LEASEHOLD INCOME FROM NNN PROPERTIES
Investors wishing to own less labor-intensive properties than apartments or store fronts, may look for replacement properties that provide consistent cash flow without the requirement to replace bathroom plumbing and deal with garbage bins and questionable tenants.
The NNN lease asset provides cash flow potential, Class “A” tenants and, most importantly, little if any labor requirements. Triple net NNN investment leases require tenants to be financially responsible for their own insurance, utilities, taxes and maintenance in addition to their rent. The landlord can enjoy a high level of potential income while the building is maintained by the tenant. This type of passive ownership may require a greater financial investment especially if the investor can attract a strong tenant such as a CVS or Walgreens, for example. This type of hands-off investment typically involves one single tenant and calls for long-term (15- to 20-year) leases. Please see the risks below.
Many well-known retail companies such as drug stores, fast food restaurants and auto parts stores enter into NNN leases with options to renew for up to 30 years providing consistent cash flow potential to the landlord.
In this type of NNN investment, the investor typically owns the property (no co-ownership); a DST and a 721 UPREIT, however, can be utilized to enjoy some of the same potential benefits while receiving potentially greater diversification. With the co-ownership structure of a DST, investors can achieve the same as a NNN lease investment but with greater diversification options like tenants, leases, asset classes, geographic location, etc., versus having all eggs in one basket with one tenant, location, etc. Diversification does not always guarantee against loss, though.
BENEFITS VS RISKS
NNN Potential Benefits
In the lease agreement, the tenant is usually responsible for his/her property taxes, insurance and operating expenses. Tenants often pay expenses directly relieving the landlords of this responsibility.
Absolute Triple-Net (NNN) leases call out that all property-related expenses are the responsibility of the tenant, the investor’s net cash flow is protected from fluctuations of leasehold income.
NNN properties provide many of the same benefits as investing in other real estate classes. Because real estate returns do not move along with stocks and bonds, they can provide diversification to an investment portfolio.
With NNN properties, you are essentially investing in both the physical asset and tenant occupying the property. Tenants with strong credit ratings are considered to have a low probability of defaulting on their lease although investors may pay for strong credit via lower yields.
You may not believe a rental rate far above the market value could be a negative, but if the tenant vacates, the space will likely be backfilled at the prevailing market rate.
With only one tenant, you are dependent on that tenant for cash flow. Consider the underlying property and its ability to attract new tenants should the current tenant vacate. Highly specialized properties could be troublesome to release or repurpose.
Potential Benefits and Risks listed are not all-encompassing and an investor should review all potential benefits and risks before making an investment in any type of product.