Many reasons govern whether the lease on a property is single, double, or triple net. But among the lot, it’s the triple net lease that attracts most of the landlords. But why? The Triple net or NNN leases are the commercial real estate lease structure where a landlord can push the additional rent expenses associated with the property onto their tenants.
For instance, you can pass the expenses related to maintenance, property taxes, or building insurance on the lessee. These are quite common in retail properties. However, its charm is growing in office or industrial properties as well.
In this article, we will be talking about the benefits and risks involved in investing in a triple net property. Let’s get going!
- It’s Predictable: This is quite a reliable and stable income stream for investors. So, if there is no bankruptcy or default involved, it will be pretty simple to calculate the rental income or payment in a year. The structure of this net lease usually comes into the picture when you are ready to sign the lease. Only then can the entities know the terms of the lease.
- It’s Stable: If you opt for an investment-grade tenant for a long-term net lease, you won’t have to worry about the default on the lease payments or contracted rent. Thus, it makes it easier for the owners to determine the profitability. This is why the investors often look for Triple net property for sale to protect themselves from a downward market by leasing it to a strong tenant.
- It’s Simple: The simplicity of the entire concept is a benefit. The landlords don’t need to take care of any other services other than structural property maintenance under a NN lease. On the contrary, under an NNN lease, you are not even responsible for any operating obligations. Thus, it makes the ownership pretty simple and straightforward. So, you can say “bye” to those stressful day-to-day activities.
But that’s not all!
Like any other property, this also comes with its fair share of risks. So, let’s understand the risks now!
- Difficulty in Replacing Tenants: This is probably the most significant risk involved with these types of properties. If your tenant declares bankruptcy by any chance, it gets challenging to replace it with another tenant. It is especially the case if your property is on loan. But you can mitigate this situation by either looking for good tenants or consider acquiring fractionals interests of net leased real estate.
- Location Can be Tricky: It goes without saying that a strong area will always woo tenants because such sites have large populations with better incomes. Plus, these places have hassle-free and less daunting re-leasing options. However, it might not provide you with better profits if you go for any other location that’s not so strong.
- Slower Growth: Since you sign a lease for the long term, your growth is comparatively smaller. This is true in the case if there is rent growth during your lease period.
Clearly, there are more upsides than downsides in investing in NNN properties. So, if you are a passive investor, this project might be ideal for you.