When you begin to consider your options for real estate investments, or when selecting a replacement property for a 1031 exchange, a variety of net lease investment options come into play. For those looking for a value-oriented, real estate investment, then the type of lease is an important part of your decision.
What is a NNN Lease Investment?
A triple-net lease or NNN lease is a common commercial lease structure. In this type of lease, tenants pay property taxes, property insurance, and common area structural maintenance in addition to the rent.
As the number of “nets” increase, tenants take on more responsibility for the property and gain control of the upkeep and the property costs. As they pay utility costs, taxes or insurance fees directly, tenants are less likely to be overcharged for these costs when they are estimated into a standard rent rate. This is often preferred by tenants so that the landlord does not have to seek higher rent from the tenant.
There are other ways to structure a lease agreement such as Gross Lease, Net Lease, NN Lease, Absolute Lease, or Bond Lease. You can read about the differences here.
Benefits of NNN Investment for Real Estate Investors
A triple-net investment property is one of the more popular choices because it offers businesses and organizations greater freedom. This type of net lease tends to be the most commonly selected net lease agreement for commercial and retail space, and that is because there are several benefits.
• Having all expenses paid for by the tenant decreases the investor’s overall exposure to potential loss. Properties on a NNN lease usually provide steady and predictable returns over time.
• Much of the burden and time commitment that comes with managing a property is lifted from the shoulders of the investor because, in a NNN lease, the responsibility falls on the tenant. The landlord is not responsible for any operating obligations. This makes ownership relatively simple and hands-off.
• A NNN lease is generally a long-term agreement and is usually made with credit-rated tenants who are more likely to uphold long-term leases. This can generate higher long-term income and higher growth potential for landlords.
Risks of NNN Investments for Real Estate Investors
NNN investment properties can be great long-term investments, but as with all investments, there are potential risks that are important to be aware of before you invest.
• These types of NNN lease agreements are usually occupied by single tenants who require the property to meet specific requirements for their business. Grocery stores and coffee shops will have specialized interiors that may require a lot of upfront cost to renovate should you have to re-lease the property.
• If the tenant does not renew the lease, you risk 100% vacancy for an undefined period of time. With only one tenant, the rent goes to zero and the owner becomes totally responsible for the taxes, insurance, and maintenance until the space can be filled.
The best way to minimize or prepare for this risk is to make sure you understand that it exists. If an investor does their homework and looks at the location of the NNN investment property, the long-term lease of most NNN leases and other factors, the risks may not be a concern.