How to get started in NNN leased investments
NNN leased investments can be an excellent hands-off approach to holding real estate in your portfolio.
A triple-net (NNN) leased investment is a type of lease where the tenant is responsible for paying not only the rent, but all three of the “net” expenses, hence the “NNN”. Net expenses include property taxes, insurance and maintenance. We usually see this type of lease used for single-tenant properties occupied by well-known national credit tenants such as CVS Pharmacy and Walgreens as well as Bank of America, 7-11 or McDonalds.
The Benefits of a NNN leased investment
These types of leases provide the investor a secure, long-term revenue stream. It is not uncommon to see a 25 year lease for some retail tenants. The revenue stream is generally stable and predictable as the tenant is responsible for maintenance and capital expenditures for the building so the investor is not impacted by increases in expenses.
They encompass hard to find inflationary resistance. Not only is the income stable and predictable, but step-up rent escalation clauses are common-place in a NNN lease. The rent escalation could be a fixed-rate or could utilize a consumer pricing index such as the San Francisco-Oakland-San Jose All Urban Consumer index.
There is limited or no property management responsibilities. Unlike other real estate investments, there are virtually no management duties with a NNN leased investment. The NNN lease is structured for the tenant to handle all maintenance issues of the property.
The security of national credit corporations backing the lease. These are large corporations who would rather use their capital in the operation of their business rather than holding real estate.
Three steps in evaluating the investment.
Just as in any real estate investment, the age of the building, zoning restrictions, area real estate market, demographics and local employment climate are all critical issues to have insight into.
A large part of the investment value is placed on the creditworthiness and stability of the tenant. The value of the real estate investment is directly proportional to the credit rating of the tenant. The lower the rating, the higher the capitalization rate used for the investment in the analysis and the lower the value of the real estate. If the tenant is a publicly traded company it is easy to determine the credit rating through services such as Moody’s or S&P. If it is a private company you will need to do your research, first by securing their corporate credit report. Then, you will want to review their business plan, sales history, annual financial reports, tax returns and marketing material.
It is integral to know what the lease document contains. You may be lucky and a boilerplate lease is used, but most likely not. You may need to have your real estate attorney interpret the lease for you. Know your market rents (which you should had completed in step 1) because if the rent in the lease is above market, it could be reduced upon renewal thereby reducing the value of your investment.