If you are considering investing in commercial real estate, you have probably been looking at the location of properties where major retail stores are and wondering who owns these places. While some think that the retailers own these shops or stores, they belong to someone putting these properties on a long-term lease. This type of lease is called an NNN or a triple net lease.
This type of investment can benefit anyone, especially if you want to diversify your portfolio. But what exactly is an NNN property, and what role does it play in minimizing investment risk? Here is everything you need to know before you invest.
What is an NNN Property?
Adding an NNN or triple net lease property to your portfolio is an excellent idea if you want a low-risk investment that guarantees a stable income. Earlier this year reports state that triple net lease properties made a return of almost 50% over the past five years. Experts also predict that the numbers could be even more remarkable as demand for commercial real estate is increasing due to the growth of retail and industrial markets.
There are different types of commercial properties and leases, but NNN properties are one of the best kinds for those who want to take a mostly hands-off approach to managing the investment. In a triple net lease, the tenant is responsible for maintaining the property, including repairs, renovations, professional cleaning, etc. Leasing an NNN also means that the tenant has to take on all the financial responsibilities that come with the property, such as paying taxes, property insurance, and operating expenses, to name a few.
Well-known brands such as Starbucks, 7-Eleven, Taco Bell, and Dollar General are some companies that sign up for a triple net lease. Pharmacies such as Walgreens are also some of the most highly-credited NNN tenants, as reported by Pharma Property Group.
How Much Rent Can You Charge For an NNN Lease?
Investors looking to charge a high rent on an NNN property may have to think twice before making the giant leap since triple net lease agreements show that the more expenses the tenant has to pay, the fewer property owners can charge as rent. Investing in a single lease or an NNN property may be better if you want to charge higher rental rates. This lease option means the tenant must only pay rent and property taxes. Since the landlord is responsible for maintenance, repairs, insurance, and utility costs, charging a higher rent is reasonable.
How much would you charge as rent if leasing out a triple net property? Most NNN property owners charge an NNN rate on top of a base rental rate. For instance, let’s say that the commercial property measures 2,000 square feet, and you are charging $20 per square foot as your base rent and $5 as the NNN rate. Multiply 2,000 by $20 to get the amount of $40,000 to determine your base amount. Divide it by 12 months; you get $3,333 as the monthly base rent.
For the NNN charges, multiply $5 by 2,000, and that gets you $10,000. Divide it by 12 months, and you will get the monthly amount of $833. Add this to the monthly base rent of $3,333, and you will get a total of $4,166. As a result, this is the monthly rent you should charge your tenant if you are leasing a triple net lease property. Note that if you own multiple NNN properties in a single building, you must split the NNN cost among all the tenants, but the base rent remains the same.
What it Takes to Invest in an NNN Property
The cost of investing in a triple net lease property usually starts at $1.2 million, and the price usually depends on the tenant who is already using the space, the size of the property, and the location. Some NNN properties go for a lower price, but remember that those a little higher usually have longer leases and fewer expenses for the landlord. Investors must also show that they can cover at least 30% to 40% of the down payment for the property while maintaining liquidity. It would be best to have an excellent credit score and a high net worth to start the triple net lease property financing process.
Is There A Guarantee for Tenants Wanting to Sign a Long-Term Lease?
One of the things that makes triple net lease properties so attractive to investors is that tenants usually agree to sign a long-term lease. A long-term lease reduces the chances of having an empty building or commercial space for months, and landlords do not need to exert so much effort looking for new tenants all the time. But is there a guarantee that there will be tenants who will agree to sign long-term leases?
Multinational companies and brands typically choose NNN properties since they aim for uniformity when seeking locations for their shops or stores. Companies like Walgreens often opt to sign 25-year leases, primarily if the location of the commercial property is within a prime location. As a result, triple net lease investments are advantageous for older investors looking to get steady earnings for many years in a low-fuss and low-maintenance way.
What to Look for in an NNN Property
Apart from the company or brand tied to NNN properties, there are other things that investors should look for before starting the financing process. First, ensure that the commercial property is located in a place with high foot or vehicle traffic to ensure sales. Check to see if it offers parking spots or accessibility features for customers, and ensure that it is not obstructed from view by structures, trees, and the like. Also, inspect the property to assess how much you will be spending on maintenance or repairs so you can prepare to finance construction or renovation projects.
NNN properties can minimize investment risk in a portfolio by providing a steady source of income over a long period. Make sure to scout out suitable locations and know the triple net lease agreement terms to make your investment worthwhile.
