Thinking of buying a triple net lease property? You’re not alone. Triple net lease properties are some of the most attractive and profitable investments, allowing for an attractive return on investment and a steady income stream. However, navigating the triple net lease property market can be tricky and requires careful planning. In this article, we look at what you need to know before you buy a triple net lease property, including the different types of triple net leases, the benefits and risks of investing in such properties, and the key factors to consider when making your decision. The market is overloaded with triple net lease for sale, but only with the right information and guidance, you can find the right property.
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Types of triple net leases
There are two main types of triple net lease properties.
- Full service – Full service triple net lease properties allow the property owner to provide all property-related services and maintenance, including landscaping, repairs, property management, and cleaning. The tenant is usually responsible for paying for these services. Full service triple net lease properties are generally more expensive than limited service.
- Limited service triple net lease properties are where the tenant is responsible for all property-related services. If a problem arises, the tenant is responsible for fixing the issue. Investors should be aware that the specific terms of the lease will differ from property to property and should always be checked before signing on the dotted line. For example, the tenant may have certain obligations and responsibilities, such as cleaning the sidewalks in front of the property during snowstorms. It’s also important to note that the lease terms may change over time as the property ages.
Benefits of investing in triple net lease properties
Looking for NNN properties for sale? Well, that’s a commendable ambition, but first, let’s run over their key benefits:
- High returns – They provide investors with high returns and predictable cash flow, making them an attractive investment. In fact, according to the Urban Land Institute (ULI), the return on investment for triple net lease properties is 10.2%.
- Low risk – Triple net lease properties are extremely low risk, making them a safe investment for new and experienced investors. The tenant is responsible for paying for any maintenance or repairs required during the lease term, which means the risk is passed on to them.
- Steady cash flow – The steady cash flow from triple net lease properties provides peace of mind and helps investors plan their finances accordingly.
- Fixed costs – Investors can benefit from fixed costs on triple net lease properties, which means that costs will remain the same regardless of external factors.
- Predictable returns – Investors can expect a predictable return on investment due to the fixed costs and the steady cash flow.
Risks of investing in triple net lease properties
Like any investment, triple net lease properties do come with certain risks. However, these risks are easy to manage and can be reduced with careful research, as well as with the help of a good real estate agent. The risks of investing in triple net lease properties include:
- Low rental rates – While this is a risk for the investor, it is also a benefit for the tenant, as it gives them a low monthly payment.
- Extended lease terms – While the initial term of the lease is specified in the original lease agreement, the terms may be extended at the end of the term, as the property ages.
- Tenant default – While tenants are responsible for paying for any maintenance or repairs, they may default on their payments. If this occurs, the investor will have to cover these costs.
- Losing control – One of the most significant risks with NNN properties is that tenants may try to take control of the property, which can be challenging to deal with. It’s important to find investors who are experienced in managing and maintaining triple net lease properties.
Key factors to consider when buying a triple net lease property
When searching for NNN for sale, there are some factors to consider, including location, property type, and the tenant. Here are some key factors to consider when buying a triple net lease property:
- Location – These properties tend to be in urban areas, which means they are more likely to experience tenant turnover. However, this also means that you’ll have an easier time finding new tenants if someone does decide to vacate the property.
- Property type – It is an important factor to consider when buying a triple-net lease property. For example, retail properties are generally low-risk, while industrial properties tend to be high-risk.
- Tenant – The tenant is a critical factor to consider when buying a triple-net lease property. You’ll want to ensure that you find a reliable tenant who can afford to pay the rent. You can do this by carrying out a tenant credit check, which will provide you with a detailed report on their finances.
Tax considerations for triple net lease properties
When you invest in this type of property, you’ll be taxed on the income you receive from the lease. However, there are a couple of ways in which you can reduce your overall tax liability. For example, you can use a 1031 exchange, which allows you to defer capital gains and tax on the profits. Alternatively, you can use a 1031 exchange to defer the tax liability until you sell the property. There are also tax benefits when it comes to selling the property. For example, you’ll be taxed at a lower rate if the property has appreciated in value since you bought it. If the property has depreciated in value, you’ll be taxed at a higher rate.
Conclusion
When it comes to triple net lease properties, the only certain thing is that there will be challenges. But with the right amount of due diligence, research, and planning, you can navigate these challenges and come out on top. You’ll need to start with a research phase to find the right triple net lease property for you. From there, you’ll need to conduct a market analysis as well as a financial analysis. Once you’ve found the right property, you’ll want to hire a property inspector to assess the risk and a real estate attorney to help you with the legal aspects of the transaction.
