Let's connect Join the Revolution
Risks of NNN Investments
Now that you’re aware of the benefits of NNN properties, read through the following drawbacks to triple net properties. This will help you get a better sense of how this type of property could affect your real estate investment portfolio.
- Rollover Expenses: Once a NNN lease has ended, there will likely be costs associated with getting the property ready for the next tenants. Additionally, if your previous tenant(s) didn’t fulfil their end of the lease agreement or notify you of problems with the building, you may find yourself having to pay a large sum for property repairs.
- Tenant Default: If your property has only a single tenant and they default, you’ll be responsible for the loan payment and all operating costs until you can either find a new tenant or your current tenant corrects the default.
- Limited Upside Potential: Net leases are often fixed arrangements with outlined rent increases each year. If the market increases faster than your specified increase, you could miss out on greater returns.
- Greater Risk of Liens: Unless all operating costs are in the landlord’s name, there’s greater potential for missed payments when not all bills are the sole responsibility of either the tenant or the landlord. Checking for liens regularly can help mitigate this risk.
Although there are risks to triple net properties, by doing your due diligence you can mitigate many of them and run a successful net lease investment business.
Triple Net Lease Example
Look through the chart below to get a better idea of landlord and tenant responsibilities for a net lease vs triple net lease as well as other types of net leases.
|
Single Net Lease |
Double Net Lease |
Triple Net Lease |
Absolute/Gross Lease |
|
|
Mortgage Payment |
X |
X |
X |
X |
|
Property Tax |
X |
X |
X |
X |
|
Building Insurance |
✓ |
X |
X |
X |
|
Basic Maintenance |
✓ |
✓ |
X |
X |
|
Structural Maintenance |
✓ |
✓ |
✓/X |
X |
|
X = Tenant responsibilities ✓ = Landlord responsibilities |
||||
Although each net lease type has differences, they are all the same in that the landlord and tenant split operating responsibilities in addition to the tenant paying rent and utilities. The biggest difference between a gross lease vs triple net lease is that the landlord is still responsible for a certain level of property maintenance.
Triple Net Lease Properties FAQ
Triple net lease properties can be complex until you’ve worked with them a few times. If you still have questions, look through the frequently asked questions below to deepen your understanding.
What Is a Net Lease?
A net lease is an agreement between landlord and tenant where the tenant agrees to pay certain operating costs of a property. This could include things like property tax, building insurance, and basic maintenance costs. Depending on the agreement, the tenant may also be responsible for taking care of certain aspects of the building’s structure.
How Do You Calculate a Triple Net Lease?
When a building has more than one tenant, you can calculate a triple net lease monthly payment by adding the annual property taxes, building insurance, and average annual maintenance expenses. You’ll then divide that sum by the building’s total square footage. This will tell you how much to charge per square foot.
After you know how much to charge per square foot, you’ll multiply the cost per square foot by the number of square feet each tenant is renting out. You’ll then divide this number by 12 to get the tenant’s monthly payment.
Can You Negotiate a Triple Net Lease?
For both tenants and landlords, the responsibility split on triple net properties can be negotiated. Tenants can negotiate their base rent depending on certain liabilities taken on. On the other hand, landlords can negotiate certain responsibilities held by the tenant. Because of this, net leases can provide both parties with added flexibility.
Are Triple Net Properties a Good Investment?
If you’re looking for an investment property with more flexibility and security than a traditional lease or property, triple net leases will likely be a good investment option for you.
However, if you’re a landlord that likes to check in regularly and have full control over the operation and costs of your properties, triple net properties may not be the best investment for you.
If triple net properties are what you’ve been looking for to round out your real estate investment portfolio, contact Revolution Realty Capital today to learn about the financing options available to you.
