This post originally appeared on tBL member blog SVN Southland Commercial Blog and is republished with permission. Find out how to syndicate your content with theBrokerList.
What Is a NNN Investment?
Triple net (NNN) investments are one of the most popular and sought after commercial real estate investments in existence. The reason for this is that NNN investment properties, which can be single tenant or multi-tenant, are typically properties that are secured by a long-term lease (usually 10-25 years) to a high credit tenant. These tenants include Drug Stores, Grocery Stores, Casual Dining Restaurants, Fast Food Restaurants, Auto Parts Stores, Banks, Dollar Stores, Medical Offices, etc. The structure of a NNN lease can vary, however the tenant is commonly held responsible for all the expenses associated with the property. The basic components of a triple net lease include, base rent, property taxes, property insurance, and maintenance (including both common area maintenance, as well as general building maintenance). Investor demand often exceeds the number of available NNN leased assets and that is why publicly traded REIT’s, large corporations, and private investors find NNN investments to be extremely lucrative.
There are countless benefits to purchasing a NNN investment. Some of the most notable include:
- Stable Income (Secure monthly income without worrying about unexpected vacancies or expenses, as well as built in “rent bumps” that act as a hedge against inflation.)
- Long Term Occupancy (Worry free tenant turnover during initial term with a long-term lease already in place.)
- Attractive Capitalization Rates “cap rates” (Cap rates typically range from 4% to 9% or greater based on the level of risk an investor is willing to take on.)
- No Management (Little involvement from the landlord)
- Ability to defer capital gains taxes through a 1031 “like-kind” tax-deferred exchange. (Use the 1031 tax code to defer the taxes on the capital gain from the relinquished property to invest into a new property with a greater cash flow.)
- Triple-Net lease property has high residual value and is a liquid investment. (NNN properties are always in demand.)
- Properties are typically in prime retail areas with high traffic counts and great demographics. (Routinely A+ locations, therefore the value of the real estate is commonly secure and often will appreciate in value.)
Just like with any investment there are always risks involved. With NNN investments it is noted that the benefits often seem to outweigh the risks. However, that does not mean they are risk free. The most significant risks include:
- Limited Upside (Limited room for growth of cash flow during the initial term.)
- Risk of 100% Vacancy (Generally only a major concern with single tenant properties.)
- Tenant inability to pay rent (Does the tenant have strong credit? Is their business model being challenged by other retailers or online competition?)
- Re-leasing of the property (Overly specialized buildings can be difficult to re-lease.)
- High Price Relative to Underlying Value (Is the tenant paying an inflated rent compared to the real market rate?)
Should I Purchase a NNN Investment?
It is important to understand how NNN investments are valued. Most NNN properties are bought and sold on a cap rate. A cap rate is the correlation of the net operating income (NOI) in relation to the sales price. For example, a property with an NOI of $129,600 and a sale price of $1,800,000 would represent a cap rate of 7.2%. Typically, the longer the remaining lease term, the higher the tenants credit rating, and a favorable real estate location would decrease the risk associated with the property and cause the cap rate to decrease and vice versa.
It is also important to note for investors seeking to add a NNN investment to their portfolio that cap rates can sometimes be considered misleading. This is because the cap rate is the correlation of the NOI and the sale price which in turn is the rate of return for the first year of property ownership which only applies if the property was purchased with all cash. The cap rate does not take into consideration future rent escalations, nor does it consider actual investment return or what is known as the cash on cash return, which could potentially be higher than the cap rate when purchasing an investment using leverage or debt.
The best answer to the original question should you purchase a NNN investment is, it depends. While NNN investments are certainly one of the most popular forms of commercial real estate investment, determining whether to explore this investment avenue depends on an individual’s personal goals and objectives. Thoroughly analyzing these properties, the lease in place, and carefully navigating the entire due diligence process can make or break the deal.
Often the advantages of NNN properties outweigh the disadvantages. Triple net leased assets make for outstanding investments for investors who are looking for low risk and low management intensive properties. Triple net leased assets are extremely ideal as buy and hold investments. They have become overwhelmingly popular avenues for corporations, private investors, retirees, and high net worth individuals to park their wealth. The passive yet steady income stream associated with this type of commercial real estate investment has and will continue to make it a must have in your real estate portfolio.
Whether you are an investment property owner who is looking to cash in on the current record low cap rates, an owner/investor who is interested in exploring a 1031 tax-deferred exchange, or an investor looking to add net leased properties to their portfolio, be sure to contact the professionals at SVN Southland to assist you in every step of the way. Our team would more than willing to discuss your objectives, as well as offer a property evaluation if you are in the market to sell. SVN| Southland Commercial Real Estate and our qualified experts, possess years of experience helping property owners in the acquisition and disposition of their investment real estate properties. We are here to help you. Reach out to us by viewing our listings at southlandcommercial.com, or by calling the office at 850.434.7500.
SVN | SouthLand Commercial Advisor
Bryan is an Advisor with SVN | SouthLand Commercial Real Estate which has offices in Pensacola, Panama City and Tallahassee, FL. He is a Licensed Commercial Real Estate agent in the state of Florida and has experience representing buyers, sellers, landlords and tenants.
Originally from Jupiter FL, Bryan relocated to Pensacola upon the completion of his bachelor’s degree. Bryan joined the SVN Southland team in the spring of 2017 where he joined Chris Palmer, and Sonny Granger to work together in team format to help better serve their clients. Prior to joining SVN, Bryan attended The University of Southern Mississippi where he graduated with a bachelor’s degree in Business Management and was also a varsity letterman in baseball.