The quality of the real estate, or its location, is essential to a successful triple net (NNN) lease investment. In fact, location is one of the three leading factors lenders look at to decide if they will mortgage a commercial property. The location also determines if your NNN investment will be easily re-tenantable and has a high resale value. And, not surprisingly, location is a factor in the cap rate.
Location can include:
- Type of parcel (corner lot, side street, main road, strip mall)
- Nearby essential businesses (grocery, gas, pharmacy, fast-food, etc.)
- Daily traffic count
- Primary, secondary, or tertiary designations
- Local and outlying area population
- Planned population and economic growth
- Transportation links
- Nearby attractions, campuses, activities, sports, amenities
What is a NNN Prime Location?
A prime NNN location is most often a high-density area with good exposure along a major retail artery with strong traffic counts, near other consumer staples like the pharmacy, grocery store, auto parts store, and fast-food restaurants. Prime locations can also be near attractions, highway exits, large campuses, sporting venues, and areas with population growth.
It is no surprise that triple net lease tenants choose these prime locations. Walgreens is a perfect example of a NNN tenant that’s known for its quality real estate. Stores typically sit on 1- to 2-acre prime corner parcels surrounded by other consumer staples, such as banks, fast-food/QSRs, and grocery stores.
Is a Secondary or Tertiary Location a Good NNN Choice?
A secondary NNN location will usually be within walking distance of a busy road with a few other essential shops nearby, maybe a block or two away from the main road. Local shopping districts can be considered secondary depending on how active the market is and how much money is being spent there. If you assess the NNN property in a secondary location and find it is profitable, then yes, this would be a good choice.
A tertiary area is typically considered to be on the outskirts of a major city or in a rural area. Tertiary locations can also be near a more remote industrial park, sports arena, or campus. Rural communities are considered tertiary, but many have a dependable population and few choices, so McDonald’s, Taco Bell, and Dollar General properties tend to thrive here.
If you are choosing a secondary or tertiary location in a less populated market, find out if it’s rated a Class A, B, or C property, and assess whether it’s prominent and easily re-tenantable when the lease expires.
Many brands choose booming communities with population growth, urban renewal living areas, small towns with fewer options, university towns, and rural locations that need their services. These can be favorable choices for reliable, long-term monthly income.
Nationwide Locations with Specific Tax Benefits
As a NNN investor, you will realize the greatest benefit from a property that aligns with your objectives rather than focusing solely on a certain geographical location. However, if a diversified portfolio is a priority, depending on your tax situation and the state in which you reside, you may benefit from owning properties in states that do not levy a state income tax. Those states are Alaska, Florida, Nevada, South Dakota, Texas, Tennessee, Washington, and Wyoming. Colorado and New Mexico do not levy a capital gains tax, while others offer a very small tax range (be sure to speak with your CPA to learn if these tax benefits pertain to you).
Moreover, some of the best places to invest are in overlooked yet growing areas throughout the Midwest, like Indiana, Iowa, Missouri, and Kansas. There is also growth on the southeast coast, in towns and communities in Virginia, Georgia, and North and South Carolina. Quite often, these underestimated CRE investment locations offer slightly higher cap rates than the more popular states.
The bottom line is that is impossible to know where to invest without an expert buyer’s advisor who knows the market well and can help you choose a high-credit tenant in an area where you feel most comfortable investing.
Great NNN locations typically command higher rents and provide the security of being easily re-tenanted if the creditworthy tenant should vacate.
Great NNN Location + Right Tenant = Successful Investment
The combination of a great location plus the right tenant can have a significant impact on whether your NNN investment is successful. Location will often be the first clue to a strong potential investment — you’ll rarely find blue-chip, multibillion-dollar companies in underperforming locations. However, the reliability and creditworthiness of the actual tenant go hand in hand with the location as a success factor. A corporate-guaranteed lease provides peace of mind, but it is still imperative to ensure the tenant is credit-worthy.
Look for these NNN property types with high-credit tenants in prime locations:
- Retailers – auto parts, dollar stores, drug stores
- Medical & healthcare – dialysis centers, dental centers, urgent care facilities
- Fast-food QSR restaurants – Taco Bell, KFC, Starbucks
- Pharmacies – Walgreens
- Gas stations & Convenience stores – 7-Eleven, Mountain Express, QuickTrip
- Child care and early learning assets – Montessori, Kinder Care, The Learning Experience
Owning a mix of single-tenant NNN properties in strategic locations provides relatively low-risk stability and a cushion against inflation and economic uncertainty. Along with the rewards of consistent monthly income, a steady return on investment (ROI), and immediate and long-range tax advantages, you can enjoy peace of mind knowing your NNN lease investment will remain steady.
To Wrap it Up — Location, Location, Location! There’s a Reason Successful Commercial Real Estate Relies on It
Anyone familiar with commercial real estate knows location is essential to a successful investment, but what is “location?” Location is a combination of factors, including daily traffic counts, where the business sits on a street or main avenue, what other stores and consumer staples are nearby, whether it is in an up-and-coming area, and if the location is exactly right for the tenant’s customers (in secondary or tertiary markets).
Location is also a determining factor in the cap rate, as mentioned in the overlooked locations blog, and matters when obtaining a commercial mortgage. Location also determines the ability to re-tenant and the resale value. So, when you are looking for your first or next triple net lease property, learn as much as you can about the location to see if it’s an investment worth pursuing.
It is true finding the right NNN investment in a prime location on your own can be difficult. Triple net properties in prime locations often sell before they ever hit the open market. Westwood Net Lease Advisors can help! We have a vast nationwide network to help you find the right investment in the right location, whether it’s listed, pre-listed, or newly constructed and selling off-market through the developer. We are specialized NNN and 1031 exchange buyer’s advisors who represent you from before the property search through closing, at no cost to you. Contact us today for your no-obligation, free consultation, and bolster your portfolio with confidence. 314-997-5227