Here’s a little secret: real estate moguls love to buy triple net properties. True, triple net leases might not be as sexy as some other types of commercial properties, but when it comes to a steady income that is basically hands-off, they can’t be beat.
Most forms of real estate require a certain amount of management. If you decide to manage the property yourself, you’ll end up spending a good chunk of time handling tenants, payment, and other day-to-day issues.
At a certain point you’ll need to hire a property management team, however, which although necessary will end up costing you a portion of your profits.
If you find a good one you’ll still be responsible for making some decisions about the property, and if you don’t find a good one… you’ll spend a lot of time searching for one that you can rely on.
That’s why, unless you love the “challenge” of hands-on management, many big real estate investors prefer to diversify their portfolio with triple net leases. Triple net leases allow them to spend more time on the properties that benefit from their attention, while bringing in a predictable cash flow even during the ups and downs of a volatile economy.
You don’t need to hire a property manager, since there is nothing to manage. The tenant is responsible for the insurance, all repairs and maintenance, and any structural components of the building such as the roof. All the operating expenses also fall to the tenant, including taxes and insurance…
… and all you have to do is pick up your check in the mail. Nowadays with automatic deposit, you don’t even have to do that.
It’s passive income at its best.
Types of Commercial Real Estate Leases
Commercial real estate leases range from absolute net leases, where a tenant is responsible no matter what (for example, even during a natural disaster or if the building is condemned) to absolute gross leases, where the owner is responsible for paying for all expenses associated with the property.
Most leases fall somewhere in between, with the tenant being responsible for some portion of the expenses and the owner responsible for other specified expenses.
What Exactly is a Triple Net (NNN) Lease?
A triple net lease is a lease where the tenant is responsible for paying nearly all expenses associated with a property. Because tenants are investment grade tenants from nationally well-known franchises, they are less likely to default.
The great thing about a triple net is unlike with other commercial properties, you don’t have the ambiguity of what will happen when a tenant leaves in a few years. NNN leases run anywhere from 10 to 20 years, with five year renewal options.
So as long as you’re not at the end of the lease, you won’t have to worry about vacancies or finding a reliable tenant.
Lenders Love Triple Net Leases
Commercial real estate lenders, whether a bank or a private lender, look at the potential of the property rather than the buyer’s credit.
Lenders love triple net leases, because they provide all the benefits of a commercial investment property with few of the risks.
Single tenant NNN properties are long-term leases, located in visible areas with high foot and vehicular traffic. They are often next to or in front of anchor tenants like Walmart or Home Depot, which means they are well-positioned to benefit from the traffic these tenants bring in,
And because these are national tenants that are franchises, they are supported by their parent company, who makes sure they succeed. They are also guaranteed by the parent company, so if for some reason they do fail, the parent company will ensure you get paid anyway.
They Make Perfect 1031 Exchange Replacement Properties
A 1031 exchange allows you to sell one property and buy another one without paying taxes, since the gain is deferred to a later time. As long as all the funds from the sale property are used to purchase a like-kind property, the investor does not need to pay any taxes associated with the purchase of the property until it is sold.
If you’re tired of management intensive properties you can easily use a 1031 to sell your previous property or properties and purchase a triple net instead.
One Caveat… Make Sure the Lease Is Actually A Net Lease
Even though a seller may claim a lease is a triple net lease, that doesn’t mean it actually is one.
It’s not unheard of that a seller will claim a lease is triple net, when in fact the fine print in the lease requires the owner to pay for certain expenses. This is more common in older buildings which require more maintenance and therefore often require the owner to pay for any capital expenditures.
The best way to ensure this doesn’t happen to you is to read the lease carefully in order to check if the wordage of the lease is in accordance with the name.
Keep in mind that even with an absolute net lease there are some expenses that simply can’t be passed down to the tenant. For example, accounting or legal costs – though small – are not covered by most NNN leases.
Another important factor is that when you’re considering a net lease property, not all national tenants are the same. Corporate-backed leases differ from franchise-backed leases; just because a store is well-known doesn’t mean the parent corporation will step up to the plate if your tenant fails. Due diligence of the company in question is still a necessity, even at this level.
Still, whether you have a mature portfolio or are just starting out, triple net lease properties are an attractive opportunity to leverage your money and increase your rate of return.