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Why Should Investors Love a Triple Net Lease?

In most cases, a Triple Net Lease provides headache-free, passive income. Another smart RE investment? Retail properties with tenants like a bank or CVS.

MIAMI – As you drive to work you will probably pass by businesses such as fast-food restaurants, gas stations and banks. Chances are many of those are triple net lease (NNN) properties.

Let’s start by explaining what they are and what benefits they offer investors: An NNN is a lease agreement on a property where the tenant agrees to pay all the property’s operating expenses, including real estate taxes, building insurance and maintenance.

Triple-Net lease ownership is great for first-time real estate investors, as well as for long-time investors seeking to achieve headache-free passive income.

An NNN lease is the most common and sought-after lease structure by commercial real estate investors. There are several reasons for this.

First, it provides passive income, given that it ensures the responsibility for operating expenses are on the tenant. Second, it provides a cash flow stability, as leases are between 10 and 20 years. Third, in NNN investments you are dealing with companies instead of tenants. Fourth, many of these tenants are credit tenants, meaning that they have a strong credit rating. As such, they provide the property owner with a high degree of confidence that all rent payments will be honored.

There is a wide range of NNN property types. Some of the most common are pharmacies such as CVS and Walgreens, auto-related stores such as AutoZone or Jiffy Lube, fast food restaurants like Subway, convenience stores such as 7-Eleven, and bank branches, such as Chase or Bank of America.

After determining the investment amount, one must choose the geographic location. It may be limited to one state or region of the U.S., as every state has different state income tax rates.

Then determine what is the desired return. In commercial real estate we use the cap rate, which is the net operating income divided by its asking price. Investors should select the industries or type of businesses most appealing. For example, investors may look at quick service restaurants (QSR), pharmacies or auto-related stores because they are more resilient to recession.

A very important factor when selecting an NNN property is the term of the lease. These properties have the greatest value when they have more than 10 years to expiration. As the lease gets closer to ending, the value can be affected as there is a risk the tenant may not renew.

There are properties that are so well located their value is not affected. Tenants who have robust annual sales have the tendency to renew their leases.

Another key factor in selecting a NNN property is choosing one that provides rent bumps, which are periodic adjustments to the rental rates expressed in a fixed percentage. This is very important, especially in the current inflationary environment.

Also important is a site location with good demographics, meaning it is in a growth area, with good household income and a large enough population within a specific radius that would be the target consumers.

Every investment is unique and choosing the ideal deal depends on the investor’s objective and risk tolerance. A thoughtful analysis is the key to choosing the right NNN property. An investor must consider all the property characteristics as well as the industry of the tenant and economic conditions in the market where the property is located.

© Copyright 2023 Fernando Echeverri, is a broker specializing in commercial investment properties and works with Great Properties International.