Triple net lease (NNN) properties can be an attractive addition to your real estate investment portfolio. Because the tenant pays for property taxes, insurance, and maintenance under an NNN agreement, this real estate can generate steady income streams without headaches related to property management.
While this investment has potential advantages, there are also drawbacks, including the following, that you should consider before investing your capital into NNN real estate.
One of the most significant risks of NNN investments is relying on a single tenant for income. In other words, the property’s cash flow depends on the tenant’s ability to meet lease obligations. If the tenant goes out of business, defaults on payment, or breaks the agreement, you could be left with a vacant property and no income. Additionally, finding a new tenant can be time-consuming and challenging.
Because of the single-tenant dependency risk, you must perform due diligence on the tenant’s financial condition, creditworthiness, and lease agreement before buying the property.
Triple net leases are long-term. They’re typically negotiated for 10 to 25 years; some can be 50 years or longer. Long-term leases can provide stability but also mean you might be unable to take advantage of changing market or economic conditions. For example, you could be locked into below-market rents, which could be problematic if comp rents increase.
Even if periodic rent increases are included in an NNN lease, you could miss out on higher returns or significant property appreciation.
With an NNN lease, your tenant has significant control over the property and its use, reducing your workload. However, this can also generate problems if the tenant fails to maintain the property or exhibits poor performance.
If the tenant fails, the property could be viewed as undesirable by future occupiers. This, in turn, could lower property appreciation and asset value.
Proactively handle this potential problem. Include provisions in the lease that specifically define tenant requirements regarding property maintenance and operations.
Market and Location Risks
Your NNN property’s performance depends on location and market. It should do well in a locale with plenty of foot traffic and high economic activity. On the other hand, it could suffer if the asset is in an area suffering from changing demographics or decreased economic activity. The property’s long-term value might be negatively impacted.
One step is to perform an economic study and market analysis of the area before buying the property. This can tell you how well (or not) your property might perform.
Triple net lease investments can provide benefits. They also have their downsides. Though they might generate stable cash flow and modest appreciation, NNN properties might not work for you, depending on your investment approach and goals.
As with any investment decision, it is important to perform due diligence when considering buying a NNN property. Assess the creditworthiness of your tenant, study the location, and seek the advice of a real estate professional.
By understanding the advantages and disadvantages of this investment type, you can make informed decisions to help achieve your financial objectives.
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.