In last week’s blog, What is a NNN Lease Investment? we shared the basics of triple net leases, who leases the properties, and the benefits and drawbacks. We also demonstrated just how straightforward these income-producing investments can be. So now the question remains, how do you invest in a triple net (NNN) lease property?
How Much Money do I Need to Buy a NNN Lease Property?
Before you spend time property searching, it’s good to know what is expected from a financial standpoint. Generally, you will need 30 to 40% down and approximately $500,000 to start, all while maintaining liquidity in savings or investment accounts above and beyond your down payment. In other words, a lender wants to see that you are not investing your entire savings into a NNN investment property.
How do I Choose the Best NNN Property?
Now that you know what the financial parameters include and you’re ready to move forward, how do you choose the best NNN property for your goals? This is a great question since acquiring the right NNN investment will determine your investment’s success. Therefore, spend a little time upfront to assess your risk tolerance and financial situation in greater detail before you choose the property you think you want to purchase.
Once you know what you can afford and how you feel about the level of risk involved, then you can narrow your scope to the triple net properties for sale that best fit your goals.
When you engage a NNN buyer’s advisor from the start (at no cost to you), he or she can help with your risk assessment, then show you pre-market, off-market, and listed properties that could achieve the desired outcomes. A reputable buyer’s advisor can also provide a buying advantage, help you determine the tenant and lease viability, and be a resource for lenders, title companies, and legal support.
Once you find your ideal NNN property and you’re ready to make an offer, the details of the transaction can be handled by your buyer’s advisor, from the letter of intent to the closing table, with minimal involvement from you. Here is how the process unfolds.
10 Steps to Buying a NNN Property For Sale
- Engage a reputable NNN buyer’s advisor (at no cost to you) as you begin the process.
- Define your risk tolerance and financial goals.
- Determine the income/returns you need from the investment.
- If you are obtaining a mortgage on the property, identify your lender.
- Determine if you want to use a tax benefit.
- If you’re using a 1031 exchange, you’ll need to identify a qualified intermediary.
- Conduct a property search, look at tenant credit, location, lease type and term.
- Through your advisor, make an offer, send an LOI, and secure a contract to purchase.
- Your advisor will conduct in-depth due diligence on the tenant, lease, and property and help expedite the resolution of anything that is not up to standards.
- Close on the property and collect monthly income.
- Create an exit strategy.
1. Engage a Reputable NNN Buyer Advisor as You Begin the Process
Engaging a buyer’s advisor to represent your best interests throughout the buying process can be step one, two, or three. We recommend engaging a specialized triple net advisor right away since he or she can get to know you and your goals and lend professional advice on the financials, including tax opportunities.
Once you’ve created a NNN investment strategy, your advisor will narrow the search for triple net properties that fit your objectives. Often, when buyers come to us at Westwood Net Lease Advisors, they think they know which properties they want to buy, then we uncover reasons why those may not be the best investment for them or we find better pre-market or off-market options.
Your buyer’s advisor will make the entire process easier and less stressful while making sure you’re not leaving money on the table.
2. Define Your NNN Investment Risk Tolerance & Financial Goals
The key to any successful commercial real estate (CRE) investment is to understand your capacity for the risks involved and what you need financially going forward.
To define your NNN investment risk tolerance and financial goals, there are many important questions to answer, such as what portion of your wealth are you investing, or are you spending your entire 401k? Do you need to live on the income, or will the income pay down the commercial mortgage? How much down payment do you have? How much monthly income do you need? Will there be any extra money for unexpected expenses? What lease term are you most comfortable with? Do you need depreciation for tax purposes or tax write-offs? Is this property satisfying a 1031 exchange?
As you can see, there are a lot of factors to consider. This is where a buyer’s advisor will not only speed up the process but educate and lend advice for the most positive triple net investing experience with the most ideal outcome.
For a printable version of the risk tolerance assessment, download our Know Your NNN Risk Tolerance Worksheet.
3. Determine the Income & Returns Needed from the NNN Investment
Before you invest, learn the different figures advertised, such as cap rate, NOI, and ROI, and clarify any misinformation that may be clouding the potential for a profitable NNN Investment.
The following calculations can help you determine if an investment has the potential to provide the income you need and the returns you’re hoping for as you go forward with your property search. Simply click on the linked text to learn how to calculate the different measurements.
- Cash-on-Cash (CoC) 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 net income (rent) it generates. With absolute NNN leases, the cap rate is the net operating income (NOI) as there are no landlord expenses.
- Cap Rate Spread is the difference between the aggregate nationwide cap rate and the current interest rates offered by lenders. It estimates the incremental difference in returns expected from your NNN investment over risk-free bond returns.
- IRR, or the internal rate of return, gives you the yearly return on equity after adjusting for expenses, rents, loan payments, and tax opportunities.
- ROI, or return on investment, measures how much profit is made on an ongoing basis.
Absolute NNN investments surprise many investors with healthy, uncomplicated, adjusted returns of up to 8% when factoring in depreciation. They preserve cash flow, build wealth, and yield a reliable, long-term monthly income with very little, if any, risk of loss. Knowing these figures will provide a strong indication if the property types and tenants you’re selecting will meet your financial criteria.
4. If Obtaining a Mortgage for the NNN Property, Identify Your Lender
Identifying a lender is a pretty straightforward step, but what many NNN buyers don’t know is that some lenders specialize in financing triple net lease investments. When you choose to work with a bank, mortgage broker, or credit union that is familiar with triple net lease tenants, their leases, and their reliability, the process is often faster and smoother. You’re also more likely to get different financing terms, such as a lower interest rate or longer payback period, than you may get with a lender unfamiliar with the NNN lease-buying process.
Not sure where to go for financing? Westwood Net Lease Advisors has a network of nationwide, reputable mortgage brokers and lenders that can be a resource for you should you wish to use them.
5. Determine if You Want to Use a Tax Benefit When Buying a NNN Property
You may be investing to receive a specific tax break, like straight-line depreciation or bonus deprecation, or maybe you’re unaware of your tax code options.
One valuable example of tax relief is cost segregation depreciation (CSD), which may allow nonstructural improvements such as indoor and outdoor lighting, heating and cooling systems, and parking lot and landscaping to be depreciated over five, seven, or 15 years, versus 39 years.
There is also the potential for bonus depreciation, which allows you to take 100% of the adjustment in one year (on buildings purchased after September 2017 and on/before December 31, 2022), and other simple tax strategies such as living and/or buying in a US state that doesn’t impose an income tax.
To determine if it’s worthwhile to use a tax benefit when buying a NNN property, consult your CPA or tax professional to get the specifics. Your NNN buyer’s advisor can share some details to get you started, but cannot offer legally binding tax advice.
5. a. 1031 Exchange: Identify a Qualified Intermediary
There is also the 1031 exchange tax code, which allows you to trade any like-kind investment property for another and defer federal capital gains tax, potentially indefinitely. For example, you can sell a high-maintenance apartment complex, purchase a NNN Dollar General and potentially defer 100% of the capital gains tax from the sale of the apartment complex.
To do this, you’ll need to identify a qualified intermediary and work with a team of 1031 professionals who understand the 1031 exchange and can help you complete it on time and within the rules set forth by the IRS.
By achieving significant tax relief on your NNN investment, you can preserve capital, realize immediate cash flow, and build wealth.
6. Conduct a NNN Property Search, Look at Location, Tenant Credit, Lease Type & Term
Now that you’re ready to start the NNN property search, concentrate on three things: location, tenant credit, and lease type/term. Location is often the first clue to a strong real estate investment — you’ll rarely find blue-chip companies in underperforming locations. But the reliability and creditworthiness of the tenant go hand in hand with the location as a success factor. Add a long-term, corporate-guaranteed triple net lease that provides reliable, worry-free monthly income for ten to twenty years, and gain peace of mind that the tenant is contractually bound to stay.
- Prime location with high traffic counts or an area that fits the tenant’s geographical audience, i.e., Dollar General thrives in suburban and rural communities
- Investment-grade or high-credit corporation (franchises) as the tenant
- Long-term, corporate-guaranteed, absolute or regular NNN lease with built-in rent increases and extension options
7. Make an Offer, Send an LOI & Secure a Contract to Purchase
Once you find the triple net property that fits your criteria, the fastest way to start the offer process and secure the property is for your buyer’s advisor to help you negotiate the deal and present a Letter of Intent (LOI).
An LOI demonstrates to the seller that you are serious about purchasing their NNN property for sale. It is a bridge between your intent to buy and the legal sales contract. Though it is not legally binding like a contract to purchase, it is a realistic start to the buying and selling process that both parties respect and agree to uphold. It also encourages the seller to stop marketing the property until the legal purchase contract is presented. Additionally, an LOI is a valuable tool in the property identification process for a §1031 exchange.
Chris Schellin, Westwood Net Lease Advisors President, explains, “An LOI presented by one of our advisors carries weight with commercial real estate sellers and their agents because we’re known for being experts in this field and representing qualified buyers. Sellers know we operate as efficiently as possible to get to the closing table without disruption.”
8. Conduct In-depth Due Diligence on the Tenant, Lease & Property
For 30 days or so after you go under contract on the NNN property, due diligence is performed. During the due diligence period your advisor will investigate to confirm that the property and lease are exactly as advertised, the property is being used as per its legal description, and there are no undisclosed details. The survey and environmental studies are also performed during this time.
Your offer to purchase will be contingent on the information disclosed by the due diligence review – tenant financials, lease review, title review, easement details, environmental report, and as-built survey. If the review reveals any discrepancies, it can be used to exit the deal without risking your earnest money deposit.
9. Close on the Property & Collect Monthly Income
Once due diligence is finished, any issues have been corrected or negotiated, and you and your advisor have worked with your lender, CPA, attorney, and title company to get all the closing paperwork in order, it’s time to close on your new triple net lease investment. Depending on the type of transaction — all cash, financed, 1031 exchange, or new construction — NNN lease properties can close anywhere between 20 and 180 days. Once the closing documents are signed by both parties, you can enjoy retirement or continue to work while collecting passive monthly income for the next 10 to 20 years.
10. Create a NNN Investment Exit Strategy
Knowing what you eventually plan to do with your NNN real estate helps guide the entire process. This is called a NNN investment exit strategy. You may want to keep the property long-term or sell it in a few years, gift it to heirs, or use a 1031 exchange to trade into one or more NNN properties when the time is right.
Your exit plan could influence which asset class (retail, fast food, gas station, medical clinic), lease type (NNN ground lease, triple net lease, absolute NNN lease), or tenant (Walgreens, Dollar General, 7-Eleven) is most likely to get you to your destination.
Though exit strategies tend to change over time, knowing why you’re buying and what your long-term goals are will ensure you buy the right property for your objectives. Your NNN advisor can help you create a solid plan that gives you the most direct route to exiting so you can follow the path throughout the course of ownership.
To Wrap it Up — Step-by-Step Guide: How to Invest in NNN Properties
We hope this step-by-step guide helps you understand how to invest in NNN properties, regardless of your level of CRE experience. Even savvy real estate investors see the value in engaging a NNN buyer’s advisor who manages all the steps in the process and takes an advisory approach, from the risk tolerance assessment to closing and thereafter, at no cost to the buyer. Westwood Net Lease Advisors is here for you throughout your triple net investing journey. Contact us today for a free, no-obligation conversation. We look forward to meeting you! 314-997-5227
