Pros And Cons Of Investing In NNN Properties

James had a property worth $450,000 in Chicago but had to move to Houston and was considering selling the property when his friend Cathy offered to broker a triple-net lease to a single tenant, a reputed company with excellent credit ratings, for a duration of 10 years, guaranteeing him of a return on investment of 9% annually, without any of the headaches of managing and maintaining the property. The tenant had agreed to an absolute net lease, agreeing to take care of taxes, insurance, expenses incurred from operations and maintenance, and any necessary repairs and replacements of the structural components. James got to move to Houston because his tenant had excellent credit ratings and was a fast-growing and well-established company who had paid him a premium on account of his property's excellent location. 

Triple-net leases or NNN properties are excellent solutions for those who want to invest in real estate without being burdened with the chores of landlords. It may seem that they are getting a lower rent with NNN rather than any other lease agreement, but it is preferred in general because the expenditure to the investor, the owner, is reduced significantly, plus the fact that the investors need not be constrained by location to own properties and worry about maintenance. There are returns averaging between 6% and 17%, additional tax benefits and property appreciation rate that makes investing in properties and making them NNN properties. There are those who argue that NNN offers lower return on investment than a property with owner management and maintenance and that there are a high degree of risk to as in if the tenant were to go bust and leaves you with a huge NNN property minus tenant, in need of extensive repairs before it could be leased again.

Selecting The Right Tenant For NNN Properties

Retail outlets such as department stores; lifestyle shops; smaller tenants such as pharmacies and restaurants; industrial outlets, where research and development, manufacturing and distribution are done; and corporate offices are some major NNN tenants. 

The NNN lease terms are based on many factors, such as the tenant, location of the building, duration of the lease, and (most importantly) the credit rating of the tenant. 

If you own a NNN property and are willing to lease it NNN, be sure to research as much as you can about the prospective tenant, a bad judgment can have severe consequences and losses. Study the history of the tenant. Is his business having a comfortable debt-to-equity ratio? Is his business successful: his financial strength, the number of other stores leased by him, the stability of management, the future prospects of his business? Is there any chance of changes, such as in the ownership structure, or a merger that could affect the business and could influence his decision to continue his lease? Due diligence is required not only while looking up NNN properties for sale but also while you decide to select the tenant.

If your property is in a prime area and in excellent condition, you could get much better terms rather, than if the property was in a less desirable area and not in the condition it should be in. Hence, geography also affects the pricing of the lease, as in any other real estate deal.

The duration of the lease with renewable options will also have an influence on the rent structure, with corresponding increases.

The credit ranking is a very important factor. Be very sure to select tenants with excellent credit ratings, such as Wal-Mart or Walgreen’s.

Investing In NNN Properties For Sale 

NNN properties for sale require as much if not more due diligence than other properties with a different lease structure. In fact, the perception that they are risk-free investments is completely misleading. Be sure to research the tenants, the location of the property, the local market, the current value of the property after repairs if necessary. Find out the size, quality, and occupancy of the building. The lease terms need to be thoroughly scrutinized by an attorney. Study the lease as well as do tenant due diligence because you will not want to end up with a property with no tenant and extensive remodeling required before it can be leased again. Study and identify any local conditions that may influence the resale of the property. Carefully estimate all risk factors and do the math to determine any negative impacts, as well as assess it against positive financial gains.

Triple-net or NNN properties and investing in them require extensive due diligence and the ability to analyze even the tiniest detail and the impact it will have on the value of the property.

 

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