NNN lease properties are an excellent starting point for investors who want a low-risk, low-management investment properties. But, even though NNN lease properties seem easy to own and operate, they are a very challenging type of commercial real estate investment.
To prevent yourself from making any mistakes, you must learn how to address critical components when negotiating the lease. And, to take advantage of the income opportunities, you need to start with due diligence.
If you do your homework right, and on time determine your investment objectives, examine the lease primer, and carefully choose the type of seller and tenant, there will be no place for failure.
If you consider investing in NNN Lease properties, but having second thoughts, take a look at some of the key reasons why this commercial real estate asset can be an outstanding income opportunity.
Why Triple Net Lease Properties Can Be A Great Opportunity For Steady Cashflow
NNN Lease properties have been designed to be landlord favorable, and here are some of the key reasons why it might be a great idea to include them in your investment portfolio.
1. Little To No Management Responsibilities
NNN Lease properties offer little to no management responsibilities for owners during the lease period, although there are cases when some tenants transfer capital costs to the owner.
In NNN Lease investment, the tenant is responsible for paying property taxes, insurance, maintenance issues and repairs. So, the landlord is basically free from any liabilities. The landlord usually takes care only of bookkeeping, tax returns and refinancing the property.
When the lease nears its end, the landlord needs to take in mind the releasing process and prepare capital costs for a new tenant (if necessary).
Basically, you can invest in NNN Lease properties and have another full-time job since you don’t have to bother with any management and maintenance duties.
2. Stable Cash Flow
NNN Lease is especially attractive for its stable cash flow. This lease is structured with a flat rent or fixed increases.
Let’s say that if you purchase a property worth $3,000,000 at a 6,5 CAP rate, you’ll gain $195,000 per year for the lease. Some leases underlie rent increases up to 3% per year. Landlords don’t have to worry so much about finding new tenants and having vacant properties for months since the lease’ span is usually up to 10 years.
In other words, with NNN lease investment you can enjoy positive cash flow for quite a long period.
3. No Property Responsibilities
NNN Lease leaves the landlord with no property responsibilities. This means that the tenants have control over the property they rents.
Let’s say that the tenant needs to repair the roof of the property. He won’t have to call the landlord and wait for him to show up. Instead, he will call a professional to fix it.
The landlord does not need to hire anyone to take care of repairing systems and appliances. The tenant has the freedom to do that, and this is what makes him feel like an “actual owner” of the property.
It’s a win-win situation: the landlord doesn’t deal with all the repairing issues, and the tenants have freedom in taking care of such issues.
4. Lower-Than-Market Lease Rate
Leases which are under the market average trigger tenants to sign a lease of 5-10 years or longer period of time. When having NNN lease property, the landlord can provide lower rent to tenants. And, with lower rents, tenants are willing to make improvements to the property and fit the space for their own specialized purpose. On the other side, the landlord is free from making any interior changes and specific updates.
5. Tax Benefits
There might be some tax benefits for the owners, although the expenses that constitute tax deductions hardly exist since tenants are responsible for those expenses.
These are just some of the many reasons why NNN lease investment can be a perfect investment opportunity. But, as every investment, NNN lease has its own potential pain points. Let’s take a look at some of them.
Potential Pain Points Of NNN Deal
The Investor’s Objective
Investors who are willing to get into NNN deals, usually have certain objectives in mind. And sometimes, those objectives might not be met. Such include no management liabilities, guaranteed income, the pride of ownership etc.
Let’s say that an investor is looking for like-kind property to do a tax-deferred (1031) exchange. He has sold a property (such as a multi-family building) which required a lot of maintenance and management responsibilities and he decided to reinvest the money into a commercial real estate property. And, by doing so, the investor gets an advantage of the exchange provisions.
Investors want to release themselves from any responsibilities, but still, want to receive income. Often, they want to have a well-known and respected company as a tenant.
A Lease Primer
Many investors make a mistake when they make a purchase transaction. It is very important to approach the lease, rather than the property and land. In fact, it is the lease that you are buying.
Another very important note is to understand what the lease should and should not include. If you do not fully understand what the lease includes, your objectives might not be met.
Whenever you find a potential property, make sure to have a copy of the lease and analyze it first. This will give you insight into the nature of the lease. Instead of spending too much time and money on market research, inspection, and contract negotiations, do your due diligence to convince yourself that you are purchasing the right lease. To better understand this, check out the different types of lease.
The Type Of Seller
Sellers fall into three categories:
- Investors/Owners – With this type of seller, you might receive a lease that has a short remaining primary lease term and it might require re-leasing or several short-term options. Investors may determine the base rent and history of expenses in order to evaluate future income.
- Owners/Users – The sale/leaseback has many benefits for both the buyer and the seller. Often the seller frees up 100% capital (of the equity in commercial real estate) to develop and improve the business. Thus, the seller benefits from the lower cost of investment capital. Buyers and sellers may also gain benefits by modifying a transaction, negotiating the deal, and lease terms which determine the landlord’s and the tenant’s needs. For example, investors may consent to pay a higher price for the property in order to get specified rent increases, instead of having variable increases. Also, they may negotiate a lease term of 10 years instead of a shorter option of 5 years.
- Developers – They are often professionals who have straightforward objectives and all the necessary information. Their first objective is to build. Having obtained the lease, they can get construction financing and ‘create’ a property. Their second objective is to sell at a profit. The lease is already written, and with a precise analysis, the landlord will prevent himself from any inconveniences.
The Credit Worthiness Of The Tenant
Evaluating the credit-worthiness of your tenant is a crucial factor to your business. From an investor’s perspective, the NNN property should be worth as much as the tenant is able to meet the lease terms.
The CAP rate is an indicator of any potential risks. As we know, the CAP rate is related to the net income and the price that the investor is willing to pay. Higher CAP rates indicate that the risk of not fulfilling the payments over the long term will be lower.
The Type Of Business
Often, the type of business has an impact on the value of the investment. From an investor’s perspective, a general purpose-use determines that the tenant improvements can be transferred to another tenant needs.
In a special-use case, the seller transfers the costs of improvements to the buyer, who in turn may not be able to deal with over the lease period. The most typical example are fast food outlets.
Hiring A Buyer’s Agent: The Smart Way Of Doing NNN Deals
No matter how much experience you have of the commercial real estate market and process, it’s still important to have the right people on your team. Even if today you can get access to tons of information (thanks to the Internet), closing on an investment deal can be a tricky process. Even for seasoned investors.
That’s why the smartest way to approach the commercial real estate transaction is to get help from a professional Buyer’s Agent who will represent your investment interests and negotiate the best deal.
Buyer’s Agents has a huge expertise and knowledge of the commercial real estate market and process and represent only the buyer’s interest. What’s more, their services are free for you, the buyer. They split the commission fee with the Seller’s Agent.
A good Buyer’s Agent will make a shortlist of properties within your requirements and budget and will advise you during the entire transaction process. In other words, Buyer’s Agents will do all the legwork for you, for free.
If you are considering NNN lease investment and need a reliable Buyer’s Agent to make the whole process less stressful, don’t hesitate to contact us.
And, if you want to know more about why Westwood can represent you decently as Buyer’s Agent, check out this article.Tags: 1031 exchange, 1031 NNN Property, Buyer's Agent, cap rate, commercial real estate investing, NNN Lease Investments, nnn lease property, triple net investing