NNN investment properties often have tenants that new NNN investment property net lease investors perceive as creditworthy. Also, a NNN investment asset allows for large-dollar outlays in a single transaction and therefore justifies what the buyer wants most – passive income straight away. Hence, the huge desirability of these assets, but absent a correct and proper understanding and guidance, an investor may not fare so well, for the FIVE major reasons outlined below:
Perceptions of Simplicity
A NNN investment lease property can become an expensive, management-intensive commercial real estate property due to the magic of something called “Deferred Maintenance”. Failure to repair your tenant’s roof or an unchecked termite infestation, in a timely manner could result in damage to the building’s infrastructure that is way more expensive than the cost of that one repair!
Net lease investors also need to be aware of the “stretch” boundaries of tenant behavior under lease terms. For instance, if a tenant fails to pay a contractor, a contractor can file a lien against the property owner, unless the lease has constrained the tenant in doing so!
In other cases, retail locations may be closed without notice to the landlord etc, and the list does go on. In this challenging investment environment, landlords must be proactive in writing strong leases.
High Debt Burden
Right now, rates are low, and that could lead to problems. When interest rates are higher and less debt is available in the market, net lease underwriting is disciplined and deals are heavily scrutinized. But when interest rates are low and debt is readily available, unsophisticated buyers come in and make mistakes.
Rosy Perceptions of Tenant Credit
NNN investors may forget that these NNN net lease assets with tenants are not bonds – they are real estate. New, yet uninformed, investors could still be holding on to rosy perceptions of risk and market conditions of a bygone market cycle, and these “legacy” perceptions tend to linger to their utter detriment. Currently, retailers are in dire straits. This is a black swan scenario for net lease landlords. Strong retailers are using this economic environment to scare novice net lease NNN landlords into undesirable rent reductions.
Tenant Vacancy
Vacant net lease investment properties can become declining revenue and net present value models that still require taxes, insurance, and mortgage debt to be serviced without any income, whatsoever. Now this is the exact opposite of what a tenant expects when investing, initially. Where’s the preparation for this scenario?
Restricted Free Cash Flow
Repositioning a net lease NNN investment property requires a healthy amount of time, expertise, advisory and free cash that typically few (the 20%) NNN investors may possess. So to play the NNN investment property game, it is wise to have well-lined pockets.
Avoid egregious brokers and advisors who fail to look out for your own best interest. For unstintingly candid, un-desperate, and expert advice, call on your friends at the Triple Net Investment Group. You’ll get straight talk, and great talk. Talk, that you can take to your lender and buy the NNN investment property you need for retirement, new investment, expansion or a 1031 exchange. Call today and make mistake-free investment decisions for your next NNN investment property.