A triple net lease (or NNN lease) property is a special type of investment property that typically comes with a long-standing tenant agreement in place with terms that are favorable for both investors and tenants in the long-term.
In a triple net lease, the tenant bears most of the financial responsibility of the property which they absorb as operating costs of the business they run in the location, including:
- Monthly Rental Fees for the Building or Space
- Property Taxes
- Insurance Premiums
- Maintenance, Upkeep and Repairs
As an investor you have ample choices in where you can allocate your funds in real estate, so you may be wondering, “Why do a triple net lease property investment?”
This post will explore the reasons why triple net lease properties are advantageous to investors (and tenants) and give you tips on what to look for in triple net lease locations to ensure they have the low-risk, long-term profitability you’re looking for in your next investment.
Why Do a Triple Net Lease? Triple Net Lease Investor and Tenant Benefits
Investors often find that adding NNN properties to their portfolios can be very advantageous, and this is because triple net leases offer an array of benefits that both property owners and tenants alike enjoy as part of the NNN agreement.
Triple Net Lease Investor Advantages
- Consistent, Long-Term Occupancy: NNN leases are typically structured over a long period of time, meaning that renters are typically committed to occupancy for anywhere from 10 to 25 years, on average. For investors, this creates an income stream that is reliable and eliminates the time and money usually lost when other types of commercial properties sit vacant for a period of time in between tenants.
- Low Risk, High Return Investment: Triple net lease tenants are most often responsible for the majority of the major costs associated to the property, including property taxes, insurance policies and premiums, and ongoing maintenance and upkeep costs. Of course, the particular details of financial responsibilities in an NNN lease are unique to each agreement, it’s important to understand all the terms of an existing triple net deal on a property so you know exactly which obligations you need to prepare for and which belong to your tenants.
- Predictable Source of (Mostly) Passive Income: Investors looking for a predictable and mostly passive source of income find NNN investments extremely beneficial and totally aligned with their portfolio goals. In addition to an agreed upon sum of monthly rent, the operational and tax costs are often passed through to the tenant, which gives you a solid idea of how much income your triple net property will bring in every month over an extended amount of time.
- Little to No Management or Landlord Duties: With a triple net lease in place, you’re not tied to the property with your time or money as a landlord. Low-touch management frees up your time for other ventures and ensures you’re not locked into landlord duties for the property.
NNN Lease Limitations to Know
- Fixed Earning Potential: While an NNN lease provides a consistent revenue stream each year on your investment, that amount is typically fixed for the term of the lease. This means you can’t increase the rent if property values in your area spike, which can limit your earning potential in times of growth.
- Vacancy Risks and Rollover Costs: Though triple net leases are long-term, there is the risk of a tenant defaulting, which can result in losses as you try to fill the vacancy. While you can limit this risk by vetting tenants and their businesses thoroughly, this is always an inherent risk.
Net Lease Tenant Benefits
- Established Business Location: In a triple net lease deal, the tenant is able to create an established location for their business, over a long period of time. Most NNN lease deals span an average of 10 to 25 years, which gives tenants time to create a strong customer base that knows the location and business, and can return time and again.
- Long-Lasting Footprint: By having a known location, that is secured for an extended time period, triple net tenants have the opportunity to create a well-known and long-lasting footprint for their business. Business owners can focus on building their business without having to move every couple of years and create a true destination for their goods or services.
- Good Traffic and Anchor Tenant Proximity: The best net lease properties are located in areas with good traffic and an existing base of anchor tenants. Anchor tenants are well-known businesses with established brands that attract people to the area, who then get exposure to other locations and businesses in proximity. This can benefit net lease tenants by helping them capitalize on traffic that’s already flowing into the area.
What to Look for in NNN Lease Properties
There are many benefits to NNN lease properties, but most of the best advantages (such as long-term, predictable profit and low levels of risk and management) hinge on choosing the right property for your portfolio. Here’s a closer look at some of the factors you should be considering as you look into triple net investment opportunities.
As with most all real estate, location is a very important factor in selecting a triple net property that will bring you the most investment opportunity. It’s arguably even more important in triple net real estate though, and you should look for net lease properties that are in areas with good traffic and have close proximity to established businesses that will help draw in customers to your location as well. Corner locations are the most desirable as they’re easy to access and add a bit of prominence to your location as well.
When you’re considering net lease investments, you can usually find the best opportunities by studying population trends to see what areas are experiencing a higher rate of growth. If a particular city is attracting a lot of new residents, you can capitalize on the activity by choosing a net lease property in a busy and booming areas. Net lease properties in such areas do go at more premium rates, but they also offer solid (often higher) returns that have staying power.
Businesses with Longevity (Despite Outside Factors)
Even though triple net lease investments are low-touch from an investment standpoint, you should consider the longevity of the business operating in the location you’re considering. You want a business that has longevity and is not prone to shifts in technology or the economy. In short, you want a location housing a business that sells things people will always need. Some examples of desirable net lease real estate properties with longevity include:
- Convenience Stores
- Dollar Stores
- Gas Stations
- Fast Food Locations
- Grocery Stores
- Medical Facilities
Attractive Net Lease Terms
When investing in an NNN property with an existing tenant deal in place, you should take care in making sure you understand all the terms outlined in that contract. You should carefully read the fine print to ensure that you know exactly how financial responsibilities are divided between the property owner and the tenant. While many triple net lease deals offer pass throughs on most of the taxes and operating costs of a property, there’s not really any set standard of contracts in triple net lease real estate.
Each lease is specific to the terms that have been negotiated, so it’s important to know those terms beforehand. Otherwise, you may find yourself with limited profits due to unexpected costs that come up, which you didn’t know fell under your obligations. For example, some triple net lease deals may require that you take out certain triple net lease insurance policies and cover those premiums, or it may be outlined that the property owner is responsible for maintenance on certain parts of the building such as the structure and roof. Knowing ahead of time what financial responsibilities you have as the property owner will help you determine the profitability of your investment and keep surprises from cutting into your investment down the line.
Working with a net lease advisor who knows market trends and understands the longevity of different types of net lease investment locations can be highly advantageous for helping you choose an investment that will give you the low risk, long-term, predictable profits you’re looking for in your NNN property.
Sands Investment Group is made up of experienced advisors who have extensive expertise in triple net leases. Our team can advise you on all the intricacies and benefits of investing in triple net properties, based on our proven track record of successfully closed deals and satisfied investors (in fact, we’re the fastest growing net lease investment company in America, with over 1,700 transactions in 48 states – to the tune of $4 Billion – since 2010.)
Want to learn more about NNN properties for sale and speak with an industry expert about current triple net investment opportunities? Get in touch with an expert today by calling 844.4.SIG.NNN or sending us an email at info@SIGnnn.com.