Net leased investments have become an increasingly popular real estate investment strategy in recent years. By investing in net leased properties, investors can enjoy stable income streams and lower management responsibilities compared to other types of commercial real estate investments. However, net leased investments also come with risks that need to be evaluated. In this article, we will explore the fundamentals of net leased properties, analyze the potential benefits and risks, and provide suggestions for successful net leased investing.
Net Leased Properties Provide Steady Cash Flow with Long-Term Leases
One of the biggest appeals of net leased properties is the stable cash flow they can provide investors. With net leases, tenants are responsible for paying property taxes, insurance, maintenance costs and other operating expenses. This leaves the landlord responsible only for structural repairs and maintenance. Additionally, net leases typically have longer lease terms of 10-25 years, which provides reliable income despite market fluctuations. While rental income may be lower than triple net leases on a monthly basis, the long-term leases ensure consistent cash flow for landlords.
Net Leased Investments Require Less Oversight Than Other Commercial Properties
Another advantage of net leased properties is the lower management responsibilities for landlords. Since tenants handle taxes, maintenance and insurance, landlords do not have to actively manage these aspects of the property. There is also usually no need for an on-site property manager. This makes net leased properties favorable for remote investors or those without extensive real estate experience. The hands-off management approach allows investors to spend less time on operations and focus more on sourcing new deals.
Strong Tenant Creditworthiness Provides Added Security
While net leases transfer operating expenses to tenants, landlords still rely heavily on tenants being able to meet their financial obligations. As a result, net leased properties require tenants with strong creditworthiness and financials. National retail chains like Walgreens or CVS are common net lease tenants. Their established business models and solid credit make them unlikely to default on lease payments. Conducting due diligence on tenant financials is key for evaluating the viability of a net leased property. Focus on the stability of the tenant’s industry and any factors that could disrupt their business.
Rising Interest Rates Can Adversely Impact Property Values
While net leased investments provide steady cash flow, they are not completely immune to market forces. In particular, property values are impacted by interest rate changes. As rates rise, cap rates tend to rise as investors demand higher returns. This causes property prices to drop. Net leased properties with long-term leases extending 10+ years can be especially vulnerable. Savvy investors take interest rate cycles into account and implement strategies like interest rate swaps to hedge risk.
Understanding the Sector Risks of Different Property Types
Net lease properties span several commercial real estate sectors, each with their own macroeconomic risks. For example, net leased restaurants face disruption if consumer dining habits change. Net lease retail centers are susceptible to e-commerce impacts. Industrial net leased warehouses rely on trade and transportation. Evaluate tenant industries and avoid concentrating investments in a single sector. Diversification across property types can help mitigate sector-specific risks.
Net leased real estate investments offer unique advantages like steady cash flow and passive management but also carry risks related to tenant creditworthiness and macroeconomic factors. By thoroughly evaluating all aspects of a net lease deal, investors can build a resilient portfolio poised to weather industry and market cycles.