Frequent Asked Questions
Answers to Common NNN Lease Questions
When it comes to NNN lease investing, it’s important to understand the process and how NNN lease properties can be of most benefit to you and your financial goals. In this regard, we decided to publish the most common NNN investing FAQs here.
If you do not find the answer you’re searching for, please reach out to our Buyer Advisors. Our Westwood team is passionate about helping clients understand the process and enjoy fruitful NNN investments that offer time freedom and long-term, steady monthly income.
NNN Investing FAQs
What is a NNN lease investment?
“NNN” is the abbreviation for a “triple net” lease. When you purchase a commercial building and/or the land it sits on and lease it back to a single tenant who agrees to pay net taxes, net insurance, and net property maintenance, as well as rent, utilities, and most other expenses, that is a NNN lease investment. These creditworthy tenants tend to be essential retailers, dollar stores, fast-food restaurants, gas station c-store combos, drug stores, and medical companies with investment-grade S&P and Moody ratings.
How do I start the NNN buying process?
The easiest way to begin your NNN buying process is to contact a Westwood Net Lease Advisor. Our consultations are free and there is no obligation. We are here to help and want you to feel comfortable and supported, whether you are ready to NNN invest now or later.
Does it cost money to engage a Westwood Net Lease Buyer’s Advisor?
When purchasing investment real estate, engaging a Westwood Net Lease Advisor costs you nothing. Much like with residential real estate, the cost is already factored into the price of the property and paid by the seller.
What is a 1031 exchange?
A 1031 exchange allows you to invest profits from the sale of one investment property into a similar or “like-kind” and often more valuable property within 180-days, and defer 100% of the federal capital gains taxes. Using a 1031 exchange, you can trade any type of investment property for another, including:
- Residential rental
- Multi-tenant property
- Gross lease property
- Vacant land
- Office complex
- Warehouse/distribution center
- Underperforming commercial property
- Net lease property coming to the end of the lease term
You will need the help of team of professionals to administer a 1031 exchange.
How much net worth do I need to invest?
The net-worth threshold to invest is usually $1 million, plus additional asset liquidity.
Do I need a down payment?
Yes, you need a down payment if you are financing the property, typically 30%–40%.
Can I pay all cash?
Yes. You can be an all-cash buyer.
Do interest rates affect the success of my NNN investment?
The potential benefits of securing a mortgage with a low interest rate can increase ROI, or Cash-on-Cash (CoC) return, financial leverage, and most importantly, increase basis that could be used for additional depreciation.
What is the average cap rate for most NNN properties?
Though every property has different characteristics that determine the cap rate, they typically fall between 4.50%–6.50%.
What is the average internal rate of return (IRR) for NNN properties?
Typically, the average IRR is 7%–10%. This will vary on a variety of factors including tax advantages and market conditions for financing.
How long do I have to utilize the 1031 exchange after I sell another commercial property?
You have 45 days to identify, in writing, the new property you wish to buy, and must close on it within 180 days of selling your original property.
Can I exchange residential property in a 1031 exchange?
Yes, you can use the 1031 exchange if the residential property is not a primary residence.
How do I know which tax laws apply to me and when to use them?
This is different for everyone. Speak with your CPA for the best tax advantage opportunities.
How do I know when it’s time to sell or exchange my current investment property?
Selling is a personal choice based on comfort level, financial need, and lifestyle goals. However, we do not recommend selling your current NNN investment without buying a new NNN property within the required timeframe for the 1031 exchange tax benefit. If you sell and do not roll the capital gains into another property, your tax liability could be significant. Here are a few factors that indicate it may be time to sell:
- You own a NN lease property and want to totally remove yourself from any responsibility by buying an absolute NNN investment.
- Other businesses and the economics around your property have changed.
- At the end of the lease term, the building requires large capital expenditures that may not add value to the property or be recouped by the next tenant.
- If you want to continue to buy and sell and acquire better NNN lease investments with the 1031 exchange for major tax benefits.
Can I just buy land, without the building, as a NNN investment?
Yes. That would be done through a Ground Lease, in which the tenant rents the parcel of land and takes care of it in its entirety, for up to 25 years.
Is it beneficial to own more than one NNN investment property?
It can be greatly beneficial to diversify with different tenant types, asset classes, lease terms, and geographical locations. This lowers risk and adds stability.
Are triple-net properties 100% maintenance-free?
Absolute NNN properties are 100% maintenance-free. Regular triple net properties can have some form of landlord responsibility, such as roof, structure, and parking lot.
What is CAM?
CAM, or common area maintenance, charges are operating costs charged in addition to the base rent for exactly what the title implies – maintenance fees for work performed and upkeep on the common areas of a property, such as parking lots, outdoor lighting, and landscaping. CAM can include but is not limited to:
- Sewer, plumbing, electrical
- Snow removal
- Trash removal
- Janitorial and pest control services
- Liability insurance
- Real estate taxes
- Center signage
- Common area utilities
- Common area HVAC maintenance
- Landlord’s administrative/property manager costs
- Reserve funds
CAM can also include capital expenditures like repaving a parking lot or replacing an HVAC unit, as well as system depreciation.
At what point in the process should I contact a buyer’s advisor?
As soon as you begin contemplating NNN investing. It is never too early to learn and take advantage of what the market is offering. Engaging a reputable buyer’s advisor before you begin the property search provides advantages and helps you choose the most ideal investment for your goals.
Should I use an LLC to invest in NNNs?
The answer depends on your long-term CRE investment strategy, how many properties you plan to buy, if you could benefit from investing with others, and if you want the tax structure an LLC offers. The most beneficial reasons to form an LLC are to protect personal assets, realize unique tax benefits, and if in a group, have access to more capital.
Is it easier to use online searches and platforms before starting the buying process?
From before the property search until you get to the closing table and sometimes thereafter, there are multiple actions that must be taken to protect yourself from making an expensive mistake — most of which cannot be accomplished with CRE software.
Are triple nets better than the stock market?
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, turn to triple net lease investments rather than the stock market. If you want all of the aforementioned and the peace of mind of 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.
What is a sale-leaseback?
A sale-leaseback is a real estate transaction in which a business owner, developer, or corporation sells its property to an investor and leases it back with a long-term, triple net lease, keeping control of operations while becoming the tenant.
What is a blanket mortgage and is it a good idea?
A blanket mortgage allows you to get a loan from one lender with one set of terms and make one payment for all your real estate. It allows you to buy, hold, sell, or replace various properties under one mortgage without triggering a due-on-sale clause.
When you own more than one investment property, there are benefits to utilizing a blanket loan, starting with a simplified process that frees up time and money, and goes on to potentially help you expand your real estate empire. Your CPA is the best person to help you understand if a blanket mortgage is right for you.
Which calculation is best for determining an investment's success?
There is no one “right” calculation. If you understand the difference between the following calculations and utilize the figures to determine if an investment has the potential you think it does, then you’ll have a better chance of knowing what you’re getting as you go forward with your property search.
- Cash-on-Cash Return measures pre-tax cash flow against your initial investment and shows what percentage of your initial investment is being returned to you on an annual basis.
- Cap Rate simply compares the purchase price of the property to the income (rent) it generates.
- IRR gives you the yearly return on equity after adjusting for expenses, rents, loan payments, and tax opportunities.
- ROI measures how much profit is made on an ongoing basis.
What are the best states or locations for NNN investing?
There are many states with no income tax or capital gains taxes and some with lower taxes than others, just as there are states with higher cap rates and more growth. There are overlooked locations with competitive returns; primary, secondary, and tertiary locations, as well as different class ratings (A,B,C).
This is when a buyer’s advisor helps tremendously. Location is critical to the success of your investment.
Want to Know More?
Contact Us for a No-Obligation Consultation
Whether you are a new or a seasoned investor, investing large sums of money in commercial real estate is a life-changing decision that requires planning. When you engage a Westwood Net Lease Advisor, we get to know you and your goals and help you learn everything you need to know – from the start of the process all the way through closing – so you can invest with confidence. If you would like to learn more, contact Westwood Net Lease Advisors today for your no-obligation consultation. 314-997-5227.
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