If you’re ready for a low-risk investment, guaranteed monthly income with fixed increases, and the benefits of owning a tangible asset that can be sold at any time, then yes, a triple net (NNN) investment is better than the stock market. If you want all of the aforementioned and the peace of mind knowing your tenant will pay you no matter what is happening in the economy, then NNN property ownership is a far better option to fulfill those goals than the stock market.
In this article, we’ll explore NNN vs. stock market:
- Tax opportunities
NNN Lease Investments Vs. Stock Market Returns
Properly chosen NNN investment properties are safe assets that preserve cash flow, build wealth, and yield reliable, increasing returns with little to no owner responsibility. Owning one NNN property or a mix of properties with different tenant types, asset classes, and locations can provide tens of thousands of dollars of responsibility-free income, the lowest possible risk factor, and the highest potential internal rate of return (from 7 to 10% on each).
If you’re used to the stock market with an average ten-year return of 10-12%, you may be surprised that, when adjusted for inflation, stock market returns lose 2–3% annually, providing a realistic 7% to 9% return, which is in-line with stable, income-producing NNN investments that offer less uncertainty.
Stock Market Volatility vs. Triple Net Lease Stability
The stock market is volatile. Rarely in recent history have we seen the range of ups and downs that COVID-19 has produced. Traditionally, the stock market is at the mercy of economic perceptions, predictions, interest rates, changing laws, and politics. These factors can create rapid swings in share value, making it more difficult to rely upon for asset and income preservation.
With stocks and bonds, the value of the investment lies strictly within a piece of paper promising repayment or income. You can lose as much as you gain quickly, with no control over the outcome, and there is a significant risk of losing a lifetime of wealth just when you need it most. Stocks do offer liquidity, but at what cost or penalty? Then there’s the hope of having the flexibility to wait for the market to be “just right” to sell. Stock markets can crash. The right NNN investment will not. A triple net lease investment guarantees stability and revenue.
A triple net lease is a long-term, legal contract with pre-set rental increases from a creditworthy tenant, so it will not suddenly disappear or lose value tomorrow. Additionally, there are multiple guarantees bolstering the asset, including a lease with a strong tenant promising to pay a guaranteed rental income stream, and the tangible underlying real estate value, which adds another layer of security and stability to the investment.
Triple net investments are a smart way to diversify any portfolio and temper the unpredictable nature of the stock market.
NNN vs. Stock Market Tax Opportunities
Your annual tax rate on stock market profits, depending on income and length of time you’ve held the asset, could be as high as 37% (or even more in 2022 if the Biden Administration’s tax reform passes). Short-term capital gains from stocks held less than a year are taxed as ordinary income. Long-term gains, slightly less. Stocks offer very few, if any, tax opportunities.
By contrast, the income from triple net assets, depending on the state in which the property sits, may not be subject to income tax or state capital gains taxes. NNNs also offer depreciation opportunities and the IRS’s 1031 exchange tax deferral on federal capital gains.
NNN Property Ownership in States with No Income Tax
NNN property ownership in the states with no personal income tax and no state capital gains tax can preserve significant capital. Those states include Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennesee limit their tax to interest and dividend income. Other states that don’t tax capital gains, even though they have a state income tax, are Colorado and New Mexico. Montana offers a credit to offset a portion of the capital gains tax.
When you factor in the annual savings of not paying income tax, or paying a very low tax, depending on your income bracket and where you purchase, you could save tens of thousands of dollars. If you want to see which US states are the best to buy NNNs, be sure to check out this article for greater detail.
NNN Property Depreciation
There is also NNN property depreciation, such as cost segregation depreciation (CSD). This drastically accelerates the depreciation of certain building expenses. Based on the property and individual tax variables, money spent on non-structural CapEx improvements may be depreciated over five, seven, or 15 years, versus 27.5 or 39 years.
This much shorter depreciable tax life – possibly a 100% write-off the year of purchase – helps you realize immediate cash flow and achieve significant tax benefits on new and existing buildings. These benefits are also gained through asset reclassification and write-offs when the asset is sold.
NNN Property 1031 Exchange Tax Deferral
When it comes to NNN tax opportunities, one of the biggest is the 1031 exchange. This tax code allows you to trade or “exchange” any type of investment property for another and defer the federal capital gains tax, possibly indefinitely. For example, you could exchange a residential rental for a retail store, an apartment complex for land or a medical clinic, or an office block for a fast-food restaurant.
Trading a high-maintenance property for an absolute NNN property also cuts the expenses and headaches of dealing with property issues, and paying property taxes, insurance, maintenance, management salaries, and more, putting additional money back into your bank account beyond the capital gains deferral.
NNN Investment & Stock Market Benefits
Stock Market Benefits
The stock market has its benefits, mainly that it typically rises in value over time, despite the dips and recessions. If you have decades to invest, the stock market can provide a large payout when you’re ready. It is also liquid, with plenty of buyers waiting in the wings if you should decide to sell, though selling at a profit may not always be possible.
Triple net investments are stable and have been for decades. They are not at the mercy of daily economic perceptions, predictions, interest rates, changing laws, and politics. Interest rate fluctuations can be favorable or not matter at all, depending on how you invest, and because leases are 10- to 20-years with incremental increases, inflation and any rising costs are covered.
Though real estate has a reputation for a lengthier sale time (or illiquidity), since NNNs are such valuable, high-credit tenants that guarantee income, many sell before they ever make it on the market. Those listed for sale tend to sell within days and, overall, they typically close much faster than other types of real estate.
Additionally, NNN properties are essential in nature, and as the pandemic has proven, they are adaptable, so they can thrive in any economic condition. You can realistically expect a 5–7% ROI, a healthy monthly income, and tax benefits that preserve capital.
NNN investments balance the high-risk nature of the stock market and create a dependable wealth strategy.
How to Find the Best NNN Investment
When considering triple net investing, it is important to engage a reputable buyer’s advisor to assist with your investment journey, as there are many variables in the process that should be completed with total accuracy to maximize your profitability. Searching online for properties will only get you so far, and it’s a financial risk not worth taking.
To secure the best NNN investment for your goals, an experienced, specialized Westwood Net Lease Advisor can help you define exactly what fits your financial and lifestyle objectives, locate available properties anywhere in the country that fit those objectives, and help you through the process to closing and beyond.
To Wrap it Up – Triple Net Investing Beats the Stock Market for Stability
The long-term, revenue-generating capability and stability of triple net lease commercial real estate is a reliable, passive, guaranteed source of income. NNN investments far outweigh the volatility and ambiguity of the stock market with an assurance that your investment will provide consistent cash flow, as well as many other benefits.
Westwood Net Lease Advisors specialize in NNN investments and 1031 exchanges – we know the market and are well-known in the marketplace. We work hard for our buyers and provide the confidence to navigate the often-complex process with ease while offering objective advice, education, knowledge, and advocacy, at no charge. Contact us today for your free, no-obligation conversation. 314-997-5227