Last Updated on March 8, 2022 by Admin
Investing in taxes-based triple net listings has become increasingly popular among commercial real estate owners. They’re sometimes addressed as “NNN” properties. With the correct information in hand, you can rest assured of having a viable passive income stream. We’ll see the details of NNN properties, the various types, and how you can maximize them.
Triple Net Lease Investments: What Are They?
Triple net lease investments are real estate investments that insulate the landlord from all property-related expenses. Examples of such costs include property taxes, utilities, basic repairs, and insurance costs. As in other states, NNN leases in Texas last over the long haul (ten years or more). There’s also provision for an increase in rent to accommodate inflation over the lease term based on market indices.
Think of NNN leases as long-term contracts that allow the tenant to act as an interim owner—while paying rent. The NNN property occupant agrees to pay the lease, plus other expenses the property owner would generally make. Of course, there are terms and conditions which the owner stipulates on the use of their property.
Single, Double, and Triple Net Lease
A single net (N) lease isn’t as popular as other lease types. In single net leases, the tenant only pays taxes on the property in addition to their rent. The landlord of a single net property takes care of insurance and facility maintenance costs.
In double net (NN) leases, the tenant pays two out of three primary obligations—insurance premiums and property taxes. Due to the additional obligation involved, the rent is understandably lower. The property owner retains responsibility for maintenance costs.
The third type of net lease is the triple net (NNN) lease. The tenant in an NNN lease pays for the triple net lease property taxes, insurance, and any maintenance or repairs on the building. Because of the operating expenses involved, the tenant usually pays a lower rent than in a standard lease contract. Moreover, the creditworthiness of the tenant factors in the calculations of the rent the tenant pays.
Benefits of Triple Net Properties
Net lease investments are popular among investors across the United States for various reasons. Let’s get to see some of them.
The Strength of Potential Tenants
A variety of tenants could utilize an NNN lease. However, triple net leases tend to be more common among companies we’d call “credit” tenants. These “credit” companies like Walgreens and CVS have an” investment grade” rating from credit rating agencies.
Imagine having a large store like Walgreens as your tenant. What does it feel like? Does it sound far-reaching? Well, that’s what NNN investments can help you do! NNN investors have a much lower risk of tenants defaulting lease agreements.
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Possible Lease Escalations
When contracting a taxes-based triple net listings, both parties agree to increase rental rates gradually over a long time. For instance, a lease might include a 0.5% rental increase every three years. Such additions in pricing and other expenses of the tenant make it a long-term -profitable investment.
Favorable Financing Terms
Since NNN properties often receive favorable financial terms from lenders because of the strength of typical tenants. While regular commercial facilities could need more than 15% down payment, NNN leases having credit tenants may require only 5% or less. Where the most vital NNN tenants are involved and the facility is relatively new, they could command 100% financing.
Liquidity
Due to triple net investments’ popularity among investors, it’s usually relatively easy to favorably sell off your acquisition. Whenever you want to sell, there’ll likely be several bidders, especially when selling under favorable terms. For instance, bidders might be higher when the properties are in choice locations, with lengthy lease terms.
Mild Management Obligations
As highlighted earlier, triple net leases place responsibility on the tenant for all operating expenses. That would only leave the owner to few routine management obligations. Consequently, NNN lease owners have more free time to focus on other investments or even go on vac.
Leveraged Depreciation
NNN lease properties usually enjoy high leverage from tax institutions. Following specific tax rules, you can get tax deductions from the depreciation of your NNN property. The leverage which the owner enjoys over depreciation might help in settling other taxes.
Long Term Leases
Income-generating real estate properties are valued based on their length and how stable their income stream is. Investors, therefore, prefer NNN lease properties because of their long lease term clauses. A Walgreens Pharmacy, for instance, could contract an initial 15-year lease term with the landlord. And that initial term could increase to 30 years, subsequently. Buying an NNN property hosting Walgreens would then resemble purchasing a long-term bond.
FAQs on NNN Leases
Having seen the benefits of taxes-based triple net listings, it’s likely that you still have some more questions. We’ve compiled answers to some of the frequently asked questions on NNN leases. Let’s see them.
How Do I Calculate the Amount of an NNN Lease?
There are different ways to compute the amount of an NNN lease. For instance, the landlord might calculate the annual property taxes, insurance, and other maintenance expenses and divide them by 12. That gives them the monthly baseline rent amount based on a per square meter rate.
What Are the Obligations of the Landlord in a Triple Net Lease?
The tenant takes up responsibility for most of the expenses involved in an NNN commercial property lease. Nevertheless, the lease agreement could say that the landlord bears responsibility for the parking lot or the roof.
Can a Prospective NNN Property Tenant Negotiate Their Rent?
Yes. The tenant may utilize the base rental price in negotiating with their prospective landlord. Considering the risk which the tenant will bear, they might arrive at a more favorable base rent. A prospective tenant could also negotiate what utility or repairs over which the landlord would take responsibility.
Is a Triple Net Lease a Profitable Idea?
Yes, NNN leases are beneficial to both tenants and landlords. Tenants have more freedom with their facility and can adapt their space to suit their brand’s ideals. On the other hand, landlords have a passive source of income and minor overhead to bear.
