Investing in triple net (NNN) lease properties can be a rewarding venture that offers promising returns, potential tax benefits to the investor and adds value to any diversified investment portfolio. However, for first-time investors, navigating the complex realm of NNN lease investing can be daunting. To help you kickstart your journey, we’ve compiled a list of the top 10 frequently asked questions we often hear from our first-time NNN lease buyers. Let’s dive in!
1. What exactly is a NNN lease property?
Triple net or NNN lease properties are commercial real estate assets in which the tenant bears the responsibility for all property taxes, insurances, and common area maintenance expenses. In an absolute NNN lease, the tenant pays for 100% of everything, so you, the landlord, simply collect rent, making these investments a low-maintenance option.
When you own an absolute NNN property, such as Dollar General, KFC or Walgreens, with zero landlord responsibility, you are free to work and enjoy life without the headaches and high costs associated with property ownership.
2. What kind of returns will I get?
NNN lease properties are typically stable investments that can offer better interest rates and financing terms than the riskier gross lease, short term properties. For the last decade, through the ups and downs of a changing market, triple-net (NNN) lease property investments have been in very high demand.
NNN lease properties create wealth preservation without the uncertainty that’s inherent in other Commercial Real Estate (CRE), stocks or mutual funds. The combination of NNN lease properties’ expense-free nature, the ability to write off depreciation and interest, and other financial benefits such as the power of possible positive leverage, can transform a 5–6.5% capitalization rates (cap rate) into a possible 7–10% Internal Rate of Return (IRR).
3. I just sold a commercial property, how do I address my impending tax liability?
Consider a 1031 exchange: This provision allows you to reinvest your sale proceeds into a new property, deferring federal capital gains and depreciation recapture taxes.
When you decide to sell your NNN lease property, if the sale price exceeds the tax basis or adjusted cost basis, the difference is “recaptured” by reporting it as income. There is also a capital gains tax levied by the IRS and possibly the state in which you file taxes.
However, when you use a 1031 exchange to trade into a different investment property, not only can you defer 100% of the federal capital gains tax, potentially indefinitely, but also you may defer the depreciation recapture tax, which can provide you with an additional savings of 25%, freeing up a significant amount of capital to reinvest.
Depending on your investment strategy, you could choose to exchange investment properties indefinitely as there is no limit to how many times you can use the tax code in a lifetime. The 1031 exchange is a smart way to build wealth by acquiring increasingly profitable commercial real estate while avoiding capital gains taxes.
4. What is a 1031 exchange, and how does it benefit me?
A 1031 exchange allows you to defer capital gains taxes when selling an investment property and reinvesting the proceeds into one or more like-kind properties. This could potentially save you tens of thousands to millions of dollars and an additional 25% on depreciation recapture taxes. Read more about the benefits of a 1031 exchange here.
5. Why should I choose a NNN lease property over investments in the stock market or mutual funds?
NNN lease properties offer ownership of tangible assets, income stability, a predictable monthly and annual return, tax efficiency, long-term wealth building, and estate planning benefits. Unlike stock market investments, which are susceptible to wide swings in value on any given day, NNN lease investments provide you with greater long-term and short-term stability and more control over your assets.
6. How long does the buying process take, from start to finish?
On average, the buying process for NNN lease properties can take anywhere from 1 to 6+ months. This timeframe will vary based on individual circumstances if you try to buy without buyer representation, and property availability. We recommend starting the process by contacting a Westwood Buyer’s Advisor when you begin to think about investing. We can help you prepare for your buying journey and shorten the process while finding you the exact right property for your financial and lifestyle goals.
7. What is a sale-leaseback NNN property?
A sale-leaseback is a real estate transaction in which a business owner, developer, or corporation sells its property to an investor and leases it back with a long-term, triple net lease. The business owner maintains control of the building operations and becomes the tenant.
Sale-leaseback deals can be attractive to buyers during a period of economic unpredictability because they rival or exceed the internal rate of return (IRR) of less reliable investments. They usually carry less risk than gross lease properties.
Sale-leaseback NNN properties are typically stable investments that offer long term wealth preservation.
- In a sale-leaseback, the buyer purchases the land (or the land and the building) of an established business with a high-credit tenant who wants to remain.
- This lease is typically an absolute triple net lease. The landlord has little to no responsibility and earns contractual income for 10–20 years (ground leases can be as much as 50–99 years)
- Rent is determined based on historic profitability, data drawn from actual measurable figures and educated financial forecasts.
- Locked-in future rent increases fight inflation and ensure both tenant and landlord have fixed costs and predictable income.
- Often the property’s depreciation expenses can be deducted from your income taxes.
8. How do I know if a property is genuinely a triple net lease?
A genuine NNN lease places the responsibility of property expenses like taxes, insurance, and maintenance on the tenant. Before you buy, make sure you know the difference between a Gross Lease, Modified Gross Lease, and an Absolute NNN Lease. Ensure the lease agreement clearly outlines these terms to confirm it is a true NNN lease and consult with Westwood Net Lease Advisors to guide you through your buying journey.
9. What type of properties can I get with my budget?
As a general rule, a NNN investor should have a net worth of $1 million (not including the value of your primary residence) and/or make $200,000+ per year.
A few of the more popular NNNs sell in the region of:
- Dollar stores: $1–2 million
- Gas stations/convenience stores: $1–2 million
- Fast-food restaurants: $1.5–2.5 million
You will typically need a 35-40% down payment to purchase a NNN lease property. For example, if you choose to buy a Dollar General for $1.5 million, you would need a $525,000 to $600,000 down payment, in addition to the other requirements.
Some NNN investment properties start around $750,000 and go as high as $25–50 million for big-box retailers, such as Walmart and Home Depot, multi-property portfolios, and some industrial properties. Please see our properties pages for actual sale prices of a wide range of triple net investments.
10. Why choose Westwood Net Lease Advisors over other real estate brokers?
At Westwood Net Lease Advisors, the buyer-advisor relationship starts with us getting to know you and your goals. Then we help you find a NNN investment (or two) that fits your criteria, including some you may not have considered, and walk you through the entire process from property search and offer to closing. We are the only NNN specialists in the nation who primarily represent buyers.
At zero cost we also provide the following for clients:
- A risk tolerance assessment and evaluation of the investment opportunity.
- Maximize your numerous financial and tax considerations, like 1031 exchanges and cost segregation depreciation.
- Review of the best price, best cap rates, and the different classes of investment opportunities.
- A nationwide inventory of properties that fit your goals.
- Objective advocacy, education, and knowledge.
- Assistance with negotiations on the price and lease terms to meet your financial and lifestyle goals.
- Presentation of a Letter of Intent (LOI) to the seller as soon as possible in order to demonstrate to the seller that you are serious and intend to buy.
- Evaluation of tenant financials and credit ratings.
- Guidance and clarity around lease terms (including but not limited to opt-out clauses, termination dates, and common area maintenance charges (CAM)).
- Assistance while you navigate the lengthy and complicated documentation process, which varies across states, municipalities, and cities.
- Access to our network of reputable providers (financial sources, closing agents, title companies, legal counsel, and others, as needed).
To Wrap It Up: Westwood Cuts through the Complex World of NNN lease investing
NNN lease properties present an excellent opportunity for investors seeking predictable, attractive returns, no hassles, and tax advantages. By understanding the lease structure, securing favorable loan terms, and taking advantage of tax opportunities like the 1031 exchange, you can make the most of your real estate investments.
Choosing NNN lease investments over traditional stock market and mutual fund investments can offer ownership benefits, tax efficiency, and long-term wealth building. And when it comes to making the journey smooth, working with a reliable partner like Westwood can be a game-changer.
To learn more about purchasing a NNN lease property and begin your journey, reach out to Westwood Net Lease Advisors today, without obligation. Our buyer representation is free and we are passionate about helping investors like you obtain the right net lease real estate for your goals. 314-997-5227