The Risks and Rewards of NNN Investments

Populations across the US have increased dramatically in the last few years. In 2020, Utah, Idaho, and Texas all experienced population increases of over 15%. Rising populations bring more businesses, and more businesses mean more opportunity for investors. 

If you’ve been looking for lower-risk investment opportunities in hot markets across the country, NNN investments may be your answer. These investments provide passive income on commercial property ownership without much financial and operational responsibility.

Table of Contents:

What Is NNN Investment

An NNN (or triple net lease) investment is a lease agreement where the property tenant agrees to pay all maintenance costs, property taxes, and building insurance associated with the property, along with rent and utilities.

Triple net leases are similar to single-net, double-net, and absolute-net in that the tenant is liable to pay for specified operating costs – or “nets” – that the property incurs. 

  • Single Net: The tenant is responsible for paying property taxes, rent, and utilities. The landlord pays for maintenance expenses and building insurance.
     
  • Double Net: The tenant is responsible for paying property taxes, building insurance, rent, and utilities. The landlord pays for maintenance expenses.
     
  • Triple Net: The tenant is responsible for paying property taxes, building insurance, maintenance expenses, rent, and utilities. The landlord may be responsible for any necessary structural, roofing, or parking lot expenses depending on the lease negotiated structure. 

  • Absolute Net: The tenant is responsible for paying property taxes, building insurance, maintenance expenses (including structural, roofing, and parking lot costs), rent, and utilities. The landlord is free of all financial obligations related to the property.

What Is NNN in Commercial Real Estate

NNN leases only apply to commercial properties – so this option isn’t available for residential real estate investors. Many fast food chains and convenience stores with gas pumps as well as retail, medical, distribution and industrial properties are under triple net lease agreements and are available for commercial real estate investors with a net worth of $1 million or more.  

Because NNN investments place a large amount of financial responsibility on the tenant, rent is often lowered to account for property expenses. However, depending on how well you do your research before triple net lease investing, you could still expect anywhere from a 7% to 12% return on the property. 

Keep in mind that some agreements include the projected operating costs in the monthly rent. If this is the case, the landlord will have to track the monthly expenses – adding a layer of responsibility. If these operating costs were under the projected amount at the end of the year, the landlord will refund the necessary amount. If they were over the allocated amount, the tenant must pay the difference.

What Are NNN Expenses

Different real estate investments come with varying levels of responsibility and returns. Understanding your potential return on investment can help you determine whether a triple net lease is a good fit for you. 

However, before you can find a projected ROI, you first have to know what your expenses might be for a given property. Review the chart below to better understand what expenses you may be responsible for with different lease options.

 

Property Tax

Building Insurance

Basic Maintenance

Structural Maintenance

Single Net

T

L

L

L

Double Net

T

T

L

L

Triple Net

T

T

T

L/T

Absolute Net

T

T

T

T

T = Tenant responsibility 

L = Landlord responsibility

 

A property’s capitalization rate (cap rate) is one way to see the current or potential ROI for any given property. To find your cap rate, use the formula below: 

(Incoming rent - expenses) / property value 

For example, say you find a property on the market for $2,500,000. Said property accrues a yearly rent of $150,000 and the landlord is only responsible for structural maintenance, your cap rate would look something like this: 

 (150,000 – 12,000 yearly expense) / 2,500,000 = 6%

Ideal capitalization rates are between 4% and 10%, ROI isn’t the only thing you should know about a property before jumping into the deep end though. Accounting for risks and understanding the potential rewards to offset those risks will help you better gauge your tolerance toward NNN investments.

Buying NNN Property: Risks and Rewards

As with any investment, NNN lease agreements come with pros and cons. If you’re new to this type of investment, finding the right real estate broker who can walk you through how it works is crucial to your success. Until then, however, look through the risks and rewards below.

Risks of NNN Investments

Much of the risk associated with NNN investments is related to unforeseen events. Having a backup plan and safety net with additional funds can help offset those risks. A few drawbacks to triple net lease investments include:

  • Possibility of hefty repair costs: Although landlords are only responsible for structural repairs in NNN investments, those repairs can quickly add up – especially if tenants don’t notify you immediately and the problem gets worse.
     
  • Tenant default: If you have a build to suit loan on the property and your single tenant declares bankruptcy or defaults on payments, there would be no other tenants to offset your financial losses. Investing in a multi tenant property can help mitigate this risk. 

  • Limited upside potential: Triple net leases are typically fixed arrangements with a specified rent increase percentage each year. If the market grows at a rate quicker than your designated increase, you could lose out on higher gains from the open market.

Rewards of NNN Investments

Benefits of NNN investments present themselves in a variety of ways. Capital gains, a steady stream of income, and little risk are a few to name. Additional pros of triple net lease agreements include: 

  • Fewer financial responsibilities: NNN investments place most of the financial responsibility related to the property on the tenant.

  • Predictability: Triple net leases often include 10+year lease contracts, providing long-term tenant occupancy.
     
  • Increased opportunity: Due to the limited amount of responsibility that comes with triple net leases, investors can purchase properties in hot markets, even if they don’t live nearby. 

  • Less overall responsibility: Depending on the terms of the agreement, the landlord may not have to deal with operating costs – leaving more time to focus on other investments. 

20 Best States for NNN Investments

The best NNN investment opportunities are typically found in areas with booming economic and population growth. Additionally, purchasing a property in a state with low to no income tax can save you a significant amount of money in the long run. There are currently only nine states with zero income tax. 

Lorem ispum dolor sit umit

note-image
Notes

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Proin interdum dolor a ullamcorper molestie. Vivamus in justo velit. Aliquam vehicula massa et venenatis placerat.

Subtitle in the post

Adipiscing elit. Proin interdum dolor a ullamcorper molestie. Vivamus in justo velit. Aliquam vehicula massa et venenatis placerat. In hac habitasse platea dictumst. Maecenas scelerisque ipsum et mauris aliquam, eget rhoncus enim facilisis. Praesent tincidunt vehicula ante, sed tempus libero vulputate at. Proin sed erat neque. Vivamus faucibus magna at facilisis suscipit.

  • Taesent tincidunt vehicula ante, sed tempus libero vulputate.
  • Lorem ipsum dolor sit amet, consectetur adipiscing elit.
  • Taesent tincidunt vehicula ante, sed tempus libero vulputate.
  • Lorem ipsum dolor sit amet, consectetur adipiscing elit.
note-image
Notes

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Proin interdum dolor a ullamcorper molestie. Vivamus in justo velit. Aliquam vehicula massa et venenatis placerat.

Let's connect Join the Revolution

Apply Now
note-image
Notes

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Proin interdum dolor a ullamcorper molestie. Vivamus in justo velit. Aliquam vehicula massa et venenatis placerat.

According to the U.S. Census, the states with the highest population percentage change in 2020 include Utah, Idaho, Texas, and North Dakota. See the 20 states with the highest percentage change listed below.
  1. Utah +18.4% 
  2. Idaho +17.3% 
  3. Texas +15.9% – No state income tax
  4. North Dakota +15.8% 
  5. Nevada +15% – No state income tax
  6. Colorado +14.8% 
  7. Florida +14.6% – No state income tax
  8. Washington 14.6% – No state income tax
  9. Washington DC +14.6% 
  10. Arizona +11.9% 
  11. South Carolina +10.7% 
  12. Georgia +10.6% 
  13. Oregon +10.6% 
  14. Delaware +10.2%  
  15. Montana +9.6% 
  16. North Carolina +9.5% 
  17. South Dakota +8.9% – No state income tax
  18. Tennessee +8.9% – No state income tax
  19. Virginia +7.9% 
  20. Minnesota +7.6%

Understanding state tax laws and population metrics can ensure your NNN investment is profitable.

What’s the Point of NNN?

Not all investment opportunities are suited for every investor. If you’re looking for something with low risk, little responsibility, non-recourse lending options, and steady cash flow, NNN investments might be a good fit for you. However, before signing the contract, do your due diligence on the property and current or future tenant. 

Reach out to Revolution Realty Capital today to talk with nationwide lending investment advisors about the process of obtaining net lease financing.

column-icon-image
Taesent tincidunt

vehicula ante, sed tempus libero vulputate.

column-icon-image
Taesent tincidunt

vehicula ante, sed tempus libero vulputate.

column-icon-image
Taesent tincidunt

vehicula ante, sed tempus libero vulputate.

column-icon-image
Taesent tincidunt

vehicula ante, sed tempus libero vulputate.

post-inner-image

Key Takeaways

Adipiscing elit. Proin interdum dolor a ullamcorper molestie. Vivamus in justo velit. Aliquam vehicula massa et venenatis placerat. In hac habitasse platea dictumst. Maecenas scelerisque ipsum et mauris aliquam, eget rhoncus enim facilisis. Praesent tincidunt vehicula ante, sed tempus libero vulputate at. Proin sed erat neque. Vivamus faucibus magna at facilisis suscipit.

  • Taesent tincidunt vehicula ante, sed tempus libero vulputate.
  • Lorem ipsum dolor sit amet, consectetur adipiscing elit.
  • Lorem ipsum dolor sit amet, consectetur adipiscing elit.
  • Taesent tincidunt vehicula ante, sed tempus libero vulputate.
quoet-image

Proin interdum dolor a ullamcorper molestie. Vivamus in justo velit. Aliquam vehicula massa et venenatis placerat. In hac habitasse platea dictumst. Maecenas scelerisque ipsum et mauris aliquam, eget rhoncus enim facilisis. Praesent tincidunt vehicula ante, sed tempus libero vulputate at. Proin sed erat neque.”

note-image
Notes

Lorem ipsum dolor sit amet, consectetur adipiscing elit. Proin interdum dolor a ullamcorper molestie. Vivamus in justo velit. Aliquam vehicula massa et venenatis placerat.

Other Categories

Recent Posts

Real Estate Investing

Motivated Seller: How to Find and Land Leads in 2022

See More
Long Term Rental

Multifamily Real Estate Investing: Pros, Cons, and Strategies

See More
Ground Up Construction

How To Qualify for Hard Money Loan: 6 Requirements

See More

Let’s connect Join the Revolution