There are a number of benefits and risks to triple-net (NNN) properties that are quite different from those involved in residential and non triple-net commercial investments.
A triple-net property – and these are always commercial, never residential-is one in which the lease requires tenant to be responsible for all maintenance, taxes, and utilities. The landlord need do nothing, simply collect his rent check.
If you’re used to owning apartment blocks, for example, you’ll appreciate immediately the chief benefit of triple-net buildings: you won’t be spending your time hiring painters for the hallways, or worrying about the municipal taxes going up again. These are all the responsibility of the tenant.
In addition, triple net leases can be much longer than other leases, even up to periods of 25 years or more, and the tenants are usually stable, established companies, whose rate of return on the capital deployed in their business is higher than the rate they have to pay for real estate, hence they choose to lease.
But there are some big disadvantages to triple net properties which can trap the unwary investor. Unfavorable lease terms, a bankrupt tenant, or a property with little residual value upon the lease expiration can reduce your returns substantially.
When considering an investment in a triple-net property, look first at the lease, rather than the property. When you buy an apartment block, you want to look at the building before you decide whether you want to consider investing in it, but with a triple net property think of it as though you’re buying a lease.
Look closely at the lease terms. They may have options to renew that don’t account for inflation, or termination clauses that will leave your property vacant on short notice to you. The terms of a triple-net lease are as flexible as the minds of the lawyers drafting them. If you don’t understand everything, and its doubtful that you will, seek legal advice concerning the lease.
Next, look at the company who will be your tenant for the next 10, or 20 years or more. Are they likely to remain solvent? You have a big stick as a commercial landlord with a triple-net lease in the event of a tenant which defaults on its rent. Unfortunately, you’ll be using that stick in concert with a bunch of other creditors, and bankruptcy litigation is expensive and perilous. Make sure your tenant is likely to be around for a good long while before you invest.
Finally, you can look at the building itself. Don’t look at just the building’s structural integrity, and how well it has been maintained, but also look at the type of use it’s suited for. Warehouses, for example, can be extremely specialized in their construction, and you may never find another tenant for the property if the lease isn’t renewed. Look also at environmental issues affecting the building. You may find rather than being left with a valuable property at the end of the lease you have a liability in the form of an environmental clean-up bill.
Triple-net (NNN) properties can be great investments. Unlike other real estate investments, which are really more like business which require a lot of work from you, a triple-net property will pay you a predetermined return on your investment as reliably as a bond. If you avoid the pitfalls mentioned above, the benefits you receive from an investment in a triple-net property will exceed your risks, without all the work you may presently associate with other types of real estate investments.