NNN properties are leased to tenants on a triple-net basis, meaning the tenant is responsible for and pays for all real estate taxes, insurance, and property maintenance. This unique lease structure makes NNN properties a largely passive commercial real estate investment.
Investors love NNN lease properties because they do not have to deal with traditional property management responsibilities. Tenants love them because they can lock in generally lower rents for a longer term than a traditional lease. They are very popular investments for a number of reasons.
Of course, not all deals are created equal, and there are some good quality NNN investments (Invest In Triple Net Lease) available, in good locations, with solid tenants and 10+ years remaining on the lease. But while a NNN property may seem like an attractive, passive, investment for a 1031 exchange or direct investment, a closer look is required to determine if it truly meets your investment goals and objectives.
Myth-busters:
NNN properties have steady, predictable NOI: investment real estate is valued based upon its Net Operating Income (predictable NOI). A probable lack of NOI growth means the property may be worth less every year, not more. Investor generally rosily bet that in the future, buyers will pay more for a property that generates nearly the same income as it does now, and buy a NNN property at a robust CAP rate. Generally, this is a poor bet.
NNN properties have the best, investment grade tenants: Things can change. A tenant who looks solid today may be worthless tomorrow. If an investor loses a NNN tenant (investment grade tenants), they will be on the hook to not only find a replacement, but possibly also pay for build-out required to secure the new tenant. Thus, an investment property that once seemed great can suddenly be a dud.
NNN properties have solid Cash on Cash returns: while a 7%+ cash-on-cash return seems attractive during the first few years of an investment, nothing is certain later? Whatever the rental rate increases are, it is unlikely they will keep up with inflation. If the dollar buys less in ten or fifteen years than it does today, then that average CPI annual increase could mean nothing. And if the local market is doing well, the NNN property could fall far behind local market rents, decreasing the value of the property (solid Cash on Cash returns). Also, because the tenant is responsible for so many of the property expenses, landlords lose many valuable tax deductions against income that they can otherwise claim.
NNN properties have long leases: while a long-term lease is attractive, the most important question is how much remains of that lease. A 12-year lease with 7 or fewer years remaining could be a disaster if the tenant doesn’t renew or extend the lease at the end of that 12-year term. The shorter the term remaining on the lease, the lower will be the value of the property and the higher its cap rate.
For the best, myth-busting advise regarding Invest In triple net lease property, call your able and expert specialists at the Triple Net Investment Group, today.
