Here at Diversified Investment Strategies, we help real estate investors with 1031 Exchanges. There are many 1031 Exchange options, and we are here to discuss each one with you, along with your current and future goals as an investor, to see which option is best for you. In recent blog posts, we’ve discussed DSTs, UPREITs, and oil and gas. Today, let’s discuss Triple-Net, or NNN.
A NNN lease is ideal for investors who are looking to own less labor-intensive properties. If you’re tired of dealing with the three T’s, toilets, trash and questionable tenants, then perhaps you’re ready for some class “A” tenants with little to no labor requirements in a “turnkey” investment!
With a NNN lease, you are still a landlord, but the tenant is typically responsible for insurance, utilities, taxes, maintenance and rent. As the landlord, you may enjoy a high level of cash flow and income without the task of maintaining the building.
To acquire this type of passive ownership, you need a greater financial investment to begin with, with a net worth of at least $1 million, excluding the value of your primary residence, or $200,000 of income. The leases are typically 15-20 year long-term leases. Many well-known retail companies may choose to renew, providing you with consistent cash flow. Examples of tenants include drug stores, like CVS or Walgreens, fast food restaurants, like McDonald’s or Burger King, or auto part stores, like NAPA.
Often, there is no co-ownership in a NNN and you solely own the property. However, a DST or 721 UPREIT may be utilized with the potential for greater diversification. This also allows for smaller investors to participate.
Potential investment risks of a NNN lease arise due to the low diversification and single-tenant situation. Even a publicly traded and finally strong national tenant can go bankrupt, or they may choose not to renew after a long-term lease ends. You as the landlord will have to fill the vacancy, as it is either 0 percent or 100 percent vacant with only one tenant. It’s important to understand the credit risk of the tenant before signing a lease.
It’s also important to note that just because a lease is called a triple net lease, this doesn’t mean that it is. Or, it might require landlords to fund certain capital expenditures over time on older buildings. It’s important to always read the lease and make sure you know exactly what you’re signing up for!
Do you think you might be interested in long-term, stable income with the possibility of capital appreciation? Are you done with the three T’s and are looking for a low-maintenance investment? Contact our team at DIS to see if a Triple-Net (NNN) Lease is right for you! We can answer all of your questions and help you find an ideal tenant to meet your needs through a 1031 Exchange.
Bryan Hakola
Diversified Investment Strategies
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