Triple net lease is an increasingly popular real estate investing strategy that can provide investors with steady and predictable income streams. Under a triple net lease, the tenant takes responsibility for taxes, insurance, and maintenance costs, freeing the landlord from these operating expenses. This type of lease appeals to investors looking for stable, low-risk cash flows with minimal landlord duties. In this article, we will explore the benefits and risks of the triple net lease investing strategy, and examine how investors can use it to meet their real estate investment goals.
What is a triple net lease and how does it work?
A triple net lease, sometimes abbreviated as NNN lease, is a type of commercial property lease agreement where the tenant pays all or most of the costs associated with maintaining the property in addition to rent. This includes real estate taxes, building insurance, and maintenance. By transferring these costs to the tenant, the landlord is able to receive a predictable net rental income stream. Triple net leases are commonly used in freestanding retail, office, and industrial properties that are leased to a single tenant. Tenants are often large corporations like pharmacy, grocery, or restaurant chains that occupy the entire building. By taking on more financial responsibility in a triple net lease, these corporate tenants gain more control and flexibility over the space.
What are the benefits of triple net lease investing?
There are several advantages that make triple net lease investing appealing for landlords and real estate investors:
– Stable, predictable income – Withtriple net leases, landlords receive a fixed minimum rent payment each month that is not subject to increases in property taxes, insurance, or maintenance costs. This results in a reliable income stream.
– Lower operating expenses – By passing onvariable costs to the tenant, the landlord’s operating costs are minimized. This can increase cash flows.
– Long-term tenants – Triple netleases often have longer lease terms of 10-25 years. This reduces turnover costs and vacancy risk.
– Minimal management – Tenants handle all repairs andmaintenance, allowing for passive ownership. Landlords have few responsibilities.
– Corporate tenants – Creditworthy national chains likerestaurants and pharmacies often occupy the property.
– Attractive financing – Lenders may offer morefavorable loan terms for triple net leased properties due to stable income.
– Diversification – Adding triple net leased property to aportfolio can balance out volatility from other assets.
What are the risks associated with triple net lease investing?
While triple net leased properties have many advantages, there are also risks to consider:
– Tenant default risk – If the tenantexperiences financial difficulties and defaults on the lease, the landlord suffers lost income. Vetting tenants is crucial.
– Renewal risk – There is uncertaintywhether the tenant will renew at lease expiration. The property may sit vacant.
– Capex risk – Landlords remain responsiblefor major capital expenditures like roof replacement. Reserves should be maintained.
– Limited appreciation – Propertieswith long-term leases may not capture the full potential for value growth.
– Supply risk – Some sectors, like drugstore retail, arerisky due to oversupply concerns and online competition.
– Rising expenses – While expenses arepassed through, sharply rising costs can reduce investor returns.
Tips for successful triple net lease investing
Here are some best practices to follow when investing in triple net lease properties:
– Target national credit tenants – Focus onestablished companies with investment grade credit ratings. Avoid startups or regional tenants on shaky ground.
– Examine corporate financials – Reviewtenant financial statements, especially for retail where sales drive rent sustainability.
– Negotiate lease terms – Seek longer lease terms, contractual rent bumps, tenant renewal options, and landlord protections.
– Evaluate the market – Factor in localdemographics, population and job growth, and competition when selecting property markets.
– Conduct due diligence – Inspect the propertycondition, title, required capex, and compliance issues thoroughly before acquiring an asset.
– Maintain reserves – Set aside funds for majorexpenditures like vacancies, tenant build-outs, and roof replacements.
– Diversify – Mitigate risk by investing across different property types, geographic markets, and tenants.
Alternatives to triple net leasing
While triple net leases can provide stable passive income, they are not suitable for every real estate investing strategy. Some alternatives include:
– Gross leases – The landlord pays operatingexpenses and maintains greater control.Tenant has fewer responsibilities.
– Double net leases – Tenant pays propertytaxes and insurance costs only. Landlord pays maintenance.
– Management-intensive properties – Become anactive landlord for assets like multi-family apartments.
– Core real estate – Invest directly in fullyleased and managed properties to retain upside.
– Non-traded REITs – Gain diversified realestate exposure without being the landlord.
– Real estate crowdfunding – Invest small amountsinto pooled real estate assets.
Triple net lease investing offers predictable income but is not the only path. Assess your risk tolerance, desired involvement level, and portfolio goals to determine which real estate strategy is optimal.
The triple net lease investing strategy offers real estate investors stable and predictable cash flows through transferring property expenses to tenants. While attractive for its passive nature, investors must weigh tenant credit risk, renewal risk, and capital expenditure obligations when pursuing triple net lease properties. With proper due diligence and diversification, triple net leases can be a valuable component of a real estate investment portfolio.