Last Updated: February 2024
Some experienced investors refer to triple net investment properties as the “holy grail” of rental real estate investing. Triple net (NNN) properties are those that are leased to tenants on a triple net lease agreement. The unique aspect of this type of agreement is that the tenant is responsible for paying for all property taxes, insurance, and maintenance costs, in addition to rent. This means that the property owner has minimal management responsibilities, making it a low-maintenance and passive investment.
What is Triple Net (NNN) Real Estate Investing?
What is Triple Net (NNN) Real Estate Investing?
Triple net (NNN) real estate investing is a strategy where investors purchase properties leased to tenants on a triple net lease agreement. Under a triple net lease, the tenant is responsible for paying for their proportionate share of property property taxes, property insurance, and maintenance costs, in addition to rent. This minimizes the property owner’s property management responsibilities, making it a passive investment opportunity. Triple net properties are often leased by national (credit) tenants, providing a reliable stream of passive income for the investor.
Who are Triple Net (NNN) Tenants?
Triple net leases are most often used in commercial retail properties but can also be industrial use commercial properties. The tenants of these properties often include national tenants, such as fast food restaurants, pharmacies, and big-box retailers. These “national tenants” are also called “credit tenants”, meaning that they are large corporations who are rated as investment grade by credit rating agencies, due to their size and financial stability. It is important to note that not all triple net tenant tenants are necessarily credit tenants. Smaller mom and pop properties can, and often do, utilize triple net leases, particularly in retail properties.
What are the Tenant Benefits to Triple Net Leases?
The benefits to landlords of triple net properties are obvious, but triple net leases are also beneficial for commercial property tenants. Several reasons include more control and flexibility for the tenant’s in customizing the property to suit their specific needs since they are responsible for making improvements and modifications. Secondly, tenants can often negotiate longer lease terms, providing stability and minimizing the risk of displacement. Lastly, tenants can accurately forecast their occupancy costs as they have visibility into and control over expenses such as property taxes, insurance, and maintenance, which helps with budgeting and financial planning.
Important Triple Net Investing Terms
Credit Tenant – A credit tenant refers to a tenant with a strong credit rating and a solid financial standing. In the context of triple net real estate investing, credit tenants are desirable because they provide a high level of assurance for the property owner regarding the timely payment of rent and the financial stability of the lease.
Cap Rate (Capitalization Rate) – Cap rate is a financial metric commonly used assess the potential return on an investment property. You can calculate the cap rate of a rental property by dividing the property’s net operating income (NOI) by its market value. Cap rate helps investors compare the profitability of different triple net properties and evaluate the risk associated each.
How to Invest in Triple Net (NNN) Rental Properties?
Investing in triple net (NNN) rental properties can be an attractive option for investors seeking a passive and stable income stream. Thanks to the tenant covering responsibilities such as property taxes, commercial property insurance, and maintenance costs, triple net properties can be a low-maintenance and passive investment vehicle. Here are the steps to invest in triple net commercial real estate rental properties.
1. Identify Your Investment Goals
The first step in investing in triple net commercial real estate rental properties is to identify your investment goals. Determine how much capital you have to invest, understanding of rental property finance, what type of returns you are seeking and what level of risk you are comfortable with.
2. Find a Reputable Commercial Real Estate Broker
Most triple net properties for sale are represented by savvy commercial real estate brokers. If buying one, it is a good idea to also use one to advocate the best deal for you in the purchase process. Research and identify local and reputable ones that have a proven track record of success in the industry. Look for brokers that have experience in triple net properties specifically and a solid reputation in the industry.
3. Identify Potential Properties
Work with your broker to identify potential triple net properties that meet your investment goals. Commercial real estate listing platforms such as LoopNet or Crexi are two of the most popular websites with triple net (NNN) properties for sale. Among the many types of commercial properties that utilize triple net leases, the most common is retail properties. Evaluate the quality of each potential property, its location, and the tenant’s financial standing.
4. Conduct Due Diligence
Conduct thorough due diligence on the property and tenant to minimize risk. Evaluate the property’s financial history, tenant’s creditworthiness, and market conditions. Commercial properties are often broken down into classifications based on quality – Class A, Class B, and Class C. An important note to look at in triple net property due diligence is the likelihood that a tenant will stay at the property. Clues such as lease term remaining, business performance, and others can provide insight into this.
5. Secure Financing
Secure financing for the property by working with a lender or commercial real estate financing company. Make sure to get pre-approved beforehand and have all necessary documentation in place. Commercial loans have substantially different requirements in comparison to residential multifamily financing and lenders will scrutinize the property’s financial performance.
6. Purchase the Property
Once you have secured financing and completed due diligence, make an offer and purchase the property. Work with a reputable escrow/title company and/or attorney to ensure a smooth and legally binding transaction.
7. Collect Rent & Manage
As the new owner of the triple net property, you will start collecting rent from the tenant(s). You can hire a property manager or manage the commercial property yourself. Either way, make sure to keep accurate records of rental income and expenses, and stay up to date on the tenant’s business to ensure that the property remains well-maintained and profitable.
8. Monitor and Manage the Investment
Monitor the performance of the investment and manage it accordingly. If you planning to self manage the property, consider utilizing a commercial property management software. Stay up-to-date on market trends and tenant financial health, and be prepared to make any necessary changes to maximize your returns.
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Pros & Cons of Triple Net (NNN) Real Estate Investing
While there are several benefits to investing in Triple Net (NNN) properties, there are also some potential drawbacks that investors should be aware of. We take a look at the pros and cons of both below.
Pros of Triple Net (NNN) Investing
- Passive Income – One of the main advantages of triple net (NNN) real estate investing is the ability to generate a steady stream of passive income. As the owner of a fully leased and managed property, investors can collect rent without the need for active management or property ownership responsibilities.
- Low Risk – Triple net real estate investing can offer a lower risk investment opportunity compared to other real estate investment strategies such as investment property syndication. This is because the tenant is responsible for paying for all property taxes, insurance, and maintenance costs, reducing the likelihood of unexpected expenses or vacancies.
- Long-Term Leases – Triple net leases often have longer lease terms than other types of commercial leases, providing a stable, consistent source of income for the investor.
Cons of Triple Net (NNN) Investing
- Limited Control – One of the primary drawbacks of triple net real estate investing is the limited control that investors have over the property. While the tenant is responsible for property taxes, insurance, and maintenance costs, investors may not have a say in certain aspects of the property, such as building products used or maintenance upkeep.
- Tenant Dependence – Triple net real estate investing is dependent on the tenant’s ability to pay rent and fulfill their lease obligations. If the tenant defaults or does not renew their lease, the investor may be left with unexpected expenses and potential vacancies.
- Market Risk – Triple net real estate investing can be impacted by changes in the market or industry that could impact the tenant’s ability to pay rent or renew the lease. Investors should evaluate the tenant’s financial standing and the potential for market or industry changes before investing.
Triple Net (NNN) Real Estate Investing FAQ
How Do I Evaluate a Triple Net Lease Investment?
Evaluating a triple net lease investment involves analyzing the creditworthiness of the tenant, the terms of the lease (including the length, rent escalations, and renewal options), and the location and condition of the property to assess its long-term viability.
Can Triple Net Leases Be Financed?
Yes, triple net leases can be financed through traditional commercial real estate loans, with lenders typically considering the lease’s income stability and the tenant’s credit rating as key factors in the loan approval process.
What Happens at the End of a Triple Net Lease Term?
At the end of a triple net lease term, the property can either be re-leased to the existing tenant through negotiation of a lease renewal, leased to a new tenant, or sold, depending on the landlord’s investment strategy and market conditions.
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