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Real Estate

Everything to know about NNN Investment 

If you are looking for an investment with the most return for the least amount of effort, triple net investment might be for you. This little-known investment type will allow you to reap rewards on your investment with minimal work. If you are interested, keep reading on to find out more!

What is NNN Investment?

Triple net lease investing (NNN) involves buying buildings that are leased to credit-worthy tenants such as Walgreens, McDonalds, Bank of America, and other well-known and reputable companies. Typically these properties are leased to tenants for a 10 to 25 year term.
The tenant or lessee is responsible for costs of building insurance, maintenance, and real estate taxes, as well as typical fees like rent and utilities. Because the leases are typically long term, investors can relax while profit accumulates. As long as you find a reliable tenant guaranteed to make profit, and a smart lease structure, this investment type presents a low-risk and profitable opportunity for you to start earning passive income.

Reasons to Invest in NNN Properties

Predictable income, minimum involvement, stability, tax benefits, easy financing are some of the reasons investors love NNN properties. However, given those benefits, the return might be lower than the other commercial real estate investment alternatives.

Analyzing Triple Net Lease Investments

If you want to invest in this type of real estate, you will need to analyze the situation before jumping in. There are three important steps when searching for an NNN investment:

1. Evaluate the Real Estate. 

Visit the site property to view the asset and get a feel for the area. NNN investments are less work but don’t let that make you lazy! You still want to visit your site to scope it out before diving in. Check out the population density. Net lease tenants are more likely to succeed in high-population areas with a lot of traffic, so look out for this!
After you have done a site visit, conduct a legal analysis to be aware of easements, restrictions, and encroachments. These can impact the value of the property because they can restrict what you do with the space in the future, so be sure you understand!

2. Evaluate the Tenant.

In triple net investments, half of the value of the asset is determined by location of the real estate and the other half is determined by the credit quality of the tenant. To underwrite tenant risk, ensure tenant has good credit rating. If the tenant is a public company, you can find their credit rating through sites such as Moody’s and Zacks.com. If the tenant is private, request and analyze these documents:
-Credit Report: review credit profiles from at least one agency (Equifax Small Business Enterprise, ClientChecker, Accurint Business, etc)
-Business Plan
-Recent Sales History
-Annual Financial Reports and Tax Returns 
You can also hire a tenant underwriting service to help you decipher this information and decide if your potential tenant is a good fit. 

3. Evaluate the Lease

The lease is extremely important when it comes to buy and hold investment analysis. You need to ensure your lease is written clearly without any room for ambiguity in the terms. Read every word and ask your attorney to do the same. Compare notes with your attorney to ensure what you will need to cover as the landlord, what rental increases are agreed, and how a tenant can get out of the lease. 
Another thing to ensure in your lease is inflated rent analysis. Inflated rents make investment returns more appealing but it may not reflect current market rents and if current market rent is cheaper, they may drop upon renewal. This will negatively impact the resale value of the property which could be less than what you paid for. It is important to read the lease to understand annual rental rates on a per square foot basis and compare to market rents. 

A few more tips…

Now that we have covered the basics, let’s go over a couple more things to keep in mind.

Don’t restrict yourself to your home state!

Investors often stick to properties nearby, especially if you are managing the property yourself or will need to oversee aspects of your investment. With this type of investment, consider purchasing in another state. You won’t need to be so involved in managing the property, and looking to other states will allow you to explore quality locations. These tenants are looking for prominent locations with heavy traffic and an established population. That’s what they need to be successful, so look for locations they will succeed, and in turn, you will succeed. 

Focus on your network and investment team.

Finding the right property may be tricky with this type of investment. Many properties won’t show up on public databases, especially trophy properties. The broker representing the seller will first inform his network a property is available, and many offers may come in quickly. Build relationships with brokers and sellers and work on building your network so you are privy to the availability of these trophy properties. 
You also want to make sure you have the right people on your investment team. An experienced broker will offer value throughout the entire process of buying a property. Hiring the best broker you can find will ensure your success. 
If you need help with finding NNN investment alternatives that fit with your budget, contact us deniz@mylocationadvisor.com or check out our website to find out what’s on the market.