So, what is an NNN lease? For starters, it’s a method of generating passive income with little to no effort on your side. A triple net lease is a type of agreement on a property in which the tenant promises to cover all operating costs in addition to providing rent. In other words, you’re able to collect regular monthly paychecks without worrying about property taxes, maintenance, or insurance. Let’s see exactly how you can utilize NNN leases.
What Does Triple Net Mean?
Triple net is short for “net net net” lease – an agreement between a landlord and a tenant. In this type of lease, it’s decided that the tenant provides the rent and pays all three additional expenses (property taxes, insurance, and maintenance costs). As opposed to a gross lease, in which the landlord must cover these expenses, or a single net lease, in which the tenant is responsible for only one additional thing, in NNN leases tenants take care of everything. Landlords are completely free from worries and risks.
Note that every real estate lease lies either on the absolute net lease side or the absolute gross lease side of the spectrum. The triple net lease would then fall in the absolute net category, whereas the single net lease, the double net lease, and modified gross lease would be in the middle.
Reasons to Use a Triple Net Lease
You might be wondering why tenants would ever decide to pay property taxes, insurance premiums, or maintenance costs for properties they don’t even own. Well, it’s simple. Since tenants are covering all these expenses, the base rent charged is quite lower. They take on additional responsibilities and risks, which ends up being more affordable for their long-term goals and finances.
As for the landlords, they can use triple net leases as a reliable source of risk-free passive income. In the long-run, not dealing with monthly taxes, insurance, and maintenance expenses saves so much time, energy, and eventually money. It doesn’t matter how high repair costs get or whether property taxes change – all risks are transferred to the tenant.
Investors in triple net leases don’t have to worry about management operations, vacancy, or leasing fees. After selling the property in question, all investors on the project can put their money into another NNN investment without paying capital gain taxes by doing a 1031 exchange. Note that even smaller investors can participate in triple net lease deals by investing through REITs that have such properties in their portfolios.
Triple net leases can often be bondable to prevent tenants from backing out in case operating expenses become higher. A bondable lease can’t be terminated before the expiration date, and the rent amount can’t be altered. Tenants are also obligated to rebuild after a casualty, pay rent after partial or full condemnation, etc. Triple net leases are mostly used in commercial real estate, and the lease term is 10-25 years with options for renewal.
What Does a Landlord Pay for in Triple Net Lease?
Now that you know what a triple net lease is, we should see how is the financial side of things doing. First and foremost, let’s answer the question: do landlords pay anything in a triple net lease? Sometimes, depending on the lease terms, the landlord can be responsible for structural repairs, like fixing the roof. Heating, ventilation, and air conditioning are often shared responsibilities, too. In some cases, the area around the commercial property, such as parking lots, can also be under the landlord’s care.
These and a few additional administrative costs when making the contracts are generally not very high, but you should be aware of them if you decide to invest in these deals. Always conduct due diligence on properties and leases when entering real estate investments.
Note that as an investor, the amount of your income will depend on:
- Location. In the real estate world, choosing an attractive location is crucial for generating higher income. Investing in property with a location high in demand might be more expensive, but it’s much more profitable in the long term.
- Tenants. Having a good tenant can ease your worries by a ton and also boost your income source. When scanning candidates, you must check their credit records and previous business history to make sure they are trustworthy and reliable. You don’t want to end up in court to make sure the tenant pays, right?
- Lease. The terms of the lease impact your cash flow just as much as tenants and location. You can’t allow premature termination of the contract or offer renewals without increasing rental rates in accordance with the market value of your property.
- Ownership. Different ownership types influence the amount of money you’ll be receiving. You might be a complete owner of the property or a partial one. There’s also the option of owning triple net leases for certain fees.
- Asset. The type of real estate also has a saying in your expected income. Before entering the investment, make sure to conduct market research to find which properties are in demand.
Examples of Triple Net Leases
Triple net lease investments typically contain a portfolio of commercial properties leased by businesses. Commercial real estate includes office buildings, shopping malls, and even industrial parks. Franchises, fast food chains, and convenience stores are very common tenants entering NNN leases.
Walgreens can be used as an example of a well-known company that chooses triple net leases. This pharmacy usually opts for 25-year net leases. So, how does Walgreens benefit? Mostly by getting access to the prime retail locations, which boost its revenue. When all their ongoing expenses (in addition to lower rent) are put on paper, these lease types prove to be much more profitable.
Pros and Cons of NNN Leases
All parties should carefully consider both benefits and limitations of triple net leases before entering this agreement. Tenants have more responsibilities, but they can negotiate a more favorable base rent in return and claim tax benefits for their business expenses. Likewise, landlords also get various advantages, with a few limitations, too. Let’s go through the pros first.
No Landlord Responsibilities
The most obvious benefit of NNN leases is the lack of landlord duties when compared to a gross lease. You won’t have to maintain the property nor take care of property taxes and insurance, so you can focus on chasing other investment opportunities.
The vacancy rates can surely become a problem with short-term leases. On the other hand, the NNN lease secures long-term tenant occupancy (even up to 25 years per lease). You wouldn’t have to worry about property sitting vacant anymore!
Risk-Free Passive Income
Since tenants are responsible for everything that happens with the property, triple net lease investments are essentially risk-free. Investors get a consistent income for multiple years without worries about catastrophic property expenses.
An NNN lease is often used as an equity-building strategy. As the property’s value increases in the market, you’ll be able to profit after selling it if debt associated with the asset stays lower. Secured income from triple net leases allows you to create more equity over time since the lease time is longer.
Cons of Triple Net Leases
Long-term leases prevent landlords from increasing the rent, even if the property value increases. This is a “pro” for the tenant, but the limited earning potential for the investor.
Finding tenants with a strong credit profile can also be problematic. Since tenants need to cover real estate taxes, insurance, and maintenance costs, they need to be fully prepared for these financial burdens. Hence, qualifying for NNN leases ain’t easy.
We hope this small guide has clarified what a triple net lease is so you can enter these deals more comfortably. When it comes to the real estate market, one can never be informed enough. Everything is always changing, and you need to have a good eye to catch lucrative deals. If you need assistance with locating top-notch NNN properties, don’t hesitate to reach out and get a customized list of properties. We’ll guide you through the entire process, so you can invest with confidence.