How Net Lease Income Stream Adds To Your Bottom Line


Calculating Net Lease Income? There’s An Easy Tool For That


If you’re shopping for a new home, car or even life insurance these days, the first stop is often that handy online calculator. Plug in a few numbers and it helps give you a starting point on how much house you can afford, or what that monthly payment might run you on a new Audi Q7 versus a Honda Accord. We have brought that same concept to triple net lease (NNN) investors with our unique Invest Net Lease Calculator.


The Invest Net Lease Calculator offers a good first step into exploring triple net lease investment options. Similar to shopping for that new car or boat, it is a tool that can help compare, contrast or narrow down the field of choices based on your spending power, basic terms of the deals and your investment objectives. For example, if you are looking at three possible net lease investments that all have different variables on factors such as price, cap rate and rental rate increases, how do you determine which one would produce the highest accumulated income stream – the most money in your pocket – over time?

This is a simple, straightforward tool that shows you normalized cash flows for various scenarios even when it isn’t apples to apples comparison, meaning you have different metrics for inputs such as cap rate, lease term or rent increases. Investors can leverage the net lease calculator to quickly see the total accumulated rental income of each deal. Specifically, the Invest Net Lease Calculator provides an analysis based on five key inputs: price, cap rate, years remaining on the lease, percentage rent increases and the frequency of those rent bumps.


Example: Let’s examine the cash flow scenario for two NNN investment properties – Denny’s and Dollar General. This example highlights three important observations in regard to total cash flow.


Denny’s net lease cash flow scenario:

  • Price: $3,000,000

  • Cap Rate: 5.35%, Net Operating Income: $160,500

  • 15-Year term, 10% rent increases every 5 year

  • Accumulated Income: $2,656,275, ending cap rate: 6.47%

Dollar General’s net lease cash flow scenario:

  • Price: $3,000,000

  • Cap Rate: 6%, Net Operating Income: $180,000

  • No rent increases during the 15-year base term

  • Accumulated Income: $2,700,000, ending cap rate: 6.0%

Observation #1 - Rent increases don’t always win

If you are a long-term NNN investor on a specific property, ideally you would want to not only enjoy higher yield now (if you can), but also receive rental increases from your tenant over time to keep up with inflation. In the Denny’s example even with 10% rent increases every 5 years, the accumulate rental income over 15 years is $2.656M. The Dollar General scenario, which has no rental increase during the base term, ends up generating slightly higher total rental income of $2.7M due to a higher starting cap rate.


Key takeaway: The obvious choice is to go for the deal with the highest cap rate. Rental rate increases during the lease term are enticing, and could potentially be a bonus, but they may not end up generating more cash flow in the long run.


Observation #2 – Don’t forget to factor in risk

It is prudent to view the yearly and accumulated cash flows based on starting cap rates and rent increases (or lack thereof) in order to assess the net lease passive income stream over time. However, it also is important to consider how much risk is associated with that cash flow projection. In this example, even if the Denny’s is operated by a 100+ unit franchisee operator, the Dollar General property is still backed by the full financial strength of Dollar General Corporation, a company with a 75-year history, 16,500+ locations and an investment-grade rating of S&P:BBB. As such, there is more surety of rent payments across the full term of the lease (less risk) with the Dollar General investment opportunity as compared to the Denny’s property.

Key takeaway: Use the net lease calculator to gather potential accumulated cash flows. However, don’t automatically assume the cash flow is certain. Credit risk is an important factor in NNN investment analysis.


Observation # 3 – There is greater value in the dollar earned today

Looking ahead at the next tier of investment analysis, real estate professionals would account for rental income cash flow occurring in future years in the context of discounted analysis using formulas such as Net Present Value (NPV) and Internal Rate of Return (IRR). These are formulas that can be leveraged to calculate the fundamental concept of Time Value of Money. The basic premise is that a dollar in your pocket today is worth more than the same dollar you will receive in the future because you have the ability to put that dollar to work now and make more money. NVP & IRR calculations are typically leveraged for more complex deals.


Key takeaway: It is important to use the Net Lease Calculator in tandem with other ROI-centric calculations (such as NPV and IRR) to conduct a holistic 360° investment analysis.


The Invest Net Lease Calculator is a good first step into NNN investment analysis. It provides that back-of-the-envelope calculation to determine the total projected cash flow in any given triple net lease opportunity. It also is an easy tool to compare and contrast investment opportunities to quickly narrow the list of investment opportunities. However, the devil is in the details, and there is a lot more to NNN investment than simple cash flow analysis.

At the end of the day, it is important to layer on top in-depth expertise in investment analysis and deal making. The next steps in the decision-making process often require conducting diligence of the location, property and credit quality of the tenant to fully vet any NNN investment opportunity. Analysis needs to take into account any number of dynamic what-if scenarios that could alter those calculator inputs, and ultimately impact cash flow and IRR. You should also supplement that simple cash flow calculation with more complex ROI-centric calculations that account for the Time Value of Money.


To learn more about whether a NNN investment property is the right fit for your financial and lifestyle goals contact Andrew Vu at 415-539-1120 for a complimentary strategy consultation.

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Disclosure:  We do not provide accounting, tax or legal advice. invests should conduct their own due diligence to understand  risk associated with any investment opportunity including net lease assets.  There is potential for loss of part to all of investment capital

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