Finding the Most Profitable NNN Properties for Sale: Important Factors to Keep in Mind
As a new investor, you will be presented with various ways to achieve the financial freedom you have been longing for. And, one of the best investment vehicles that you can choose to build wealth fast is commercial real estate.
However, it is important to remember that commercial real estate comes in many forms, and each has its own set of qualities that help investors achieve their individual goals. For example, there are publicly traded securities offered by real estate investment trusts (REITs) if you are looking for short-term, highly liquid opportunities. You can also become a developer, though this is a costly, long-term engagement that comes with high risks.
Now, if you want to hold a real estate portfolio that generates a steady, long-term cash flow with little involvement on your part, your best option would be investing in Triple Net Lease or NNN properties for sale.
What Is a Triple Net Lease Property
In commercial real estate, there are basically two types of leases used by the parties involved: the gross lease and the net lease.
The one that you might have always heard about is the gross lease. Under this agreement, you (as the investor and property owner) collect monthly rents from the tenant and use a portion of your income to finance the property’s operating expenses.
On the other hand, a net lease is a structure where you charge the tenant monthly rents, but you are not responsible for the operating expenses. Typically, the tenant will be one handling the costs of managing and maintaining the property. However, this would mean that rental rates will be lower than those under a gross lease. Nonetheless, this is beneficial for you as you will be shifting most of the risks to your tenant.
Types of Net Lease
As there are two types of commercial real estate leases, the net lease also comes in different types, which are distinguished by the financial responsibilities of the tenant.
- Single net – The tenant is obliged to pay the base rent and the taxes incurred by the property.
- Double net – The tenant is required to pay the property taxes and insurance, aside from the base rent.
- Triple net – The tenant pays the base rent and handles the taxes, insurance, and maintenance costs.
Among these three types, the triple net properties for sale are particularly popular among investors. After all, owning these properties will free them of management responsibilities while providing them with a reliable stream of long-term income and more time to tend to their main business or other properties they might have.
Attributes of a Good NNN Property to Invest In
While investing in NNN properties for sale is a smart decision to make, it is still important to remember that not all of these properties will generate the same profitability. Here are some important factors to keep in mind when hunting for one.
The location plays an important role in assessing the profitability of an NNN property. Ideally, it should see high foot traffic and have good access to major establishments in the area.
You should also do your research to find out whether there is high tenant demand in the area, as this will give you the ability to replace tenants in case they choose not to renew their contract with you.
Your success in investing in NNN lease properties for sale with an existing tenant will be strongly influenced by their creditworthiness. As previously mentioned, the lessee will be responsible for handling almost all of the expenses incurred in managing the property, so it is important to know beforehand that they have been diligent in meeting their financial obligations.
You can do this by using some of the most reliable tenant screening services that you can find online.
Fair Lease Rates
When looking for NNN properties, you will find out that some of them already have a certain lease rate in place.
While it can be exciting to find one with a rate that is way above the market price, this could actually indicate a problem. For one, it could entail a very high purchase price. Or, in the event that the tenant chooses to end their contract, it could be difficult to find a new business to sign a lease agreement with you.
On the other hand, a very low lease rate could be bad for your bottom line. You could be receiving less than how much you are supposed to.
The best way to find an NNN property with a fair lease rate is by investigating the standard market rates for these properties in their location.
Built-In Lease Appreciation
Whether you are buying multiple or single tenant NNN properties for sale, your contract should include “lease escalations”, which are rental increases that will be implemented at certain points in the lease term. Combined with the base rent, these increments will ensure that your property is profitable over time.
Good History of Occupancy
One huge risk in owning an NNN property is the uncertainty as to whether the lessee will renew your contract with them or vacate your property for good. With that in mind, it would be good to choose a place with a good history of occupancy. Of course, you can always choose a property that is already occupied by big brand names, such as Walgreens, 7 Eleven, and Jack in the Box, which gives you the peace of mind of having a long-term agreement.
However, as for a place without one, you can limit the risk by thoroughly vetting potential tenants and their prospective businesses before signing on the dotted line.
Even if you prefer high-risk real estate investments, NNN properties for sale are still a good addition to your portfolio. Not only do they require fewer management responsibilities on your part and provide you with a steady source of monthly income, but they also allow you to diversify your holdings.
However, like any other investment venture, you have to do your due diligence in picking the right property from the plethora of options offered on the market today. You can start on the right foot with the information provided in this article.
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