Commercial real estate industry is growing fast and many investors choose to invest their money in commercial properties as a source of building wealth over time. But, what investors like the most is investing in commercial properties with passive income opportunities. That’s why they see Triple Net Leases as great investments with steady cash flow.
However, investing in the commercial real estate industry can be quite challenging especially if you’re new in this market.
But, whether seasoned or new, investors should always be mindful of certain principles since there are a number of issues they should address when analyzing NNN investments.
That’s why I’ve decided to provide you with several key tips for NNN investments that might help you to successfully profit into the CRE world.
1. Analysis Of Future Rental Potential
Rent analysis is the first thing you should do before getting into a commercial Triple Net Lease investment. Even though the current tenant and the chosen location might seem perfect to you, you’ll still need to make an in-depth rent analysis.
Rent analysis may determine the potential of the property and protect you in case a current tenant vacates from the property. That’s why it is important to know how to identify an asset with a rental income that could be replaced.
Everyone likes a property that provides high rents, but you should be careful if the rental rate is not replaceable. For example, some property may provide $250,000 annual rent, but a rent analysis might tell you that if the tenant vacates from that property, the local market may hold twice as less, that is $25,000 a year.
That’s why seasoned investors should rent out their Triple Net Lease properties at less than market value. Specifically, if you have picked the right market and location, you are far more likely to be getting an increased return on investment, even though the rents are below market rent.
2. Credit-Worthiness Of The Tenant vs. Location: Which One Is More Important?
You will always need to look over the credit history of the tenant when analyzing Triple Net Lease investments. But sometimes, you will need to look beyond the creditworthiness of the tenant. Yes, a tenant who has a good investment grade credit can be advantageous…but not always.
Sometimes, there is nothing much attractive about a property other than a well-known tenant/company. But, if the tenant decides to vacate, you may have difficulties in re-leasing the property to another tenant due to the less desirable market without much value.
So, before investing in a Triple Net Lease property, make sure that the property would be appealing to other tenants based on the location, the structure, and the local neighborhood.
Having a tenant with a strong credit background is great, but not everything is about the tenant. Commercial real estate deals depend on other factors as well.
Yes, owning a property in a tertiary market and leasing it to a tenant with a strong credit record might look great, but think about what will happen if the tenant decides to leave.
3. Knowledge Of The Market
The key to success is a thorough knowledge of the market area. That’s why investors often target markets which they are familiar with rather than markets they don’t know well.
But before investing in a market you are comfortable with, make a market analysis which will include:
- potential traffic,
- estimated population growth, and
- similar factors that will increase business growth.
When analyzing a market you are familiar with, the chances of finding properties with a potential increase in value are much more likely.
Too much information about the market area…is never too much. Make sure to collect as many details as you can, whether from local businesses, professionals, journals or media that will help you make the right choice.
4. The Right Lease Structure
Since NNN investments are considered to be passive income opportunity, the lease for the property needs to be an Absolute Triple Net Lease. The lease must specify that the landlord/owner is free from any tax, utility, common area maintenance costs and building maintenance.
The investor should have a copy of the lease before getting into a purchase and sale agreement. The lease should also be reviewed by a commercial real estate attorney in order to evaluate the liabilities of both parties, the tenant, and the landlord.
5. Lease Term
In the short term, NNN investments provide income stream by the rent collected from the lease. The income stream will be short if the remaining lease term is short as well.
Since releasing a property can be quite expensive, you might need to use up more money to re-lease the property when the lease expires.
So, when considering NNN investments, it might be better to go for long-term leases, with approximately 10 years or more. But if the remaining term of the lease is short and you want a long-term investment, then you might ask for a reduced property price from the seller so that you can balance the releasing costs.
6. 1031 Exchange Funds
Investors can use the sale money from of a relinquished property to buy another Triple Net Lease property. This is the wisest way of doing a commercial real estate investing.
However, for a successful 1031 Exchange, you should follow strict timelines. You must identify a new, replacement property within 45 days after the sale of the relinquished property, and buy it with the 1031 funds.
You must use the 1031 funds within 180 days of the sale of the relinquished property to buy the replacement property. The NNN investment should be closed before the end of the exchange period.
If you want to learn more about 1031 Exchanges, check this article: Step-By-Step Instructions To Completing A 1031 Exchange.
A Buyer’s Agent Can Help You Make The Right NNN Investments
As you can see, NNN investments can be an excellent investment opportunity, especially for those investors who want passive income and steady cash flow.
However, even if these properties are an excellent investment opportunity, the process can be quite complex. And, while you can try to figure out everything on your own, it’s better to have a professional by your side. I’m talking about hiring a Buyer’s Agent.
I mean, why not use the help from a skilled negotiator and advisor, when it is free of charge for you, the investor? Yes, free. Buyer’s Agents get paid by the seller. Actually, they split the commission fee with the Seller’s Agent. Excellent, right?
Buyer’s Agents work as an intermediary between you, the investor, and the seller with his Seller’s Agent. They can provide access to many selling listings and they have strong negotiating skills.
So why take it all by yourself when you can enjoy Buyer’s Agent services for free? Having a professional that has a huge knowledge of the market by your side can be much more beneficial.
We, at Westwood, work as Buyer’s Agents and with our 18+ years of experience, we have successfully closed thousands of CRE deals.
We know NNN Investments can be an exciting process, but why bother with all the details when we can do all the legwork for you? If you need any help finding a Triple Net Lease property, or you have one in mind, please feel free to contact us.