Are NNN Properties Good Investments?
Are NNN Properties Good Investments?
A NNN lease can be a tempting investment option if you consider buying commercial property. But is it the best solution? This type of lease has its strong and weak sides and can be viewed differently. Therefore, we will analyze various aspects of this type of agreement before answering this question.
What Is It?
A NNN lease is a type of renting agreement that shifts all the responsibilities towards the occupants and gives them considerable freedom. It means that the leaseholders pay for all expenditures, including taxes and repair, and choose contractors for this job.
As compensation for the additional costs, the building owner set the fixed rent usually lower than the market average. It means less profit and less time spent on building management and maintenance. Traditionally this kind of lease is specific for the retail property but lately is applied for commercial buildings. In theory, this lease can be offered even to the residential building occupants, but it’s not a common practice. In most cases, tenants prefer to work at one location for a long time or region-specific businesses.
How Does It Work?
The difference between various leases is in the spreading of expenses and responsibilities. The triple net variant implies paying the base rent set by the owner. Other expenditures related to the property are divided by the total quantity of square meters. Each tenant pays the part of this sum proportionally to the occupied space.
The care for the building is also the leaseholders’ responsibility. They decide whether it is necessary and what company to hire for the job. Usually, this kind of lease requires a lower monthly rent; that’s why it’s so popular among potential occupants.
Why Is It Good?
This type of lease brings multiple advantages for the potential investor; therefore, it’s no surprise it is so popular. Let’s revise all positive aspects of this renting:
It minimizes the risks for the owner. The leaseholders are almost always solid companies with decent financial capabilities. They rarely disappear without paying rent. It makes this type of renting the most stable.
It’s a great way to ensure passive earnings. The nature of this agreement guarantees the steady flow of money. Every month you’ll receive the fixed sum from the leaseholders.
It’s no need to search for new leaseholders frequently. This agreement is long-term, so setting the conditions once you enjoy peace of mind for a long time.
It eliminates the liability of the building owner almost completely. After finding the tenants, the maintenance, expenditures, and building management become their duty. It frees a lot of time and energy for other projects.
Low risks of losing tenants. Companies prefer to stay in one place for a long time. That’s why this type of lease is much more suitable for long-term rent than others. The leaseholders prefer to condone shortcomings other than changing the place their clients know.
No problems with finding new tenants. The location is an important promotional factor. If one of the tenants leaves, you’ll easily find a new company in the same business field. For the newcomer, it will eliminate the necessity of attracting customers to the well-known location.
The building location does not restrict you. Since you don’t have to control the process and manage the property yourself, you can invest in NNN property in any part of the country. This point makes this lease extremely convenient and profitable.
Why Is It not so Good?
But in the situation with such leases, not everything is so bright. Like any other financial tool, it has its downsides. To completely understand the consequences of choosing this lease, carefully read these weak points:
It provides a limited return. A great part of the leaseholders’ spending goes to the building attendance and other expenditures. You will receive only the fixed rent you are agreed on. We need to mention that it’s not completely the disadvantage since you don’t have to spend any of these funds on the property. This rent is your net profit, but as we mentioned before, it can be minimal.
Lack of control. The tenants can fulfill their duties responsibly, but such luck is not a rule. Some leaseholders can try to save money on reparation or maintenance. This will leave you with a property in poor condition. The regular checks can compensate for this downside, but it gives the advantage of low owner’s responsibility to naught.
Specifics of the property. Finding new tenants interested in a lease can be hard if you invest in a building with a specific location or other characteristics. But it also depends on your choice.
As you can see, there are more advantages than drawbacks, but consider your situation. One point from the lists above can have fundamental importance for you, and the question will be solved. In other cases, weigh all pros and cons to make an informed decision.
Tips for Beginner
Read this short guide for investors if you still have doubts and can’t decide whether this lease is good for you.
Determine the number of returns you want to receive. Different types of the lease will bring other earnings even with the same tenants, do take your preferences into account.
Consult with an experienced lease advisor. In this article, we analyzed the common aspects of NNN leases. But only a professional consultant can determine the investment value of a certain property.
Draw a picture of the ideal tenant. Is it a big company? Maybe you prefer to rent the building to several small businesses? The answers to these questions will help you choose the right type of agreement.
Compare all possible options. Don’t limit yourself by one variant. Write down the arguments in favor of all leases you can use for investment.
So, is the NNN kind of lease the ideal investment? It depends. We can’t give a definite answer without knowing the particular circumstances of the potential investor. Think before acting, listen to the specialists’ advice, and you’ll find the perfect variant for you.
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