WHY TRIPLE NET (NNN) PROPERTY INVESTING IS SIMPLY THE BEST!

I was on a Clubhouse panel the other day and someone asked me why I prefer Net Lease (also known as NNN or Triple Net) properties to value-add deals. Paraphrasing my answer: “Doing value-add deals is like buying a job while Net Lease investing is the closest thing you can get to worry-free, passive income.”

Not to mention the risk/reward ratio of many value-add projects that only yield a few extra dollars does not make sense in many cases. 

"It's not how much money you make, but how much money you keep, how hard it                 works for you, and how many generations you keep it for." Robert Kiyosaki

A 100% occupied Single-Tenant Triple-Net (“STNL”) deal gives you income from the start and, if you choose the tenant right, you could be receiving hassle-free rent for the next 10 to 20 years. In fact, we still have a Walgreens tenant in a shopping center where the original lease was signed in 1957. In 2010, we moved them to an outparcel with another firm 20-year lease term.

The Tenant Pays All Expenses with True Triple Net Leases

The terms “Net Lease,” “Net-Net-Net,” “NNN,” and Triple Net are often used interchangeably. With a true Triple Net lease you receive only net income since the expenses are “netted” out of your gross income.

This is why we named our Net Lease investing podcast the “Nothing But Net – NNN Show.” With Net Leases, there are no tenant calls, no dealing with trash and no worrying about property tax increases—you get Nothing But Net income!

NNN Leases are Structured to Create Passive Income

Triple Net properties are the perfect investment for passive income, wealth protection and appreciation from rent escalations.

With a Triple Net lease, the tenant is responsible for not only paying the rent but they also pay some or all of the expenses for the property. This includes property taxes, property insurance (including liability insurance for the interior and exterior areas and property insurance for the building), and maintenance (roof, toilets, windows, doors, lighting, HVAC, parking lots and landscaping).

With a Single-Tenant Triple-Net lease—think McDonald’s, Starbucks, 7-11, CVS, etc.—the tenant will pay rent monthly for the property and either: (a) reimburse the property owner a monthly charge for its share of the property taxes, insurance and maintenance; or (b) pay all those expenses directly.

Net Leases “Net” Out the Expenses

There are three basic types of net leases (N, NN, or NNN), each defined by the range of expenditures covered by the tenant. You can use the acronym TIM to remember the “Net” expenses the tenant pays: T for Taxes; I for Insurance; and M for Maintenance.

The following is a simple chart for the types of Net Leases:

1. N (Net or Single Net): Tenant pays Rent plus the Property Tax.
2. NN (Net,Net or Double Net): Tenant pays Rent, Property Tax and Insurance.
3. NNN (Net-Net-Net, NNN, or Triple Net) Tenant pays Rent, Taxes, Insurance, and Maintenance costs.

Long-Term Leases Create High Occupancy Rates

As discussed above, Single-Tenant Triple-Net Lease (“STNL”) properties typically have long lease terms. In most cases, there is a minimum 10-year primary term with options to extend the lease. The tenant will be investing capital to build out a location. Oftentimes, the interior fit-out and sometimes they construct the entire building and undergo site improvements.

The tenant is not only spending capital; with restaurants, fast food, retailers and service providers, they are building brand equity at the location. They want to make sure they control the location for many years since they have spent time marketing and advertising the location, plus their customers and employees are being served by the location.

Net Lease Properties are Like “Bonds Wrapped In Real Estate”

Another great benefit of owning Net Lease properties is the financial strength of the tenants. You don’t go knocking on doors and chasing tenants for rent. Major corporate tenants prefer to wire the money directly into your bank account, using automated clearing house (ACH) payments. With larger tenants, like McDonald’s, Starbucks, Walgreens or Longhorn Steakhouse, the rent is in your account within 3 to 5 days before the first of the month!

Jonathan Hipp, Managing Director of the Avison Young US Net Lease Group, describes these properties as such: “A triple-net lease is really a corporate bond wrapped in real estate.”

Ralph Cram, President of Envoy Net Lease Partners LLC (a real estate finance company specializing in single-tenant net-leased properties), describes them as “Bonds tied to a rock” because of their financial guarantee provided by the quality-credit tenants.

Net Lease property yields and tax benefits are exceptionally better than corporate bonds or muni bonds and much less volatile than the stock or cryptocurrency markets. Triple Net properties are Main Street investments that beat Wall Street by a number of metrics.

Triple Net Properties are Backed by Strong Corporate Guarantees

When acquiring an NNN property, you are not only investing in real estate; you are also investing in the company that has signed the lease. In addition to evaluating the location and condition of the property, you also need to underwrite the “credit” (financial strength and business prospects) of the tenant.

The creditworthiness of a tenant is why an STNL investment has many of the characteristics of buying a bond. The investment-grade (IG) ratings from Moody’s, Standard & Poor and Fitch are important factors to consider with a corporate lease backed by a brand-name company. These companies have income sources spread out over a number of locations or lines of business.

A corporate credit rating is like a FICO score for corporations; AAA is the best credit rating, but if a company is getting Cs, they are considered junk and most likely won’t have the capacity to occupy and pay rent for the full term of the lease.

Triple Net Properties Make Ideal 1031 Exchange Targets

Many value-add apartment and multifamily investors build up considerable equity in their properties and decide to cash out to a more passive form of real estate investing.

of the US Internal Revenue Code (IRS) allows real estate investors to exchange or swap one investment property for another and defer capital gains tax. The properties need to be “like-kind,” meaning they can be any type of property in the US held by the investor for a trade or business, or for investment purposes.

For example, let’s say an investor has owned a 55-unit apartment building for 15 years and has paid down the mortgage, utilized allowable depreciation and benefited from natural appreciation. Selling the apartment building nets them a $5 million gain. They can use a 1031 exchange with a Wawa convenience store, not only saving money from capital gains tax but also benefiting from carefree, passive income paid rain or shine, both in and out of recessions.

Sophisticated Investors Choose Net Lease Properties

Net Lease properties are a popular investment choice for high net worth individuals, family offices, institutional investors, hedge funds and private equity groups. They know that NNN properties are a reliable investment that preserves wealth and generates regular passive income.

Long term lease contracts with major corporations who pay all of the expenses also allow for long-term planning. If you have a 10-year lease with Amazon, Walmart, Aldi, McDonald’s or Starbucks, you can be pretty sure that they will be there paying rent all the way through its term. Also, since they pay the expenses, the property owner does not get any nasty surprises like a huge property tax increase or air conditioner compressor replacement expense.

Conclusion: NNN Properties are the Top Real Estate Investment Choice

As you can see, Net Lease properties have all the benefits of owning real estate without many of the common hassles associated with more management-intensive forms of property investment. Let’s face it, real estate investing should create passive income, not create an extra job to do.

With NNN investment properties, the tenants pay the rent and expenses, like real estate taxes and insurance. The tenants also maintain the properties, so you don’t have to call a plumber in the middle of the night or shovel snow during a blizzard. You get a long-term lease that maintains high occupancy levels, not the yearly turnover and expenses associated with apartment rentals. You get a corporate tenant who pays the rent like clockwork every month. With CVS as a tenant, the only drugs being sold are legal, not an unemployed chemistry teacher setting up a meth lab in your building.

Triple Net investment properties provide: 1) regular, consistent monthly income; 2) little to no management responsibilities; 3) strong financial guarantees; 4) long-term leases; 5) tax benefits; 6) inflation protection; 7) wealth preservation; and 8) pride of ownership.