buying an investment property - shops are leased as TRIPLE (NNN)

[Nomann Ehmed]

Hello everyone,

Can any one please explain triple N (NNN) lease and hint out a few pros and cons ?

Thanks in advance...

[Kenneth Reimer]

@Nomann Ehmed Hi Nomann. Some of the pros of triple-net properties are low risk, low management, and flexibility. They are seen as low risk because many times, a large company such as Burger King, Dollar General, CVS, etc. will provide what is known as a corporate guarantee. This means that the company guarantees the rents. They have low management because the tenant takes care of almost every type of expense their is. Lastly, they offer investors flexibility since they can invest in them all over the country, due to the fact that they don't need to be able to drive by much like an apartment building would require. Their hands-off management requirement provides this flexibility.

As for the cons, the major cons are lease expiration and the risk/return trade off. Since the properties sign leases with the tenants, as the leases come closer to expiration, the investment is seen as higher risk, and therefore your cap rate begins to increase (meaning less of an NOI multiple). To the same point, since a triple-net property offers great security (depending on how much longer the lease has until expiration), the cap rates going in are lower than other asset classes in the same area. This is just as expected, given the risk-return principle of economics.

Lastly, what many investors due long-term, is start to 1031 exchange some of their other properties, many times in different asset classes, to triple-net leased properties as they get closer to retirement, in order to reduce risk and management intensity.

I hope this helps!

Kenny Reimer