Guide to First Time Triple Net Lease Investing
If you’re like most people you have a daily challenge. Where do you put your money? Since this guide is about real estate we are going to cover why one for sure place should be net lease investment real estate. However before we discuss that in detail let us talk about your life, your lifestyle and what is important to you.
Most people that I know are barraged with opportunities on where to put their money. Of course, there are the typical investments such as stocks, bonds, mutual funds, CD’s etc. All of these investments have their advantages and disadvantages. Most people own one or more of these kinds of investments. But, What about net lease real estate? Many investors do not even know that they even exist, but in fact they do and for the most part, plentiful in most places. So, why don’t more investors buy net lease real estate then? Here are the main five reasons.
- Think it’s too complicated and would take too much time to educate themselves about buying, managing and selling.
- Think it would be a hassle to manage and once again take too much time and feel management would create more problems than profits.
- Not much readily available information out there for investors. When is the last time you saw a “CNBC” or “Real Estate Week” on TV dealing with just owning and managing and profiting from
commercial investment properties? Do you see real estate values published in the financial sections of the newspaper next to the stock market share prices? Of course not. There is not enough quick information for us out there.
- Too risky.
- Don’t have the time.
Probably the last reason, reason number five is the biggest reason. Not enough time. Also, number two is a big reason as well. The investor has more investment opportunities that can take
What is Net Lease Investment Real Estate?
NNN Lease Properties (Triple Net) is a lease agreement with a tenant in which the tenant are solely responsible for ALL of the expenses associated with the property in addition to paying rent directly to your “Mail Box”. Expenses paid for by the tenant include Property Taxes, Insurance, Property Maintenance and Repairs.
THE BENEFITS OF NNN LEASE PROPERTIES
Many investors enjoy the ownership of these types of leases because not only do they receive all the benefits of traditional real estate they never have to deal with the hassle of landlord involvement. As a consultant I would discuss with tons of owners in my local market about this concept of triple net lease investments and many times it would go in one ear and out the other. Not that I was telling these property owners that owning apartments are bad, not in the least, especially since I own several apartment buildings myself. I was trying to make the point of diversification. These owners solely owned apartment buildings and no other types of investments. Most of these investors would ALSO self manage the properties themselves. (Story for another day) After years of dealing with clogged toilets, nagging tenants and 1AM house calls most of them called me back to discuss this alternative investment option. As I stated earlier, NNN lease properties are just like traditional real estate but with a spin, No landlord responsibility. Many of these investors made the move and all of them are happy, because it makes sense.
Many options for tenants exist in all sectors including Corporate and Institutional Grade Retail, Medical, Restaurant, Big Box, Pharmacy, Bank, Gas Stations, Industrial and even Government Tenants! Popular choices has been McDonald’s, Walmart, Home Depot, Bank of America, CVS Pharmacy and many more.
Over 100 Top American Corporate Brands of NNN Tenants, What do I choose?
With over 100 different companies to choose from serving from Fast food all the way down to government tenants it seems pretty daunting but I always recommend to all of my clients is sticking to basic real estate fundamentals. As with any real estate Intrinsic value is always the best bet.
Intrinsic Value for Net Lease Properties
Demographics: Demographics of the area where the investment property is located. How many people are located within 1 mile of the property, three miles and five miles. For a fast food restaurant like NNN McDonalds having as many potential customers means a lot and that goes the same for Banks, Pharmacies, Auto Repair and others.
Traffic Volume: Along with having a lot of potential customers you want to make sure that people can get to the establishment right? Having a good amount of traffic and demographics is not only good for the business but as the owner will give you a better assurance that a tenant will stay long term and continue to pay rent. Of course having a reputable, financially stable tenant is just as important that the other factors, which leads me to my next point of…
Financial Stability: You always want to pay attention to the stability of a tenant. Not only we do it for a person who is going to rent our house or apartment it is equally important for triple net properties as well. You have Corporate Rent Guarantees, Institutional Rent Guarantees, Franchisee Guarantees and Personal Guarantees.
Corporate Rent Guarantee are usually a Corporate business structure with many levels of management. Typically they own, run and manage multiple locations with installed systems and procedures. Many of which have parent companies that are publically traded or multi-national or even multi-international. Lots of times you can receive financial reports about the company as well as the individual performance of that specific location. Many guarantee the rental payment through the many locations owned or by the parent public company.
Institutional Rent Guarantee are large multi-national and international companies that most are publically traded and have a institutional credit grade ratings. Top brands like CVS, Walgreens, Walmart, 7-Eleven and Bank of America are rated through Moody’s & S&P credit grading system. The higher the better of course but many of which tenants demonstrate strong financial performance and stability. To view our updated tenant credit ratings click here.
Franchise Guarantee are growing in popularity with net lease investors as they provide an opportunity to acquire at a very attractive price point compared to corporate and institutional grade tenants. Another reason are the opportunity to acquire with a sale-leaseback structured lease in which the tenant agrees to a brand new lease at close of escrow. There are many Franchises nationwide, from a few unit operator in a single state to a multi-unit owner that operates locations all over the country. The advantages are that these tenants are running a successful system and brand and typically are located in good intrinsic value locations. Some of these franchisee tenanted properties come with a Corporate Guaranteed lease of the parent company (which may be a public company) or have a deep Corporate structure that is financial stable.
Types of NNN Property Categories you can Invest In
There are different types of net lease real estate categories you can invest in. The most common are retail, office and industrial. There are also triple net leases for educational facilities, hotels, healthcare facilities and government facilities. In this section I will break down the most common types.
This category is broken down by several types of businesses, here are the most common:
Most will be familiar with these chains like CVS, Walgreens, Rite-Aid. These tenants usually demands premier hard corner locations and have serve a growing baby boomer population.
Along with retail sale of prescription and nonprescription drugs they also sell front-store products such as beauty care, personal care, household items, candy, photo finishing, greeting cards, convenience foods and seasonal items, as well as liquor and tobacco where permissible by law.
New drug store leases are typically 20 years or more with varying lease structures that can range from 50 year lease renewals or even 75 year leases.
Restaurants are another very popular category for investors because the vast majority of restaurants operate under a triple net lease structure. The current retail sector is very attractive right now. Nationally, the retail market vacancy rate decreased from 6.9 to 6.7 percent in second quarter of 2013 on the strength of more than 23.1 million sq. ft. net absorption, according to CoStar, a commercial real estate research firm. Rental rates were up 2 cents at the midyear mark to $14.50 psf. Consumer confidence has also reached its highest level since 2007. Additional research support this as well. According to NDP Group a consumer market research firm, the total volume of restaurants in the United States increased by 0.5 percent in 2013, which is 3,045 units in the year. Quick-service restaurants rose by 1 percent to 328,162 units. convenience stores experienced a 2 percent gain in consumer traffic, which led to a year-over-year increase of nearly 6 percent in dollars, reported NPD in June. New leases can range from 10 to 20 years but on average 20 years with varying rental increases.
2013 has given some good reasons for this optimism. The S&P 500 index reached new highs. The steady recovery in home prices continues in the housing market, reaching their five-year high in July. The banking industry also showed improvement, posting record quarterly profits and capital levels in the second quarter. Larger banks are seeking to acquire more sites and expanding marketshare to stay competitive. Strong credit tenants like Bank of America, PNC Bank and BankUnited are popular tenants for investors. Bank leases also ranges in lease terms which can range from 15 to 20 years with varying renewal options and rental increases.
NNN Dollar Stores
A dollar store or variety store is a retail store that sells a wide range of inexpensive household goods. As americans have been hit hard by the Great Recession, and so have the businesses they own and work for. Dollar stores have been seen as a recession proof business as they continue to increase profits through the economies difficult times. As consumer spending power crumpled, retailers especially felt the pinch. Luxury cars were harder to shell out for, electronics were no longer flying off of shelves, and every dollar began to matter. Dollar stores often have product lines including food and drink, personal hygiene products, small home and garden tools, office supplies, decorations, electronics, garden plants, toys, pet supplies, remaindered books, recorded media, and motor and bike consumables. Larger stores may sell frozen foods and fresh produce.
NNN Auto Parts Retailer
Auto parts retailers operates within the automotive aftermarket industry, which includes replacement parts, accessories, maintenance items, batteries and automotive chemicals for cars and light trucks. These retailers supply directly to the do-it-yourself (DIY) and do-it-for-me (DIFM) or commercial customers in the United States, giving customers access to thousands of parts that are available on a same-day or overnight basis at low prices
NNN Quick Service Restaurants / NNN Fast Food
Quick service restaurants (QRS) are characterized both by its fast food cuisine and by minimal table service. Food served in fast food restaurants typically caters to a “meat-sweet diet” and is offered from a limited menu; is cooked in bulk in advance and kept hot; is finished and packaged to order; and is usually available ready to take away, though seating may be provided. Fast food restaurants are typically part of a restaurant chain or franchise operation, which provisions standardized ingredients and/or partially prepared foods and supplies to each restaurant through controlled supply channels. These restaurants provide high-quality food and enhanced service while remaining quick in preparation and customer service, and those qualities are driving growth. From December 2012 to November 2013, visits to fast-casual restaurants spiked by 8 percent, while spending rose by 10 percent. That’s in comparison to the overall market, in which customer foot traffic remained steady and spending only grew by about 2 percent. Millennials have been known to have marked interest in the fast-casual segment. Fast Casual restaurants have also spiked because of the economy, as many diners want the quality of a restaurant meal without the premium cost or time concerns involved. Now that we covered a basic overview of types of property categories you can invest in. I cover individual tenants based on popularity so you can better understand each tenant. To review that go here.
This subject can get pretty deep but what we covered can get you on the right path to choosing the best net lease investment for your portfolio. To discuss any particular tenant in particular or seeking NNN Properties for Sale navigate through our website or schedule a phone call by clicking here.
For even more information get my book which covers Triple net investing in much more detail. Normally I sell this book on Amazon.com for $19.97 but here is a downloadable copy for free. Click the image below to get your copy now