Sudhir Pai is Managing Partner at SuMa Monde Kapital & Ventures.
The current unpredictable financial landscape is leading investors to continually seek new ways to balance stability and returns. Triple net (NNN) real estate can provide just that with its potential for consistent, long-term income with minimal impact from near-term market volatility.
NNN real estate has proven itself as a resilient asset class for economically turbulent times. The structure of triple net leases helps protect investors from potential loss from market fluctuation and saves on expenses related to property ownership, too.
Are NNN assets truly a safe haven? To answer that, let us first better understand NNN properties.
What Is A Triple Net Lease?
A triple net lease is a type of lease agreement where the tenant agrees to cover three primary operating expenses of the property in addition to the base rent. These expenses include real estate taxes, building insurance and maintenance.
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Tenant And Landlord Responsibilities
Before investing in NNN real estate, you should consider the tenant-landlord dynamic in NNN deals.
Tenant Responsibilities
• Real Estate Taxes: The tenant pays the property taxes directly to the government or reimburses the landlord if they paid.
• Building Insurance: The tenant is responsible for getting and maintaining insurance coverage for the property, which protects against various risks such as fire, natural disasters and liability.
• Maintenance And Repairs: The tenant will be responsible for all maintenance and repair tasks required for the upkeep of the property. This includes routine maintenance and emergency repairs.
Landlord Responsibilities
• Collecting Rent: The landlord’s primary role is to collect rent from the tenant. The landlord’s income remains stable since the tenant covers most operating and maintenance expenses.
• Property Oversight: Landlords still oversee the property to ensure it meets contractual and legal standards, and the caretaking is according to established expectations.
• Lease Enforcement: Landlords enforce lease terms and handle any disputes or issues with the tenant.
Below is a quick look at the advantages and disadvantages of these investments to help you assess the income potential and the risks involved with investing in NNNs.
Advantages Of NNN Real Estate
One of the key advantages of NNN real estate is the potential for predictable and steady cash flow. In my experience, NNN leases typically range from five to 25 years, with an average lease term of around 10 to 15 years. However, the length can vary depending on the type of tenant and property. Longer terms are common for larger or well-established tenants such as national retailers. Given the lease is signed for longer terms, the landlord gets clear visibility of the amount coming into their account as rental income for as long as the agreement stands.
Additionally, interest rate changes or short-term market fluctuations minimally impact NNN returns. This is because the price is locked in for the duration of the lease and income is fixed. This stability is especially appealing in volatile markets.
NNN leases also significantly reduce landlords’ responsibilities and their involvement in property management. This can make them a good option for passive investors looking for a low-maintenance asset.
The long-term leasing of NNN and the fact that they are commonly leased to reliable tenants of repute minimizes the risk of default and promotes a dependable revenue stream.
Additionally, these investments offer significant tax advantages. Over time, investors can deduct the depreciation of the property, which lowers their taxable income. Property-related expenses the tenant covers can be deducted from taxable income, providing additional tax relief to the landlord. A landlord may also swap one real estate investment property for another in a 1031 exchange. This allows the investor to postpone paying capital gain taxes (subject to certain IRS rules) by reinvesting in other NNN properties.
Disadvantages Of NNN Real Estate
While the advantages above might be enticing, note that there are no risk-free assets. There are assets with less risk and then there are assets with very high risk. NNN real estate comes with its own disadvantages.
The primary risk is non-payment. While tenants are assessed for creditworthiness and repute before signing the lease, it is possible for situations to change during the long tenure of the lease period. Should a tenant default on payment, the landlord may face significant losses—of steady income as well as of opportunity. Finding a new tenant can be challenging and time-consuming, especially for specialized properties.
Compared to other lease types, NNN leases often provide lower rental income. This is because the tenant takes on additional responsibilities and costs related to the property.
And while NNN investments do not react to short-term market fluctuation, this does not make them fully prone to sensitivity. Economic deflation or changes in market demand can impact the value of NNN properties, and it can be challenging to find and retain creditworthy tenants.
Key Criteria To Evaluate When Considering NNN Investments
• Location: Properties in developed commercial regions or expanding areas normally fetch higher value compared with other parts.
• Tenant Creditworthiness: High-credit tenants, such as national chains or large corporations, typically provide greater assurance of lease compliance and rent payments.
• Lease Terms: Longer leases that include recurring rent increases provide stability and protect against inflation.
So, Are NNN Real Estate Investments A Safe Haven?
Given their potential for stable income flow, minimal landlord responsibilities and the reliability of long-term, creditworthy tenants, I believe NNN real estate investments can be considered a safe-haven investment. They offer a more predictable and passive investment option that is less susceptible to the ups and downs of the broader economy.
Finding good NNN deals requires extensive research and adequate due diligence. Entities experienced with NNN due diligence can sift through a large number of properties and help you find an advantageous deal, which can act as a safe haven in times of distress.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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