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What is the Cap Rate on a Triple Net Lease?

Virtually everyone has had to deal with rental property investments in their lifetime, no matter what their income is. Investments in rental real estate with a well-thought-out strategy can bring high profits.

What is the cap rate on a triple net lease? This is a rental property in which the tenant or occupant agrees to pay the entire cost of the property.

These payments are in addition to rent and utilities. The landlord is usually responsible for all payments. The most important points:

  • The landlord agrees to pay for the property in addition to rent and utilities. These may be property taxes, routine repairs, or insurance on the building;

  • Real estate taxes are included in the rental of one-room commercial space, in addition to rent.

What is the purpose of investing in rental properties? Everyone has a different purpose. For example:

  • An increase in residential or commercial space;

  • A long-term investment.

Investing in rental properties is one of the most secure financial assets and a good way to diversify an investor’s portfolio. People buy space to create passive income or to make money on resale.

The cap rate in the case of a triple net lease is important in financial or investment planning. At the same time, the cap rate can not always be determined with certainty. This is due to the fact that the information from various sources is incomplete. In addition, it is often not entirely consistent with reality.

What is the cap rate?

It is a ratio of the value of a property to the income it can generate over the course of a year. The cap rate allows the investor to evaluate the prospects of investing money in a particular asset. A risk-free cap rate provides for investing in those assets for which there is at least a guaranteed return on the funds invested. As far as we know, risk-free investing almost does not exist at all. In this case, we mean such investments in which the probability of unpleasant events is reduced to zero.

What are the methods of calculating cap rate?

There are several of them:

  • cumulative construction;

  • related investments;

  • market squeeze method;

  • Inwood method and others.

What an investor needs to know

At each stage of investing in real estate triple net lease, you will have to deal with economic, legal and technical aspects of the transactions.

Foreign investors may not know that you can buy real estate not only in the name of an individual but also in the name of a legal entity. In this case, a company such as LLC (limited liability company). This will give the owner more opportunities since the company will be limited to the maximum amount of its liability. It is possible to divide the assets and transfer ownership rights quickly and anonymously. Moreover, due to the financial planning from day one, it is possible to save significant amounts on taxes.

It is difficult for a non-professional investor to keep all aspects related to the investment in real estate triple net lease without assistance. It is wiser to rely on people with proven experience who know what they are doing and can provide all the assistance you need to avoid risks that could jeopardize your investment.

Remember that it is important to communicate with an organization where you are understood, whether it is a small private equity fund or a large financial company.

Special details an investor needs to keep in mind

A triple net lease real estate investment often involves three or more commercial properties leased to a single tenant with a current cash flow.

Commercial buildings, and individual buildings, stores and restaurants, are examples of commercial properties. Lease terms range from 10 to 15 years, given rent increases.

Investors benefit from long-term, recurring income and the opportunity for price appreciation on the underlying property. Work, improvement costs and rent payments are not a concern for investors investing in quality properties. An investor can transfer capital to another triple net lease, tax-free when the underlying assets are sold.

Investment management is a fundamental process, and it is very difficult for the average person whose day is already full of worries and divided between work, family and vacation.

How does an investor reduce risk

Your actual return on investment can be significantly reduced if the space is idle without tenants or if they miss payment deadlines; you can also lose income due to unscheduled repairs and tidying up of the space.

However, these risks can be minimized if the property is properly managed. Downtime can be avoided by a strict tenant selection process. A professional property manager will review a prospective tenant’s financial history and get a complete report on their previous housing and financial history, including reviewing their credit rating, eviction records and more.

However, there are significant and unknown risks involved in purchasing a rental unit with a three percent net price. Here are the major risks of acquiring space in a triple net lease:

  • Dependence on a single tenant;

  • Force Majeure;

  • Dependence on location;

  • Market sensitivity.

Some issues to think about before buying a property on a triple net lease:

  • Location – if you lose a tenant, how easy is it to replace them?

  • Is the tenant a franchisee or a national chain?

  • If a franchisee, how experienced and how many other assets does he have?

  • How much time is left on the lease? The more time left, the more valuable the property is.

  • How is the location performing financially (assuming it’s been several years)?

  • What kind of mortgage terms can you get? (depending on the lender, you can get 5 years or 10 years before ballooning, with 20 or 25 years amortization, at a 60-70% loan-to-value).

Is triple net lease a good idea?

Triple net leases can be beneficial for both tenants and landlords.

Such leases are flexible in terms of tax increases, insurance, etc. Such a contract does not require a lot of expense. An important plus: The landlord also does not have to be involved in the day-to-day operation of the property.

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