How to Build Wealth with NNN Lease Investments

Mar 18, 2021 | Blog, Investment Properties, Triple Net - NNN or Net Net Net

Commercial real estate investments are often considered high-maintenance and risky. They have a reputation for unpredictable management expenses and a fickle rental and resale market. CRE is also known for illiquidity and the high cost to diversify. However, there is one type of real estate investment that defies the norm and helps you build wealth with ease – single-tenant, absolute triple-net lease (NNN) investments.

NNN lease investments nullify all traditional CRE concerns and help build wealth with:

  • 10- to 15-year monthly income guarantee with built-in rental escalations
  • Little to no maintenance or other expenses
  • Tax opportunities that increase your IRR
  • Potentially higher cash-on-cash returns and positive leverage
  • Overall returns up to and sometimes over 10%
  • Diversification of asset types, tenant types, and location

Goals Growth Success Target Concept

Start Building Wealth by Choosing the Right NNN Properties for Your Goals

One of the best things about NNN property investing is the low barrier to entry. You can enter the market with $500,000 to $1 million to invest. To learn which NNN properties would best suit your financial and lifestyle goals, conduct a risk assessment, then look for investment-grade national corporations or high-credit tenants that fit your needs, those that provide essential, recession-proof goods.

You want to lease to corporations that guarantee the lease for 10 to 15 years, and require little to no landlord responsibility. Choosing a mix of tenant types, asset classes, and locations will provide tens-of-thousands of dollars of responsibility-free income and the lowest possible risk factor.

High-credit, absolute triple-net lease properties that offer essential goods and services include:

  • Auto parts stores
  • Dollar stores
  • Fast food/QSR restaurants
  • Gas stations/convenience stores
  • Healthcare/medical centers
  • Retail pharmacies/drug stores
How does choosing one or more of these NNN investments help you to build wealth? Since a NNN lease is a legal contract with pre-set rental increases and guaranteed monthly income, it will not suddenly disappear or lose value tomorrow. When you own one or more triple-net properties with high-credit tenants, like McDonald’s or Dollar General, you benefit from worry-free, recession-resistant, tangible assets.

Understand the Ins-and-Outs of the Different Tax Opportunities

Multiple tax-saving opportunities, including cost segregation depreciation (CSD) and the 1031 exchange, can boost the return on your investment (ROI) and put triple-nets in line with other fixed-income investments and funds.

One of the most advantageous tax opportunities is the 1031 exchange. When you sell an investment property – say a rental home or high-maintenance apartment complex – to buy a NNN property, you may defer capital gains tax on the profits from the sale. The money you would have thrown away paying taxes is preserved. You can make a larger down payment on your new property or perhaps use the money to buy an additional property. As long as you reinvest, meet the 1031 timeline, and the IRS’ strict criteria, you could defer taxes indefinitely − it’s basically an interest-free loan from the government!

When you take into account the many tax advantages and incremental rent increases over the 10- to 15-year lease term, it is not uncommon for a 6.00% cap rate to become an 8–10% internal rate of return (IRR). There are also the additional benefits of a totally passive, consistent monthly income with no expenses, a tangible asset that offers more buying power, and a higher cash-on-cash (CoC) return. There is a surety of income with NNN properties not often found in other types of investments.

How is after-tax revenue higher in NNN investing than with other types of investments? The ability to write off depreciation, interest, and other property expenses, combined with other tax opportunities and the power of positive leverage can turn a 5.00–6.50% cap rate into a 7–10% IRR, creating wealth without the uncertainty that’s inherent in other CRE, and stocks and bonds.

Person putting coins on stack with an arrow showing upward progressionUtilize the Low Cost of Money Whenever Possible, Create Positive Leverage

Interest rate fluctuations can be favorable or not matter at all, depending on how you invest, and because NNN leases are typically 10 to 15 years with incremental increases, inflation and any rising costs are covered. Real assets can retain their value in both up and down markets, and if rates increase due to economic growth, NNN investments can actually benefit.

With current interest rates at historical lows, financial institutions are eager to lend for these “essential” business properties. Low interest rates are creating an interest-to-yield rate spread that pays down the loan and, on occasion, creates an increasing cash-on-cash (CoC) return with positive leverage, while providing significant income for decades.

These benefits are inspiring more buyers to enter the market, creating high-demand and a lower supply, which is furthered by 1031 exchange buyers who must purchase a property fast to fulfill their exchange and are often willing to pay a premium to lock-up. Because supply is tight and demand is high, engaging an expert NNN buyer’s advisor will help you secure the right property for your goals or you may risk not getting any at all.

Single-tenant NNN properties with strong tenants such as Dollar General, Walgreens, DaVita, 7-Eleven, KFC, and Firestone, among other major brands, remain the safest and most financeable investments to purchase.

Diversify Within Your Portfolio

To increase wealth and add further stability to your investment portfolio, it’s wise to diversify within your NNN investment holdings. You may consider owning nationwide properties in different locations (urban, suburban, industrial, rural), with different tenant types, asset classes, and lease durations. Think essential retail, medical, QSR, pharmacy, convenience stores, gas stations, industrial, and warehouses. For example, we have one pair of NNN investors who own seven dollar generals in different states and location types. We also have a client who owns a fee-simple, NNN KFC and Dollar General, as well as one NNN ground-lease Firestone.

When diversifying, you lower your risk even more by covering all the tenant, asset, location, and lease options. This strategy builds wealth with a healthy portfolio of tangible assets and guaranteed income.

When you own a NNN property, there are multiple guarantees bolstering the asset – a lease with a strong tenant promising to pay a guaranteed rental income stream and the tangible underlying real estate value, adding another layer of security to the investment.”– Jason Simon, Vice President, Westwood Net Lease Advisors

Businessman putting coins into piggy bank and using calculator to analyze tax savings with document graph data, financials

To Wrap it Up – Build Wealth with NNNs: Guaranteed Income and Healthy ROI for Years to Come

A NNN property investment will build your wealth with immediate, steady, guaranteed income with predetermined rent increases and annual tax opportunities. The long-term, revenue-generating capability and stability of NNN commercial real estate offers a reliable, truly passive investment that outweighs the volatility and ambiguity of the other types of investments, with an assurance that your investment will provide consistent cash flow and a tangible asset.

At Westwood Net Lease Advisors, we know these great properties sell fast, which is why we review the national market and connect with colleagues daily to find ideal, often off-market properties for our clients.

When you connect with your Westwood buyer’s advisor, he will do the same for you. Together, you will evaluate a selection of properties and tenants, examine various factors that determine the real cap rate value, and make sure the desired properties align with your wealth-building goals. Your advisor will guide you through the process from the risk assessment all the way to closing – at no cost to you. Contact us today for your no-obligation consultation. 314-997-5227

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