In today’s uncertain economic times, traditional investments do not provide the stability and significant returns investors seek. Perhaps that is why interest in net single-tenant real estate is skyrocketing. But for the casual investor, these properties, commonly called NNN or STNL in the industry, remain a mystery.
Definition of NNN properties
Typically, the types of real estate that are considered triple net lease investments are freestanding buildings that are rented to long-term domestic tenants for 10 to 25 years. These national tenants are typically well-known names like Walgreens, FedEx, and McDonald’s.
Why NNN Properties Are Attractive
There are several reasons why seasoned investors lean towards NNN properties. First, these investments tend to generate predictable, lower-risk income, strong capital preservation, and good tax deferral. Then there are the more intangible benefits like bragging rights that the investor owns a prestigious building that generates consistent and lucrative monthly income.
How the NNN lease is structured
The details of the lease can be complex, but the basics require that the tenant not only pay the monthly rent, but also cover property taxes, insurance, and maintenance costs. And, since there is only one tenant to supervise (and one with a strong reputation), the investor generally has little to no management responsibility for the real estate. This is especially beneficial for an investor who lives in a different city, state, or country.
NNN property types
For investors considering the switch to NNN real estate investing, there are several different types of real estate that make up the general pool. The market is segmented into three categories: retail and restaurants, industrial and medical office buildings.
Just as real property is categorized, so are prospective tenants. However, instead of looking at the type of tenant, the criticism involves the tenant’s creditworthiness. Potential tenants can be “tenants with credit” or “tenants with no credit.”
Credit tenants tend to be national names that rating companies like Standard & Poor assign a credit rating to. The most desirable tenants are usually those who are rated as institutional-grade investments, such as CVS.
Noncredit tenants tend to be local or regional businesses that are not rated by major agencies. Of course, there are also some big national names who consider themselves uncreditworthy tenants simply because they have no debt. These unqualified tenants should not be canceled.
Is NNN Right For You?
There are many factors an investor should consider before launching into the world of NNN investing. Things like return on investment, stability, lease length, potential rent increases, lease provisions, location, demographics, and other factors all play a role in the decision-making process.
While triple net leases can be a solid investment vehicle for wealth creation, stable income, and flexibility, there are myriad details that go along with these investments. Be sure to hire a qualified commercial real estate broker with specialized knowledge of these complex transactions to help you along the way.