How To Unlock Your “Freedom” By Investing In Net Lease Properties
NNN property owners let tenants do the work, while they sit back and collect the rent checks.
Investing in commercial real estate with zero responsibility sounds too good to be true. It’s not. In fact, zero responsibility is one of the main perks that has positioned absolute triple net lease investments as a hugely popular investment asset of choice among individual investors.
So, what does “zero responsibility” mean exactly? In an absolute NNN investment property, the tenant does the work and is responsible for ALL operating expenses of the building, including ongoing maintenance, property taxes and insurance. The landlord (investor) simply collects monthly rent checks and enjoys passive income with no day-to-day responsibilities.
This set-up is much different when compared to tenants that lease space in a multi-tenant property. Tenants who occupy space in say a shopping center or office building pay base rent plus a common area maintenance (CAM) fee. The landlord or property manager takes care of the work associated with ongoing operations and charges those related expenses and fees back to tenants. Those CAM charges cover all of the costs related to managing and maintaining the overall property. In the case of absolute net lease properties, the tenant is responsible for paying taxes, insurance, utilities and all property maintenance, upkeep and repairs, not to mention dealing with any incidental issues that may arise. Some common examples include:
Parking lot maintenance – repairing cracks, resurfacing, repainting lines
Maintenance and upkeep of key equipment, such as HVAC systems and elevators
Lawncare and landscaping – mowing the grass, tree trimming, planting flowers, etc.
Snow removal for properties located in cold-weather states
Janitorial, cleaning services and trash removal
Storm damage, water leaks and insurance claims
Another powerful incentive to own a triple net lease assets is that investors don’t have to deal with the perpetual headaches of handling complaints related to trash, toilets and tenants. After the closing documents are signed, you can enjoy the benefits of real estate ownership without the hands-on, day-to-day responsibilities of owning property. Owners simply sit back and earn income while enjoying life, whether that is sitting on a beach, watching a ball game or taking that dream trip you’ve always wanted.
Watching out for pitfalls: NNN vs NN Leases
So, what’s the catch? Technically, there isn’t one. However, investors do need to be mindful of the fine print. If you’re not careful, some leases could potentially throw a wrench into your plan to buy a fully zero responsibility net lease property. There are different types of net leases that include triple net, double net and single net, and it is important to know the differences these present.
N: In a net lease, the tenant pays the monthly “base” rent and property taxes. The landlord assumes most, if not all, the responsibility for management, upkeep and repairs.
NN: A double net lease (NN) is a common type of net lease in commercial real estate where the tenant pays property taxes and property insurance. However, the landlord is responsible for certain maintenance aspects of the building such as roof, structure, and/or HVAC systems.
NNN: aka Absolute Triple Net (NNN) lease, the tenant is responsible for all property operating expenses including maintenance, property insurance and property taxes. Because of that lease structure, NNN properties provide stable cash flow and no involvement in the day-to-day operations of the property.
Work with a seasoned professional
The lesson for investors is that any contract negotiation can be complex, and net lease assets are no exception. Additionally, some brokers will tout an investment property as a great “net lease” deal, even though it lacks all advantages of a true NNN asset. On the flip side, investors can also find very desirable net lease assets that are not structured as an absolute NNN lease. An investor may be willing to take on additional responsibility for the right property – or at the right price. However, it is important to have a clear understanding of the landlord’s responsibilities and financial obligations, and make sure that the purchase price accounts for those differences. As such, it is important to work with an experienced net lease professional who can help to guide you through the process and identify potential red flags.
If you are interested in learning more about triple net lease assets and whether NNN aligns with your investment objectives and lifestyle goals, contact Andrew Vu at 415-539-1120 for a free, no-obligation NNN consultation.