Property tax, building insurance, and maintenance are three of the most common 'net' expenditures for real estate investors to be aware of. The property owner is responsible for these costs in most lease arrangements, while the occupant is responsible for paying rent and utilities. It is a design that will work in most of your rental properties.
Table of Contents - A Triple Net Lease Can Set You Up With Great Cash Flow
However, since the three net expenses are unpredictable, a property owner can go months (or years) without making a profit. It is entirely dependent on the property and the circumstances. For example, a series of unfortunate events might cause your property maintenance costs to skyrocket. It is a risk that any investor should consider when making a property investment strategy.
On the other hand, the triple net contract is a lease structure that requires the property owner to transfer these three costs onto the tenant.
Understanding the triple net lease
The occupant pays property tax, building insurance, and repairs and rent and services under a triple net lease arrangement. Isn't it a little too good to be true? Well, surprisingly, it is absolutely true!
There are typically long-term leases with industrial tenants, lasting up to ten or even twenty years. They are only possible when a single occupant occupies the building. And, in general, they are only worth considering if you own a prime piece of real estate or one that has the potential to become highly in-demand because of future growth.
There are also some significant disadvantages that property owners should be mindful of before signing a contract—we will go through these later.
In case you think you have found the right property and a suitable long-term tenant, triple net lease agreements could help you earn a steady passive income with little effort. Before you sign something, make sure you have carefully considered all pros and cons associated with the situation. You will be dealing with a triple net lease for a decade or more.
If you're a real estate professional looking for advertising and growth opportunities, click the learn more button below.
What are the benefits of a triple net lease?
The predictability of a triple net agreement is its most obvious advantage. You may sit back and earn passive income when a tenant takes responsibility for the variable costs associated with real estate. This has been going on for most of the lease agreement's duration.
Since the lease agreement terms are pre-determined, your investment property generates a consistent stream of passive income. You will be collecting the same amount of rent every month, with minor increases incorporated into the long-term agreement's terms. As long as your tenant is financially stable, you can continue relying on this income for an indefinite period.
Many of the uncertainties of real estate acquisition are also removed with triple net deals. If you have a long-term triple net lease on a home, you are not required to maintain it. You still will not have to think about renegotiating your lease every year or every five years. All you have to do now is sit back and think about how you're going to reinvest your passive income while your triple net lease is active.
Triple net tenants are the epitome of a set-it-and-forget-it investment, which is why finding them is so difficult. However, if all the factors are in place and you have a reliable tenant who is willing to take on these obligations, a triple net deal is a no-brainer.
What are the drawbacks of triple net leases?
Despite their advantages and benefits, triple net leases are far from ideal. Before investing in a triple net home, you should be aware of a few main pitfalls.
To begin with, triple net assets entail relying on a single commercial tenant for up to a decade. Although working with a well-established, financially sound tenant can be a win-win situation, it's impossible to foresee what the market will look like in ten years. It can be difficult to find another triple net tenant if the current one fails. Many prospective tenants will expect you to make changes to the building and take responsibility for maintenance before moving in.
It is also essential to realize that triple net lease agreements restrict your options as a real estate investor significantly. If you buy a triple net leased home, for example, and the local real estate market improves dramatically, you will not be able to lift the rent or sell the asset before the lease expires. You will find yourself locked in!
Although it is true that most triple net leases contain annual rent rises, these are usually just 1-5 percent. In this scenario, the low risk associated with a reliable tenant is generally compensated by a lower reward.
Selecting a triple net tenant
If you have a commercial property that you believe would be ideal for a triple net lease, think carefully about the tenant type you would be considering entering into an agreement. It should be a company with an established track record of performance and stability, as well as observable demand and patronage. You need them to remain in business and thrive for the next decade and beyond, after all.
Take a look at the company's credit rating first. They could be worth considering for a triple net lease if they have an 'investment-grade’ credit report from a major credit reporting agency. Do not seek their tenancy any further if they do not have investment-grade credit. You are effectively investing in the strength of their business when you bid on a triple net contract.
Is triple net for you?
A triple net lease arrangement can be a perfect way to produce passive income quickly and reliably. Before investing, make sure to thoroughly vet potential tenants and consider the risks associated with this lease structure.
A well-crafted scenario will provide you with a stable income and little or no headaches; a hastily arranged deal might leave you with an unsatisfactory tenant or a property that is nothing but problematic.
What you need to know about triple net lease investments
Interested in Rental Property Financing? If so, contact us and we will show you how you can buy unlimited rental properties with great rates.