March 5, 2021

Buildings

Savvy real estate investors know that locking in a triple net lease on a property is one of the most convenient, low-risk investment strategies for generating reliable passive income.

The biggest benefits are clear at first glance: By signing an NNN lease, landlords can enjoy long-term contracts and minimal responsibility and avoid the time-consuming and expensive day-to-day tasks of managing a commercial property.

But just because a triple net lease can be incredibly convenient for both landlords and tenants, it doesn’t mean that agreeing to this lease structure comes without any disadvantages.

Like all other real estate investments, triple net lease pros and cons need to be considered equally, so it’s up to the prospective landlord and investor to weigh the benefits and possible setbacks before closing the deal.

In this guide, we want to give you the full picture of what to expect so you can be fully informed on the advantages and disadvantages of the NNN lease opportunity you’ve been keeping your eyes on. Start enjoying the benefits of a steady passive income stream from your property with complete peace of mind!

NNN Pros for Landlords/Investors

Compared to the single net lease and double net lease agreements, going forward with a triple net lease offers unique benefits to both landlords and tenants.

The pros of an NNN lease for landlords and investors are virtually unbeatable if you’re looking for a truly passive income stream to add to your real estate portfolio.

Here are some of the biggest advantages of the agreement:

NNN leases are a low-risk investment

When under a triple net lease, tenants are responsible for paying base rent, property tax, insurance premiums, and all maintenance costs, repairs, and operating expenses.

What this means for investors is that a triple net lease property is a fairly low-risk investment, as the tenant will assume most of the risks throughout the length of the lease term.

The opportunity to add a conservative, low-risk investment to one’s growing portfolio is often the most attractive feature of triple net leases, and it does much to explain their popularity among commercial real estate investors.

NNN leases offer long-term occupancy

Another incredible benefit of signing a triple net lease agreement is the lease term, which tends to be much longer than other types of lease agreements, especially residential leases.

With triple net lease terms generally spanning between 10 and 15 years (and sometimes, even upwards of 20 years or 25 years), investors and landlords can avoid the hefty costs associated with frequent vacancy periods, sparing you not only from income losses but also from the time-consuming work of having to find a new, creditworthy, and reliable tenant to occupy the space once more.

If we consider that other commercial real estate leases usually last between three and five years, it’s easy to see just how convenient long-term and reliable tenant occupancy rates can be!

NNN leases build more equity

Due to their more conservative and low-risk profile, triple net leases are an ideal investment for creating more equity, raising the attractiveness of an investment portfolio, and in turn, attracting more opportunities for real estate investors looking for steady growth.

With tenants taking on almost all of the duties and maintenance expenses associated with the property, the total value of the assets greatly surpasses the total value of the investor’s liabilities — it’s not surprising then that NNN lease investments are often considered even more of an equity-building strategy than a cash flow strategy!

A triple net lease investment means fewer financial responsibilities

As we mentioned, since tenants under a triple net lease are responsible for paying for the majority of property expenses, including insurance, property tax, and all other operating costs, property owners can enjoy the benefits of having much fewer financial responsibilities, plus a sharp decrease in the day-to-day responsibilities associated with running a commercial property.

For investors, minimal responsibility means more money in their wallets as well as more free time to dedicate to other ventures, often bringing about the true financial freedom that ambitious real estate investors dream of.

NNN leases generate a reliable income stream

While NNN leases will generally call for low base rent, due to the higher tenant costs associated with the lease agreement, landlords can, nonetheless, enjoy an incredibly reliable and truly passive income stream from their leased properties.

Consistency in income is given by the long-term nature of the agreement, the set monthly rental prices throughout the length of the term, and the lack of unexpected expenses due to major repairs or tax hikes, as these costly responsibilities are transferred from the landlord to the tenant.

A triple net lease property can be sold anytime

Finally, one of the biggest pros of investing in a triple net lease is the fact that the property can be sold any time by the owner, guaranteeing a return of investment if the income from the property starts experiencing unexpected drops.

Having a sound exit strategy is non-negotiable for investors looking to maximize profits and lower investment risks, so selling your property to a new owner is not that unheard of when it comes to NNN lease strategies.

Note that the lease will be transferred to a new owner with the same terms you’ve set out, so it’s best to think about the eventuality of selling even before you close your initial agreement!

NNN Cons for Landlords/Investors

Agreeing to a triple net lease can also come with a number of disadvantages (some avoidable, some inescapable) that shouldn’t be ignored by savvy investors.

Here are some of the biggest cons of investing in a triple net lease and how they can be minimized:

NNN leases are subjected to an earning cap

Generally speaking, triple net lease investors will experience earning caps throughout the duration of the lease term, as base rent prices cannot be raised in accordance to rent hikes in the area or real estate market fluctuations.

At the same time, triple net leases guarantee a consistent income stream, so it’s up to the investor to choose what will be more beneficial to their investment goals.

Businessman investor

Note that contractual rent increases will often be included in the agreement as a projection of the property’s increasing value over time and inflation. 

Outside of the initial agreement, however, investors will not be able to increase rent prices at will, as only the gradual increase that has been set out on the contract can be enforced.

Triple net lease properties demand cheaper rent prices

As tenants will be responsible for almost all the expenses associated with the property, triple net lease investors can only demand cheaper rent prices than other commercial real estate leases.

Lower rent, on top of the aforementioned earning cap, will limit your earning potential over time, as the lease term will usually span decades.

In light of this, investors need to compare the benefits of a stable and reliable cash flow (plus the equity-building advantages) with the overall lower income earned before committing to a decision.

NNN leases can also carry vacancy risks

Just because locking in a long-term net lease can dramatically lower your risk of costly vacancy periods, it doesn’t mean that there won’t be any risk that a tenant will default, even if they have been carefully vetted before closing the agreement.

When a tenant defaults, owners will be responsible for all rollover costs, as well as being responsible for finding a new creditworthy and trustworthy tenant in a short window of time.

In order to minimize this risk, investors should research their prospective tenant thoroughly and, ideally, only agreeing to a triple net lease investment if the tenant is a well-known, reputable company with prior net lease experiences across the nation, such as fast-food chains, grocery stores, convenience stores, and gas stations.

NNN Pros for Tenants

While this type of lease is generally regarded as the most advantageous for investors, as they will take on fewer daily responsibilities and management expenses, tenants can also enjoy quite a number of perks they wouldn’t get with other net lease agreements, despite the hefty financial responsibilities associated with triple net leases.

Here are some of the biggest advantages of agreeing to an NNN lease for tenants:

A triple net lease generally ensures lower rental costs

As tenants will be required to cover property taxes, maintenance costs, insurance premiums, and repairs, the gross rent for a triple net lease property will be considerably lower than other types of commercial real estate agreements.

If the property demands fewer repairs and benefits from low utility bills, a triple net lease can be a convenient way to slash costs while exercising more autonomy on the day-to-day management of the property.

NNN leases enjoy tax benefits

The expenses required to take on as part of a triple net lease are not as overwhelming to tenants as it might seem at first glance.

In fact, one of the biggest pros for NNN tenants is the tax benefits associated with this type of lease, as they might be able to build the property taxes they are responsible for into their business expenses when tax season comes around.

Tenants can benefit from premium locations

Finally, we have one of the most convenient pros of being a tenant under an NNN lease: the premium location that will be guaranteed with your agreement.

In fact, commercial real estate investors will only put their money into great locations that are guaranteed to turn a profit, like busy urban centers, bustling city corners, and even isolated areas with little competition and skyrocketing population growth.

This will help you gain traffic, new customers, and overall more exposure than cheaper locations.

NNN Cons for Tenants

So, are there cons to being an NNN tenant? While most tenants decide to take on a triple net lease because of its unique pros, there are some setbacks to consider:

Tenants must handle costly property expenses and liability 

The most apparent con of becoming a tenant for an NNN lease property is high operational costs and all the other property expenses you’ll be responsible for.

While the increased agency and control over the property might be attractive to some, the hefty financial responsibilities associated with a triple net lease can be inaccessible for businesses that are not prepared to take on the risk or have very little experience with this type of lease.

Supermarket

By the same token, tenants will also be responsible for all liabilities associated with property taxes, including penalties for late tax remittance, missed payments, and mistakes when filing taxes.

So, Is a Triple Net Lease the Right Choice for You?

After you’ve carefully vetted the pros and cons of investing in a triple net lease, your next course of action will be to research the most reliable investment opportunities available on the market.

If you have decided that the pros greatly outweigh the cons, our NNN Deal Finder is your one-stop destination for finding the best triple net lease deal for your needs.

With over 1,357 properties available from all over the country, listed by type, location, and tenant, our directory can make finding a profitable investment feel like child’s play — browse our listings today to find your next money-making net lease investment!

About the author 

Dwaine Clarke

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