The practicalities of triple net leases
In today’s uncertain economic times, traditional investments do not provide the stability and significant returns that investors seek. Perhaps that’s why interest in single-tenant and network-leased real estate is skyrocketing. But to the casual investor, these properties, commonly called NNNs or STNLs in the industry, remain a mystery.
Definition of NNN properties
Typically, the types of real estate that are considered triple net lease investments are stand-alone buildings that are leased to long-term domestic tenants, ranging from 10 to 25 years. These national tenants are often well-known names like Walgreens, FedEx, and McDonald’s.
Why NNN properties are attractive
There are several reasons why savvy investors gravitate towards NNN properties. First, these investments tend to deliver predictable, lower-risk income, strong capital preservation, and good tax deferral. Then there are the more intangible benefits, such as bragging rights that the investor owns a prestigious building that generates a steady and lucrative monthly rent.
How the NNN lease is structured
The details of the lease can be complex, but the basics require the tenant to not only pay monthly rent, but also cover property taxes, insurance, and maintenance costs. And, since there is only one tenant to oversee (and one with a solid reputation), the investor typically has little or no management responsibility for the real estate. This is especially beneficial for an investor who lives in a different city, state, or country.
Types of NNN properties
For investors considering moving into NNN real estate investing, there are several different types of real estate that make up the general group. The market is segmented into three categories: retail and restaurants, industrial and medical office buildings.
types of tenants
Just as real estate is classified, potential tenants are also classified. However, instead of studying the type of tenant, the critique refers to the creditworthiness of the tenant. Prospective tenants can be “credit tenants” or “no credit tenants.”
Credit tenants tend to be national names who are assigned a credit rating by rating companies like Standard & Poor’s. The most desirable tenants tend to be those that are classified as institutional-grade investments, such as CVS.
Non-credit renters tend to be local or regional businesses that are not rated by the major agencies. Of course, there are also some big national names who are considered bad credit renters simply because they have no debt. These unqualified tenants should not be discounted.
Is NNN right for you?
There are many factors an investor should consider before jumping into the world of NNN investing. Things like return on investment, stability, lease length, potential rent increases, lease provisions, location, demographics, and other factors play a role in the decision-making process. .
While triple net leases can be a solid investment vehicle for building wealth, stable income, and flexibility, there are myriad details that go along with these investments. Be sure to hire a qualified commercial real estate broker with specialized knowledge in these complex transactions to help you along the way.