A true NNN lease can be a nice thing for an investor—if you’re the right investor. It is comparable to buying a corporate bond in many ways —with different pros & cons, of course.
One of the most significant benefits of NNN properties is that, with the proper loan structure, you can own the property—that’s at the end of the lease term. The upside here is easy to discern: if you get the right property, it can act as a hedge against corporate default if it is easily re-leaseable and well located.
A Quick Overview of NNN Properties for Investors
As NNN (Triple Net) properties continue to gain popularity, more people now know (at least a little) about NNN properties and how they work.
Triple net properties are best leased to tenants with high credit ratings: This is on a long-term lease. The tenants generally pay for the taxes, maintenance, and insurance of the property —which means fewer expenses for the landlord. Thus, a significantly low-management alternative to other real estate investments on your side.
Are you interested in NNN investment properties for sale? Here’s a NNN Deal finder to check out the best deals.
Investing in NNN Properties: What are the Top 5 Factors to Consider?
If you’re having difficulties wrapping your head around the concept of NNN, this article about the very basics of NNN should clear the air.
All right! When looking for an NNN property for sale, there are essential factors you’ll need to consider as an investor.
1. Location
When considering NNN real estate for sale, you must take the location seriously. You’ll likely need to re-tenant a property in the future. When that happens, you will find it significantly easier to re-tenant a well-located asset.
The following factors determine what a “good location” is:
- Accessibility (the size of lot/land can impact this)
- Visibility (how easy is it for passing traffic to see)
- Population density. It is best if you aimed for 1-mi, 3-mi, 5-mi radius
- What kind of people live there? What works are available?
Ensure you analyze the points above before investing in a property, as knowledge of the market area is critical. A good reason why it is best you target markets you are familiar with rather than foreign markets.
2. Building Reusability
How reusable is the NNN investment property for sale in question? Isn’t a building that can be converted to alternate uses more profitable in the long run? Consider restaurants, Dollar shops, and auto parts stores are top examples of easily converted buildings. These buildings are converted to suit other purposes if the need arises —this is good for business.
Caution! Certain specialty buildings such as Banks (with vaults), multi-level buildings, and specialty medical clinics would require a significant investment to repurpose/convert. So, take note.
3. Debt on the Property
When evaluating NNN real estate for sale, it is essential to take note of debts on the property. It is pretty common for NNN properties in the market to have long-term debts on them —debts that cannot be paid off early —unless with significant penalties. This is sometimes CMBS (commercial mortgage-backed security) debt or sometimes debt issued by life insurance companies. Either way, the penalty is stiff.
Sometimes, there are assumption clauses—subject to the new borrower—that allows a new borrower to assume the debt.
As the investor, you must evaluate the required equity, the debt terms, and any assumption fees. This will help you to determine if the property meets your acquisition requirements.
4. Rent Analysis
Before getting into a commercial triple net lease investment, it is necessary to make an in-depth rent analysis. An in-depth help determines the asset’s potential and, of course, protects you when a tenant vacates from the property.
The ability to identify a property with a rental income that you could replace is an invaluable skill as a NNN investor: higher rents don’t necessarily mean “better” for a rent that isn’t replaceable. Renting your NNN property at a price less than the market value usually turns out best —after doing a rent analysis.
The important thing here is to pick the right location and market; you’ll be getting an increased ROI irrespective of the fact that your rent is lower than the market value!
5. Evaluate the Credit Worthiness of the Tenant
The tenant’s credit history is also important —perhaps one of the first things you should evaluate. Generally, tenants with better investment grades are advantageous.
While having a tenant with a good credit background is vital, other aspects of the tenant may not. You may have to look beyond credit strength sometimes as other factors also determine NNN real estate deals; for example, what happens if the tenant decides to leave?
Take corporate tenants, for instance, they may have “investment grade” credit, but things can suddenly go west for them —bankruptcy? Take Radio Shack and Blockbuster, for example.
6. Triple Lease!
We’re all about total freedom from tax, maintenance costs, utility, and building maintenance in this post. So the lease type for the asset is Absolute Triple Net lease.
In the terms, the agreement must specify that you (the landlord) are free from tax, certain maintenance costs, utility, and building maintenance. You need to have a copy of the lease before getting into agreements; contact a commercial real estate attorney to review it.
A commercial lease attorney reviewing the lease agreement will help make the liabilities of you and the tenant clear.
Final Words
In today’s economy, NNN investment properties for sale are a hot cake. The ROI and minimum responsibility make it one of the most attractive businesses if you’re in for the long run.
In a triple net lease, the lessee promises to pay all expenses of the property —expenses such as NNN real estate taxes, maintenance, and building insurance…and this is in addition to the rent, of course! You can take a look at the NNN Deal here.
