The retail commercial real estate market is booming in some sectors, and the opportunities available for investors continue to grow. However, it needs to be more than just owning a single retail property. Investors need to have the right tenant and the right lease to truly have wealth.
Retail property is a commercially zoned property used for business purposes, the actual selling of the product, rather than its manufacture, retail stores, malls, shopping centers and shops all falling under the “retail” umbrella.
The best way to increase your chances of success is by investing in triple-net (NNN) retail properties. But first, it’s important to understand why NNN is such an attractive investment opportunity and how it could help you achieve your long-term goals.
What Is a Triple Net Lease (NNN)?
A triple net lease (NNN) is a commercial lease in which the tenant is responsible for paying all of the property’s expenses and rent. These expenses include property taxes, insurance, and common area maintenance (CAM). The tenant is also responsible for maintaining and repairing the property during the lease term.
Triple net leases are commonly used for retail properties where the tenant is a national or regional chain store. This is the best tenant. In addition, the tenant is typically a creditworthy entity, which provides a level of security and stability for the landlord.
The terms of triple net leases vary, but they typically have long-term lease terms with established rent increases. This provides landlords with a predictable cash flow and minimal responsibilities for the property.
Benefits of Triple Net Leases(NNN)
There are several benefits to using triple net leases (NNN leases) for commercial real estate:
- Predictable Cash Flow: NNN leases typically have long-term lease terms and established rent increases, which provide landlords with a predictable cash flow.
- Minimal Landlord Responsibilities: With NNN leases, the tenant is responsible for all property expenses, including taxes, insurance, and common area maintenance, which allows landlords to minimize their responsibilities.
- Creditworthy Tenants: NNN properties are often leased to creditworthy tenants, such as national and regional retail chains, providing security and stability for landlords.
- Flexibility: NNN leases can be structured in a variety of ways, allowing landlords to customize the lease to suit their specific needs.
- Tax Benefits: NNN leases can provide landlords with tax benefits, as the tenant is responsible for paying all of the property’s expenses, which can be written off as business expenses.
- Low Maintenance Costs: As the tenant is responsible for maintaining and repairing the property, landlords do not have to bear the cost of maintenance and repairs, reducing the overall maintenance costs.
- Reduced Risk: As the tenant is responsible for all the expenses related to the property, landlords are insulated from the risks of fluctuations in property taxes, insurance, and common area maintenance costs.
- Diversification: NNN retail properties can provide diversification for investors’ portfolios, as they tend to perform differently than other types of real estate investments.
- Potential for Appreciation: NNN retail properties have the potential for value over time, as the tenant is typically responsible for any necessary improvements and maintenance, which helps keep the property in good condition.
Triple Net Lease Example
Here is an example of a triple net lease for a retail property:
Tenant: ABC Retail Chain Property: Shopping center Lease term: 10 years Rent: $50,000 per year, with 3% annual increases
Under this triple net lease, the tenant (ABC Retail Chain) is responsible for paying the following expenses in addition to the base rent:
- Property taxes: $12,000 per year
- Insurance: $6,000 per year
- Common area maintenance (CAM): $8,000 per year
In this example, the tenant would be responsible for paying a total of $66,000 per year, which includes the base rent of $50,000, property taxes of $12,000, insurance of $6,000, and common area maintenance of $8,000.
This type of lease provides the landlord with a predictable cash flow as the rent increases are established. In addition, the landlord’s responsibilities are minimal, as the tenant is responsible for all property expenses. This type of lease is commonly used for retail properties, and the tenant is typically a creditworthy entity, providing a level of security and stability for the landlord.
Triple Net Leases vs. Single Net Leases and Double Net Leases
Triple net leases (NNN leases), single net leases, and double net leases are all types of commercial leases, but they differ in the responsibilities of the landlord and tenant regarding property expenses.
As the name suggests, a triple net lease requires the tenant to pay for all three of the property’s expenses: property taxes, insurance, and common area maintenance (CAM). This type of lease is commonly used for retail properties, and the tenant is typically a creditworthy entity, which provides a level of security and stability for the landlord.
A single net lease requires the tenant to pay property taxes, but the landlord is responsible for the insurance and CAM expenses. This type of lease is often used for industrial properties.
A double net lease requires the tenant to pay property taxes and insurance, but the landlord is responsible for the CAM expenses. This type of lease is often used for office properties.
How to Start Investing in Triple Net NNN Properties
Research – Do your research on the NNN investment market and familiarize yourself with the types of properties available and their associated costs.
Develop a Plan – Determine your investment goals and create a plan to achieve them. This includes figuring out your budget, investment timeline, and desired rate of return.
Work with a Professional – Consider working with a financial advisor or commercial real estate agent to help you find and purchase the right NNN property for your investment portfolio.
Due Diligence – Before making an investment, be sure to do your due diligence. This includes thoroughly examining the property and its financials, as well as researching the tenant’s creditworthiness.
Diversify – Diversifying your portfolio is key to reducing risk. Consider investing in multiple NNN properties to spread out your investment risk.
In summary, NNN retail properties offer a variety of benefits for investors, such as predictable cash flow, minimal landlord responsibilities, creditworthy tenants, diversification potential, and appreciation, making them an attractive investment option for real estate investors. However, it is important to conduct thorough due diligence before making a decision.
There will be many opportunities in 2023 for people to break into commercial real estate. But there will also be challenges. Cherif Medawar is an authority on NNN commercial deals. His business is focused on single tenant retail and NNN with national tenants. He has a strategy that he applies within his real estate funds and shares how he invests in these deals. He shares how he has been investing in standalone buildings over the past two decades and how you can model the strategy. Learn how to FIND, ANANYLE, CONTROL, TIME & STRUCTURE the deals. BLUE OCEAN OPPORTUNITIES IN COMMERCIAL REAL ESTATE. Get Your Free Copy and contact the office about Cherif Medawar’s JV Partner program for single tenant retail deals.