What to Consider before You Invest in a NNN property
Investors have long favored triple net (NNN) lease properties to provide stable and predictable income. Because NNN leases require tenants to bear the burden of property expenses such as taxes, insurance, and maintenance, they offer investors an attractive opportunity for passive income generation.
Since your tenant is responsible for paying all property taxes, an increase in property tax does not directly affect you. But, there are some second- and third-degree impacts of rising property taxes that you should know about before purchasing a triple net lease property.
The Role of Property Taxes in Triple Net Lease Investments
Property taxes are an unavoidable component of any real estate investment. Property taxes contribute to local infrastructure and services and generate revenue for local governments. However, in a triple net lease agreement, the tenant assumes responsibility for paying or reimbursing property taxes in addition to insurance and maintenance expenses. In this way you, the property owner enjoys a steady income stream while mitigating some of the property-related costs.
In general, investing in a triple net commercial property provides tax benefits to the savvy, diversified investor. Rising property taxes lower the internal rate of return (IRR) of gross lease properties. Performing a 1031 exchange for a NNN lease property can save those tax dollars. Purchasing a NNN lease can also defer capital gains and depreciation recapture taxes, while producing steady monthly income with little to no management.
To calculate the tax basis for your property or potential investment opportunity using our tax basis calculator.
Potential Challenges Rising Property Taxes Pose to Triple Net Lease Investors
Reduced Net Operating Income (NOI)
Though it’s unlikely, rising property taxes may erode the net operating income (NOI) generated from triple net lease investments if the tenant doesn’t operate with an absolute triple net lease or a corporate-guaranteed lease. As property taxes increase, the tenant’s expenses rise accordingly, which may put pressure on the tenant’s ability to meet their lease obligations. Consequently, you may witness a decrease in your NOI, which could impact the overall profitability of your investment.
Tenant Financial Stress
As property taxes increase, some smaller tenants such as franchisees may face financial strain, especially if they operate on thin profit margins. The burden of higher taxes might result in tenants seeking rent concessions or, in extreme cases, defaulting on their lease obligations. This scenario can significantly impact the stability and reliability of cash flow for investors.
Rising property taxes can also influence the broader market dynamics of triple net lease investments. As the tax burden increases, you might witness a reduction in demand for properties with higher tax liabilities. This shift in market sentiment could impact property valuations, potentially affecting the liquidity and resale value of these investments.
Navigating the Changing Property Tax Landscape
While rising property taxes might pose a challenge if you’re a would-be triple net lease investor, you can employ key strategies to navigate this changing landscape effectively.
Thorough Due Diligence: Conduct comprehensive due diligence before you invest. Evaluate the local property tax rates and trends to assess the potential impact on your investment’s performance. Engage with local tax authorities or seek professional advice from a tax or real estate investment expert.
Diversification: Diversifying your triple net lease portfolio across different locations and tenants can help reduce the risk associated with rising property taxes. Investing in areas with more favorable tax environments or exploring long-term lease agreements can stabilize and balance your investment portfolio.
Engage with Professionals: Collaborating with experienced real estate investment professionals can be instrumental in understanding the tax implications and exploring potential tax-saving strategies. Experts, like the team at Westwood Net Lease Advisors, can offer you guidance on available exemptions and tax opportunities. If you have cash on hand or need to reinvest the capital gains from a 1031 exchange, a triple net property might be a good fit as you diversify your investment portfolio.
To Wrap It Up – Property Taxes & NNN Investing
As property tax rates continue to increase, investors must proactively navigate this evolving landscape. By understanding the potential challenges and implementing appropriate measures to address increases in property taxes, you can protect your investments and optimize your long-term financial goals.
To learn more about the property tax implications of purchasing a NNN lease property and to get started on your journey, reach out to Westwood Net Lease Advisors today, without obligation. Our buyer representation is free and we are passionate about helping investors obtain the right net lease real estate for their goals. 314-997-5227