A triple-net lease (NNN) real estate property can provide steady passive income with minimal landlord responsibilities. However, a triple-net arrangement doesn’t guarantee automatic returns. Many factors are involved in the success of a NNN arrangement.
Defining the NNN Lease
Triple-net isn’t a property type as much as a lease agreement. Specifically, entering into a NNN contract with a tenant means the tenant pays monthly rent and takes on tax, insurance, and maintenance expenses.
The advantage to you is that you’re not responsible for the above costs and aren’t responsible for the property’s upkeep. However, downsides might include long-term lease limitations, quality of property maintenance, and unanticipated tax increases.
Influences on Property Performance
In addition to the positive advantages and disadvantages of a NNN agreement, the following issues can also impact your property’s capitalization rate and rate of return (ROI).
- Tenant creditworthiness. Creditworthiness is a huge element in a triple-net lease's success (or not). Creditworthiness includes a tenant’s credit history, ability to handle debt obligations, and on-time payment history. National tenants tend to mean less risk, which could increase returns.
- Location and supply. Properties located in metropolitan areas can lead to greater foot traffic. Furthermore, your property could appreciate in value if it doesn’t have much competition (and you’re receiving multiple tenant inquiries). A higher return might be realized when you sell the property.
- Economic cycles. An economic upturn or downturn could impact your tenant’s ability to generate sales and pay rent. It can also influence operating expenses (including insurance). Furthermore, if a tenant shuts down and vacates the space, this could result in the depreciation of your property’s value and resulting returns.
- Lease terms. NNN leases are typically long-term, lasting from 10 years to 25 years or more. Agreements might also include annual rent increases that account for inflation and other elements. While returns might not be earth-shattering, they can be consistent over time.
Improving ROI through NNN Agreements
The following can help you improve your property’s return on investment if it involves a triple-let lease:
- Ensure that tenants are established with a history of consistent rent payments and meeting their financial obligations
- Acquire properties that are well-located, with reasonable competition and potential appreciation growth
- Create lease agreements with regular rent amount increases
- Reduce risk through geographical and asset diversification strategies
The Takeaway
A triple-net lease agreement with a tenant could generate stable cash flow and potential appreciation from your property. However, it’s essential to understand how issues like creditworthiness, location, and economics might impact your real estate’s return on investment and overall performance.
As such, when looking for properties with NNN lease agreements, perform your due diligence, develop a beneficial NNN lease, and ask for advice from brokers and other professionals. Taking such steps can help improve your property’s return on investment.
The tax and estate planning information offered by the advisor is general in nature. It is provided for informational purposes only and should not be construed as legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.
