investment future today.
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