Triple net lease property Investors need to consider some key signs when scouring listings for a solid investment with long-term potential and steady, passive, cash flow income. The big 5 signs are:
A strong operating business, a desirable locality, a booming region within which the business exists, tax structures of the state, and the NNN lease terms used to consummate the deal.
Strong Operating Business
The nature of the business that will operate in a NNN property location is crucial to the long-term success of an investment. Investors need to ensure that they are signing with a high-credit, reliable tenant with a strong business track record. In assessing operating strength, criteria may include the number of stores, debt to equity ratios, operating margins, stability of management and the outlook for the industry sector. This said, current research indicates that certain business models consistently do well despite see-saw economies, especially:
- Dollar stores
- Medical
- Grocery
- C-Stores
- Pharmacy
Desirable Locality
Prime locations are most often high-density areas with good exposure along major retail arteries with strong traffic counts. The best choices are near other consumer staples like the pharmacy, grocery store, auto parts store, and fast-food restaurants. If the location is in a secondary or less populated market, assess whether it’s prominent and easily re-tenantable when the lease expires.
Booming Region
Cities, towns and areas with bustling populations and booming economies are the best for NNN investment properties. However, cap rates for these regions may be low, since there is a lot of demand for NNN investment properties in the Sunbelt area generally. Prices start in the range of a 4% cap rate for the highest rated tenants, up to perhaps 6%–7% for lesser credit quality or those with short lease terms. (A cap rate is the percentage of return on the investment as if it were bought with all cash. The lower the cap rate, the higher the price.) Investors that use debt financing can produce leveraged returns in the 8%-9% range. The top 5 regions currently suggested by many pandemic-era studies, and this list keeps changing, are:
- Washington State
- Arizona
- Florida
- Georgia
- Washington DC metro area
Tax Haven States
As a NNN investor, it will pay to look nationally, and concentrate on states that do not have state income taxes. These states are Alaska, Florida, Nevada, South Dakota, Texas, Washington, and Wyoming. New Hampshire and Tennessee also have more reasonable taxes and can be very sound for triple net lease property investments.
Favorable Lease Terms and Structure
A corporate-backed lease provides peace of mind, but it is still imperative to ensure the tenant is credit-worthy. In simple terms, the true appeal of a desirable NNN lease property which has a corporate guarantee also lies in the add-in fact that depreciation will shelter all or most of the cash flow, escalating the after-tax return calculation up to 9-10% depending on the investor’s tax bracket. Note that leases can contain land mines of unexpected expenses, cancellation clauses, or toothless tenant-default penalties, so NNN investors must vet and negotiate carefully!
Thus NNN deals with investment potential can be solid assets, and triple net lease investors could be well-positioned to build wealth over the long term if NNN net lease investors understand the sources of risk, the overall marketability of the property, and value accordingly.