Triple net leases, also referred to as NNN leases, are a promising type of investment that allow you to earn income with minimal landlord responsibilities. As you pass all net operating expenses to the tenant with this kind of lease, you also limit exposure to market volatility and get to enjoy hands-off involvement. However, these same features may be considered drawbacks for certain types of investors. Given these considerations, it’s essential to ask if a triple net lease investment is right for you.
Below, Realized 1031 shares insights to help you answer this question.
1. Revisit Your Investment Objectives
The first step to NNN evaluation is to clarify your investment objectives. Taking a step back and looking at the big picture — what you want to achieve — can help you decide whether or not an NNN lease fits your investment goals. If you have the following as your goals, then NNN properties may be a good fit for you.
- Steady Cash Flow: NNN properties can provide stable, long-term rental income.
- Capital Preservation: Since lease terms often last decades, NNN properties can preserve your capital in the long run.
- Potential for Growth: Real estate, in general, tends to appreciate. However, NNN assets may have slower growth due to the limited role of investors when it comes to value-adding renovations or upgrades.
2. What Is Your Risk Tolerance?
NNN leases carry risks. For example, having a single tenant, which is the case for most triple net leases, makes tenant defaults and vacancies particularly concerning. There are also shifts in consumer behavior or demand over the span of decades, which affect the long-term security of the asset. Is your portfolio diverse enough to stay resilient if these scenarios occur? Are you comfortable enough with just one tenant?
3. Do You Want Active or Hands-off Involvement?
When it comes to triple net lease evaluation, one prominent consideration is the amount of control you want to maintain over your real estate asset. NNN leases promise passive income, and you only step in for oversight and major capital improvements. While this framework may be attractive to investors who prefer a less active role, it may not be suitable for others. In particular, landlords who want to be in control of day-to-day operations or maintenance may find NNN leases too limiting.
4. Consider Financial Requirements
NNN properties are typically large structures capable of handling the operations of target tenants, which are usually national companies with proven business models and excellent credit ratings. As such, acquiring an NNN property on your own will require huge capital up front. You must assess whether you have enough liquidity to make the investment, or if other options are available, such as Delaware Statutory Trusts.
5. Think About Your Exit Strategy
Lastly, ask yourself how easily you could sell the property down the road. Strong national tenants with long leases typically make resale smoother, but niche locations or weak tenants can reduce liquidity. Consider whether this fits your broader investment timeline.
Wrapping Up: Is an NNN Investment the Best Fit?
Before taking the leap and committing to an NNN investment, it’s crucial for you to conduct a triple net lease evaluation to determine if its features, structure, and risks are ideal for your investment goals. By clarifying your objectives, level of involvement, and financial situation, you’ll be in a better position to decide whether this investment strategy deserves a place in your portfolio.
Sources:
https://www.delawareinc.com/blog/what-is-a-delaware-statutory-trust/
https://www.law.cornell.edu/wex/triple_net_lease
https://www.investopedia.com/terms/t/triple-net-lease-nnn.asp
