11 Triple Net Lease Pros And Cons
11 Triple Net Lease Pros And Cons
I recently spoke with one of my dad’s friends (Mr. Eddie) in a grocery store. He’s one of the wealthiest people in Louisiana and has made the majority of his money in commercial real estate.
I asked if I could stop by his office to pick his brain about real estate investing and he was more than happy to do so. Actually, he seemed very excited to share his knowledge with me.
This is one thing that I think most people don’t do enough of…find a local person to mentor them. Most successful people love to teach others as they are passionate at what they do.
That two hour meeting completely opened my mind to things I’d never thought possible. I know we can read books and listen to podcasts about how to be successful, start businesses, etc. but there’s something different when you sit across a desk from someone that’s done it. It somehow clicks better.
Not only had Mr. Eddie built up a multi-million dollar real estate portfolio primarily from commercial real estate leases, but here he was handing me the “keys” to success. For free!!
He started out investing in single family homes, then moved to multi-family and now almost exclusively invests in commercial property, specifically commercial leasing with triple net lease properties (NNN).
Before we discuss triple net lease pros and cons, let’s first discuss what a triple net lease property is….
What Is A Triple Net Lease?
According to Investopedia, a triple net lease (NNN) is a lease terms agreement on a property whereby the tenant or lessee promises to pay all the maintenance and repairs of the property including real estate taxes, building insurance, and maintenance costs.
These payments are in addition to the fees for rent and utilities, and all payments are typically the responsibility of the landlord within the lease agreements in the absence of a triple, double, or single net lease.
Before we go any further, let’s briefly touch on the other types of leases.
Types Of Real Estate Leases
Gross lease – This is the standard lease that residential landlords typically use. In this case, a set amount is paid each month for base rent and the other three categories of expenses (taxes, insurance and maintenance) are the landlord’s responsibility.
Single net lease – Typically the tenant is the one that’s responsible for paying the building’s property taxes.
Double net lease – In this case, the tenant pays both property taxes and the building’s insurance.
Triple net lease (NNN) – The tenant pays all three expenses: taxes, insurance and maintenance costs.
NNN Lease Example
I’m the type of person that needs either an analogy or simple example to learn from. So here’s an example of how a triple net lease works:
Let’s use a Dollar General store as an example. Usually when you shop at one, the company doesn’t own the building.
That’s right. Someone else owns it. Usually an individual or group of people.
Let’s say you wanted to get into commercial real estate investing and you purchased one. Each month, Dollar General would pay you a lease payment.
For our example, we’ll use $17,000/month. Because this is a triple net lease, Dollar General would pay all of the expenses for the next 15 years.
That’s right. They’ll be paying for:
- YOUR insurance
- YOUR property taxes
- YOUR maintenance such as electrical, building repairs, parking lot, windows, etc.
They pay for everything.
After you receive the $17,000 monthly lease payment, you’d then use it towards the mortgage (debt – if you have any). Anything left over is your positive cashflow.
Does this make sense?
You don’t have to worry about landlord responsibilities, management duties, evictions or leaky toilets.
There’s nothing like making mailbox money.
11 Triple Net Lease Pros And Cons
Let’s start off with the property owners and how these leases would be advantageous to them.
Pros of a Triple Net Lease – Property Owners
As we’ve discussed thus far, investing in a triple net lease property comes with many pros such as:
1) Long term lease – This is one of the biggest advantages to the property owner as most of these leases are structured to last 15+ years. This helps with reducing the risk of the property sitting vacant over long periods of time.
2) Limited landlord duties – As previously mentioned, the tenant in NNN leases pay for the taxes, insurance and maintenance.
3) Reliable, stable income – Usually these leases are structured with either a flat rent or a fixed increase. This means that owners can expect a steady income on an annual basis. A standard agreement includes up to a 3% fixed increase to account for inflation, providing growth to the property owner.
4) The property can be sold with the lease – A plus for owners is that they have the option to sell the property even with the lease in place and the property occupied. If this is the case, the lease will transfer with the property’s sale. This protects the tenant from eviction.
Pros of a Triple Net Lease – Tenants
1) Location, location, location – For tenants, nothing is better for business than prime location. NNN lease properties are usually situated in fantastic, accessible locations which helps a tenant gain traffic and exposure to customers who frequent other businesses in the area.
2) Tax benefits – Even though tenants are responsible for paying the building’s property taxes, they can use these to achieve tax benefits for their business.
3) Consistent operating expenses – One of the biggest pros for tenants is the consistency of operating expenses. Because they know their upfront costs, they can make better decisions on how to optimize such expenses.
Cons of a Triple Net Lease – Property Owners
You maybe asking yourself, “What could possibly be a downside for property owners?”
Here’s a few limitations to consider:
1) Risk of vacancy – One of the top advantages of a NNN lease was the fact that most were long-term. While this is a great “pro,” it can also cause problems. If you don’t vet the tenant properly, then you increase the risk of them defaulting on the lease. If this is the case, it can result in loss of income while you try to fill the vacancy.
2) Capped earnings – Depending on what type of lease you offer, the long term tenant may only have to pay a fixed amount during that time. If this is the case, you’ll still benefit from the consistent cash flow, but your increased earning potential would be capped by not being able to increase the rent.
Cons of a Triple Net Lease – Tenants
Tenants should also be aware of some of the downsides of NNN leases including:
1) Tax Liabilities – Remember that one of the three main categories tenants pay in a NNN lease is the property taxes. This also means that they’ll be prone to any liabilities that could occur such as an incorrect tax remittance or late fees.B
2) Maintenance expenses – As previously stated, the tenant in a NNN lease is responsible for the expenses that go into the operation and upkeep of their business location. If they don’t have good credit, it maybe difficult for them to acquire any type of financing that’s involved with any of the additional expenses with running their business.
Most landlords that invest in commercial real estate usually prefer triple net leases for several reasons that were discussed previously including risk mitigation.
If you are considering investing in commercial real estate, make sure you find someone to help guide you to choose the properties that best suit your needs.
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