Investing in triple net (NNN) lease properties can grow your wealth in any economy, even if you need to take on debt to invest. But is 2023 a good time to get a commercial loan with higher interest rates? What deals are out there? Are there benefits to utilizing a mortgage versus paying all cash?
In this blog, we’ll answer those questions and help guide you as you prepare for your first or next single-tenant net lease investment.
Why NNN Lease Properties are Easily Financeable
Many commercial real estate (CRE) investors are familiar with the term “triple net lease” but if you’re new to investing, a triple net lease is a long-term lease (15–20+ years) that requires the tenant (usually a multibillion-dollar corporation) to pay all three costs associated with owning the property: taxes, insurance, and maintenance.
An absolute triple net lease takes it one step further, requiring the tenant to pay for everything, including things like roof, structure, and all other expenses, such as the parking lot and outdoor lighting. As the landlord of a triple net lease property, you are absolved from most or all maintenance and financial risk. You simply collect rent and live your life.
Therefore, due to the length of the NNN lease, the credit of the investment-grade or high-credit company backing the lease, and the location of these essential businesses, lenders are eager to offer commercial mortgages for single-tenant NNN properties. These CRE investments are more financeable than high-maintenance, expense-laden real estate, such as apartment complexes and multi-tenant buildings, often with much better terms.
Chris Schellin, Westwood Net Lease Advisors President, adds, “A triple net property investment offers much higher security against default when compared to a gross lease property, which is appealing to lenders. Because triple net mortgages are secured by long-term leases and major brand companies in prime locations, this often results in better loan terms, such as lower interest rates, higher loan-to-value ratios, and longer repayment periods.”
Benefits of Triple Net Lease Investment Commercial Mortgages
Before we talk about 2023 commercial mortgage deals, it’s helpful to understand the benefits of obtaining a commercial mortgage, even if you’re considering paying all cash.
NNN Mortgage: Financial Flexibility
One of the primary benefits of using a triple net commercial mortgage is that it offers greater financial flexibility. With this type of financing, you can take advantage of the long-term NNN lease to secure lower interest rates and longer repayment periods, which can increase your cash-on-cash (CoC) return.
Since your CoC return is the amount of cash you receive (rent minus debt service) divided by the amount of cash initially invested, the interest rate on the debt will affect your return and the long-term value of the investment (your internal rate of return/IRR).
NNN Mortgage: Potential Liquidity
NNN mortgages often provide more liquidity than other financing options. When financing becomes less expensive with a lower interest rate and your tenant continues to pay the same amount of rent or more during the escalation periods, future cash flows could increase as debt-service costs decline.
By making annual payments as a percentage equal to the return on the property, your debt essentially pays for itself, and the equity portion could provide the same return as it would in an all-cash purchase. This could allow you to leverage your existing property for additional capital, refinance an existing property, or purchase another NNN investment, instead of having to take on debt from outside sources.
Many triple net lease tenants build annual increases into the lease, some as much as 2–3%. Over twenty years, that’s a significant, dependable increase in income.
Are There NNN Mortgage Deals in 2023?
Even with so many benefits of investing in a NNN property, and the potential benefits of financing a property, you might still be wondering if it’s worth it to take on debt to invest and if there are any NNN mortgage deals available in 2023. The answer to both is yes!
Currently, there are national, regional, local, and specialty triple net lenders offering competitive interest rates, typically between 5.25–6.25% (give or take depending on the loan) on both short-term and long-term, fixed-rate mortgages for single-tenant investments. While these interest rates are higher than they have been in the past few years, they are still low enough to pay down the mortgage using rental income and reap a better cash-on-cash return than you would with high-maintenance, gross lease CRE that has multiple costs eating into your profits. When you factor in tax opportunities, a 5.00% cap rate can turn into a 7–8% IRR.
Many lenders are competing for NNN mortgage business due to the low-risk nature of the loans, so they are offering things like fixed-rate loans for the entire length of the lease (rather than 5, 7, or 10 years), no step-down prepayment penalties, no application or processing fees, and some are offering 70% loan-to-value (LTV).
“Since many triple net properties can be purchased between one million and ten million dollars, much less than a high-maintenance apartment complex or office building, triple net investors often finance just a portion of their investment, which makes interest rates less of an issue. I can assure you, even with higher interest rates, single-tenant real estate is one of the lowest-risk investments with the most reliable income and overall returns of any investment type,” Schellin explains.
What About Rising Interest Rates?
Let’s talk about the elephant in the room. Rising interest rates. Will there be more? The Fed says yes, but the plan is to implement a less restrictive policy, reducing hikes to smaller percentages (the most recent hike was .25%) until inflation returns to an average of 2%.
Is this news affecting your NNN investment strategy? Even if there is a .25% increase a few more times, with cap rates on the rise and sellers willing to negotiate prices down, the result will still be reliable monthly income from a multibillion-dollar company such as Dollar General or Walgreens.
To Wrap it Up — NNN Investing Using a Mortgage in 2023
Investing in a triple net lease property using a commercial mortgage can be a great way to grow your portfolio and increase returns over time without having to manage rental properties yourself. Obtaining a short-term or long-term single-tenant mortgage could help you reach your financial goals with responsibility-free income and a higher return on your investment, especially when compared to cash sitting in savings or low-yield, unpredictable investments.
In 2023, your triple net investment strategy does not have to be null and void due to higher interest rates. Many lenders are competing for NNN mortgage business by offering competitive interest rates and specialty terms. It’s worth considering, and with careful planning, could provide exactly what you need to move forward with your investment decision.
Westwood Net Lease Advisors is here to help you navigate the entire NNN investing process, including deciphering different types of loans so you can make an informed decision. We also have a nationwide network of reputable lenders with whom we work regularly, which makes the entire process more efficient and less stressful. Contact us today for a no-obligation conversation. We’re here to answer any questions you may have. 314-997-5227