Triple net lease or NNN properties are ideal for investors that seek to generate adequate returns from real estate investing. Presently, more commercial real estate investors turn to triple net properties, especially during and after this pandemic, seeing as they offer higher profits than bonds and other related investments.
Additionally, it provides steady income from the tenants while removing the property responsibilities from the landlord’s hands. This trend is gaining popularity in commercial real estate markets nationwide.
To help you understand triple net leases, I’ll need to address the question, “what is a triple net lease?” Rest assured, you’ll gain immense knowledge about triple net investing at the end of this guide.
Before going into a detailed explanation of what a triple net lease is, how smaller investors can enter this market, how to source for its financing, and its benefits for both tenants and investors, let’s examine the various types of commercial real estate leases.
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Kinds of Commercial Real Estate Leases
Landlords and tenants can negotiate various commercial net lease terms based on the physical and financial responsibilities and expenses that come with maintaining and occupying the property. There are generally three kinds of leases used in commercial real estate:
Gross Leases
This lease entails the tenant paying a flat rental fee for occupancy. However, the landlord pays for the regular operating expenses, such as electricity, water bills, and taxes.
Modified Gross Leases
Under modified gross leases, the tenant pays a flat rate. However, besides the base rent, the tenant handles some of the property’s operating expenses.
Net Leases
To understand the triple net lease definition, let’s walk you through the concept ‘net leases’.
Under a net lease, the tenant handles the base rent and other extra expenses on the property, like maintenance, insurance, or taxes. There are three variations of net lease: single net lease, double, and triple net lease.
In each net lease, the tenant takes responsibility for one or more of the previously mentioned expenses. Thus, a triple net lease means the tenant handles the whole three expenses.
What’s a Triple Net Lease?
Triple net leases are lease agreements on a commercial property where the tenants agree to handle the lease and all the property expenses that would have typically belonged to the landlord.
Triple net properties have become so popular as a commercial investment option for people seeking steady income with low risks.
Triple net investments are property portfolios with three or more commercial properties leased by a single tenant with an existing in-place cash flow.
The triple net commercial properties may include industrial parks, office buildings, or shopping malls. Free-standing buildings like restaurant chains, pharmacies, or shopping malls, are part of commercial properties.
The average lease term is between 10 to 15 years, with contractual rent escalation. However, popular triple-net tenants like Walgreens might opt for 20 years or more lease terms.
The Benefit of Triple Net Investment for All Types of Investors
Investors in triple net lease enjoy several benefits, including stable, long-term income with a probable capital appreciation of the property.
More so, investors aren’t bothered with real estate management operations, like tenant improvement costs, vacancy factors, and leasing fees.
When the property is sold, investors can use their capital in other triple net lease investments without additional tax payment through a 1031 tax-deferred exchange.
Investors with triple net properties must be accredited with a minimum net worth of one million dollars, excluding their primary residence value or $200 000.
Smaller investors may also participate in triple net lease investment by investing in any real estate investment trusts focusing on NNN properties in their portfolios.
Private Financing for Triple Net Properties
Getting a loan to refinance or buy a triple net investment isn’t different from a traditional real estate loan. The underwriting’s major parts will focus on the property’s lease agreement.
However, special attention will be paid to the lease’s guaranteed length of years, past business performance, and paid expenses.
Triple net properties have their risks and advantages for lenders, so applicants need to understand how the dynamic might affect lending companies’ decision-makers regarding its financing.
Why Triple Net Leases Favor Tenants
Triple net leases offer you the freedom of choice as a tenant. Although you’ll be handling insurance, maintenance, and taxes, your rent is typically lower.
In a triple net lease, it’s possible that with proper negotiation, the landlord can agree to take some expenses like certain types of renovations or utilities.
And the best part is?
If you’re under a single-tenant lease, it offers an extra benefit. Because you’re in charge of the property’s maintenance and insurance, this type of triple net lease can allow you to find the best deals when you need to maintain the building.
While the triple net lease terms might put some constraints on this freedom, you’re not required to pay anything the landlord wants as facility costs.
Why Landlords Prefer Triple Net leases
By shifting the property’s operating cost to the renter, the landlord retains the ability to remove some unpredictable costs that come with leasing a triple net property.
If the expenses for maintenance, insurance, or taxes go up, the landlord understands that he doesn’t have to bother with the increase. Triple net leases are better forms of risk management, and most landlords prefer them presently.
Under this lease, the landlord’s expenses, including those he avoids paying, all fall to the tenant. That way, the owner is free to pursue other investments while enjoying a steady income.
The Bottom Line
Whether it’s your first time as a triple net investor, there are specific considerations you’ll need to make regarding its impact on your final costs.
Many investors see triple net investment as a buy-and-hold strategy. As an investor, you’ll need to find reliable and steady tenants who’ll ensure a continuous income stream from your triple net property that’ll last for decades.
Adding a triple net investment as an income stream will not only boost your portfolio’s bottom line but also give you the confidence you require to pursue other higher-yield investments.
Contact Buy NNN Properties to get started on this lucrative and effortless commercial real estate investment.
