Triple Net properties are a growing option in real estate investment and have become increasingly popular. From hedge funds to individual investors seeking a hassle free way to invest in commercial property. The investment provides for stable monthly income with no management responsibility. It is not with out risk, however, as with most investments the risk is proportionate to the return on investment.
Triple net leases are avenues which allow investors to buy a piece of real property which is encumbered by a long term lease. The lease will provide that the tenant will pay all real estate taxes, insurance and ALL maintenance to the property. The rent received by the owner is free of all expenses therefore "Triple Net".
The tenants under the lease are generally large national commercial chains, some very well known and others less known. The risk reward is directly related to the financial condition of the underlying tenant. These companies receive credit ratings and the return on investment correlates to the credit rate. Given the same remaining lease term, the higher the credit rating the lower the "Cap Rate". The cap rate is the annual return on the investment. The simple calculation is taking the yearly net income and dividing by the purchase price. When you have a net income of $60,000.00 per year and a purchase price of $1,000,000.00 you would have a cap rate of 6%. This is a simple way to calculate and compare properties. This calculation can become a bit clouded when considering cost of acquisition along with lending costs, in the event you intend to obtain financing.
Most investors of NNN properties are not geographically bound, and therefore the acquisition costs can vary from state to state. Customary and fixed charges must be factored in to determine the true cap rate. In Florida for instance it is customary for the Seller to pay the owner's title insurance policy, however in New York this is charged to the buyer. On our $1,000,000.00 deal this would result in a closing cost of approximately $4,500.00 plus additional fees that the buyer would have to pay in New York which he would not have to pay in Florida.
Many investors purchasing NNN properties seek to obtain mortgage financing. At first glance you may assume that mortgage payment may negatively affect the cap rate, however, in today's interest rate environment it actually increases the cap rate due to the spread between the interest on the money being borrowed and the cap rate. For example, on our $1,000,000.00 investment, if you borrowed 50%, or $500,000.00 you would have to come up with a $500,000.00 investment plus acquisition and loan costs. Lets assume that acquisition costs are $45,000.00 for a NYC property leaving an out of pocket investment of $545,000.00. Lets assume the interest on the loan is 5%. (for the purpose of this example we will only factor simple interest). The interest due on the loan would be $25,000.00 annually reducing your income from $60,000.00 to $35,000.00. Your cap rate for the out of pocket investment of $545,000.00 will therefore be 6.42%. You have increased your cap rate by.42% by playing the spread between interest and the cap rate. You have also freed up $455,000.00 to purchase an additional property.
You may say "sounds great! So what are the risks?" The risk is that the value is based upon the lease and rate of return, not necessarily on the real estate you are purchasing. Some companies are know for only picking prime locations. Walgreens, for example, only chooses top, high traffic, primary retail locations for their stores. They consistently have high credit ratings and therefore their cap rates are relatively low. Dollar General, on the other hand is known to choose less desirable secondary retail locations, near but not in the main shopping districts. Their stores are simply constructed and basically no frills. Even though these dollar retailers may have very good credit ratings, their cap rates are higher (you will receive a better return) due to the inferior location.
Location is important because the retailer may go out of business, be bought out by a competitor, or simply decide that another location is better. For instance, JPMorgan Chase recently purchased Bank of New York. This left Chase with in relative close proximity to each other. If you held a lease on a branch they wished to close, you would be searching for a new tenant. With the growth of the dollar stores, many opt to close existing locations and move operations to a bigger newly constructed store in the same area leaving you searching for a new tenant.
Looking at trends ทาวน์เฮ้าส์มือสอง in evaluating a tenant is also very important. Years ago a client was looking for a NNN property. He was looking at a Blockbuster. This was before Netflix and when streaming video was just beginning. Even though Blockbuster at the time was a very highly rated company, in our discussions we did not feel comfortable with the new technology coming out and foresaw doom for blockbuster. He purchased a property leased to kidney dialysis company and has done very well. The lease was renewed and the property was further improved at tenants cost. This client then sold the property and purchased a national gas station convenience store with a new 20 year NNN lease..
There is a lot to think about in considering NNN property investment. They are generally very safe and tax friendly investments. It is important that you do your homework and fully understand the type of investment you are getting into.
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