3 Questions To Ask When Buying A Triple Net Lease
NNN leases can help investors diversify their holdings. Not only that, but it can provide them with a reliable stream of income. As with any triple net lease for sale, you should always exercise due diligence.
At Net Lease World, we provide investors like you with unique solutions to best address your needs. Whether looking to upgrade to a higher NOI property or accommodate a tenant, we’re here to help.
Today, we’ll discuss three key questions to ask when buying a NNN property.
How Strong Is The Prospective Tenant’s Credit?
The tenants’ financial strength helps determine the value of an NNN. Tenants need to be able to meet their monthly lease payments on time. They also must cover other costs such as those below.
Insurance
Maintenance costs
Property taxes
Repair costs
Utilities
For these reasons, you’ll want to ensure that they’re financially stable. To best evaluate them, use a standard rating system like these below.
Fitch
Moody’s
Standard & Poor (S&P)
These tools can help determine their credit score and help you choose the best tenant.
How Strong Is The Lease Agreement?
When obtaining an NNN, you’re really buying the lease rather than the property itself. Investors sometimes buy a net lease property assuming that it’s a pure NNN, when in fact, it’s not. This makes examining the lease before proceeding with inspections and market research that much important.
Here are two areas to watch for to avoid any surprises in the lease agreement.
Periodic Rent Increases
You’ll want to check whether the lease contains periodic rent increases. If so, make sure they’re at a fair market rate.
This is important because NNN leases range from 15 to 25 years. If there are no inflation arrangements in the lease, you could end up losing money.
Tax Burden
In NNN leases, the property tax burdens and other fees are set between the owner and tenant. Even then, those aren’t fixed and are subject to change.
This can be problematic for tenants when a property gets sold. The tax basis goes up drastically and can cause sudden financial burdens for tenants.
Are Lease Rates Higher Than Normal?
It’s tempting to have tenants pay more than the normal market rate for their lease. Many investors think that this practice will make them money. This actually can become a problem you’ll want to avoid for two reasons.
Higher Sale Price
The NNN sale price depends on the property’s cash flow. If that number inflates, you’ll wind up paying more than normal.
Uncertainty After End Of Lease
If a tenant moves elsewhere or goes out of business, many things can occur. You could be stuck with a property that can only be solvent when a tenant overpays. You’ll also end up incurring every expense of a vacant building.
To avoid these situations, find out what the standard market rate is. If you can’t obtain the data, you can also compare the replacement value to the purchase price. Make sure that there’s not a big difference between the two. If there is, then that can indicate a red flag when it comes to market rates.
Choose Triple Net Lease For Sale Options That Meet Your Needs
Buying a triple net lease for sale can be a pivotal decision. When exploring NNN options, always keep these three questions in mind. This will help guide you towards the best decision and make your investment worthwhile.
To learn more about how to obtain the best NNN investment value, contact Net Lease World today. Our team will help provide you with strategies that put your needs first.
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