Net Lease Investors’ Guide: How to Spot High Potential Investments

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Investing in commercial real estate has long been one of the easiest, most stress-free ways of generating passive income and enjoying financial freedom.

We all know that being a private landlord comes with many benefits, but it also comes with just as many responsibilities, making an investment feel much more time-consuming to savvy investors who are looking for a more hands-off approach.

That’s where net leases come in, allowing ambitious individuals to focus on what really matters to them (finding high potential investment opportunities, expanding their portfolio, and seeing returns through) instead of spending the majority of their time repairing toilets, sorting out trash, replacing appliances, and dealing with tenants.

But still, not all net lease opportunities are created equal.

Cultivating a keen eye for what generates a high potential ROI is crucial if you want to guarantee a steady and reliable income stream from your properties with none of the landlord hassles.

In this guide, we want to give savvy net lease investors the information necessary to spot a good deal, what their responsibilities as landlords are going to be, and where to find those money-making opportunities quickly and efficiently.

What Is a Net Lease Investment?

Before we dive into the do’s and don’ts of net leases, let’s take a closer look at what net lease agreements entail and what types of leases are available in today’s market.

Net leases are contractual agreements most commonly used in commercial real estate in which the tenant is expected to pay for base rent, all operating expenses, insurance, property taxes, utilities, as well as all maintenance and repair costs. In short, net lease agreements are the opposite of gross leases, which involve the tenant paying a flat rate for rent while the landlord remains responsible for all other expenses associated with the property.

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Under a net lease, tenants are not always responsible for paying all property expenses; they will sometimes only pay a portion of these costs, according to the type of lease signed: single net, double net, or triple net. The latter (also known as NNN) is the most popular option for those looking to generate a steady income stream with the least hands-on involvement in the managing and maintenance of the property.

When signing a single net lease, tenants are expected to pay for property taxes in addition to rent, while double net leases make them responsible for property insurance as well. Signing a triple net lease, on the other hand, takes off all responsibilities from the property owner, expecting the tenant to pay for structural maintenance and repairs on top of insurance premiums, property taxes, and rent. Many landlords prefer to work under a bondable net lease, keeping the rent price fixed throughout unexpected increases of costs and preventing the tenant from getting out of the agreement before the end of the term.

NNN leases offer a steady and predictable passive income to property owners while allowing tenants to enjoy unique benefits as well — it’s no wonder that the triple net lease is the most attractive lease option for those looking to get the most out of their investment strategy!

The Benefits of Triple Net Investing

Let’s take a closer look at the many benefits (and a few of the possible disadvantages) of the triple net lease structure for both tenants and landlords.

Triple net lease investors generate a consistent passive income with very little work and for a long time, as most leases are signed for a period of time between ten and twenty years. In addition to that, as tenants are responsible for nearly all the costs associated with the property, this is fairly low-risk compared to other real estate investments. If you’re looking to expand, triple lease properties can be added to your portfolio as a conservative strategy to create more equity.

Tenants also benefit from unique benefits when signing a triple net agreement: Long-term leases allow for long-lasting business locations, improving traffic and company profit, and create the opportunity for tenants to enjoy tax benefits, such as building property taxes into their business expenses. 

On top of that, tenants signing a triple net lease often end up paying lower rent prices to offset the costs of maintenance, insurance premiums, and all other property expenses.

At the same time, investing in higher-risk net lease opportunities may come with a set of disadvantages.

Landlords who sign long-term lease agreements generally lose the ability to increase the rent if the property values of the location increase over time, limiting their earning potential (though at the same time guaranteeing a stable and reliable cash flow for a decade or more). In addition to that, there is always a risk that the tenant might default, no matter the nature of the agreement, leading to a risk of vacancy and sizable losses for the property owner. From the tenant’s point of view, triple net leases may become a large financial burden due to the high cost of running a business plus all other unexpected operating expenses, not to mention the tax liabilities they are expected to be responsible for. Of course, these risks are largely offset by the credit profile of the tenant, which is usually a trustworthy U.S. company with a strong credit profile and established reputation.

All in all, triple net lease investments are a profitable option for both tenants and landlords who can qualify for them, allowing the latter to preserve equity, maintain a stable cash flow, and build value over time thanks to the good real estate fundamentals put in place by the agreement.

So, if you’re ready to dive into the world of triple net lease investing and turn the opportunity into a consistent money-making machine, here’s what you should look for when considering your first investment:

How to Spot Money-Making Net Lease Investments

As a general rule of thumb, you should know that because of their overall stability, returns for net-leased properties are lower than other types of real estate investment. The return rate will depend on the years left on the lease and the projected rent increase over the remaining term, so you may need to dedicate a significant amount of time researching and comparing options, examining your risk tolerance, and negotiating the deal just as you would with any other type of investment.

Even though investing in a net lease requires a lot less day-to-day work and is generally considered a low-risk real estate investment option, you shouldn’t go into an agreement without weighing in the pros and cons carefully!

The most successful net lease investors assess potential locations against 4 main criteria:

Geographical Location

Like any other real estate deal, location is the most important factor to consider when evaluating the profitability and risk of a net lease investment.

You’ll want to look for an accessible central location with plenty of traffic and other businesses surrounding the property so that you are guaranteed to have many people coming into the area. It’s usually best to invest in prime locations situated near or right in the middle of visible retail arteries, busy retail parks, and highways, as well as near retail staples consumers are likely to find themselves in regularly, like pharmacies, fast food joints, grocery stores, and gas stations.

If possible, you can also gauge the profitability of a given location according to the tax benefits associated with the state the property is in: Alaska, Washington, Wyoming, Texas, Florida, South Dakota, and Nevada have no income tax, which is a factor that may lead you to save up a whole lot more in the long run!

On top of that, it’s usually best to pick a business operating in sprawling urban areas and geographical locations projected to maintain high growth, in terms of both population and average income per capita.

At the same time, however, you might also want to look out for more isolated locations with little competition, as they could possibly guarantee the same profits as a business operating in a busy area with much more competition. In this case, it’s best to examine the type of business that will be operating in the property first and draw your conclusions accordingly: The combination of the right tenant with the right location is the perfect formula for long-lasting success!

Type of Business Operating at the Property

As an equally important factor to consider, you’ll want to look for a type of business deemed stable and reliable in terms of credit, annual profits, and growth so that your investment can be guaranteed longevity for years to come.

Choose a type of business likely to generate consistent profit throughout the ups and downs of an unpredictable economic climate.

Generally speaking, retail is the most attractive option, with pharmacies, grocery stores, fast-food restaurants, gas stations, drug stores, and dollar stores being some of the most popular investments for prospective owners. Medical clinics and other medical facilities can also turn out to be very profitable for landlords, as they are virtually recession-proof businesses and always in demand.

Tenant Profile

Aside from the type of business your tenant is going to run, you’ll also want to make sure their credit profile is as strong and as trustworthy as it can be.

Established and household name businesses make for the ideal candidates for a triple net lease, but don’t be fooled thinking that no publicly-traded companies will ever create any problem when it comes to rent payments and other agreed-upon financial responsibilities. Whatever business you might be dealing with, it’s imperative to do your due diligence on the lessee to ensure they have strong credit!

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The creditworthiness of a tenant (or lack of it) is the number one reason why triple net leases succeed or fail in turning consistent profits. You’ll want to look for tenants with an S&P rating of BBB and above, as well as ask for their history of profitability throughout different economic climates.

For the lowest-risk and highest ROI, look for long-standing corporate businesses with solid reputations, like Dollar General, Walgreens, Walmart, CVS, 7-Eleven, O’Reilly AutoParts, and Dollar Tree.

Lease Term and Structure

You’ll want to take a closer look at the lease agreement to calculate how profitable the current clauses are for you as the landlord.

First, consider how long the lease term is and make sure there are options for the tenant to renew timely to avoid financially heavy vacancy periods. If you’re coming in on an already agreed lease, keep in mind that your passive income stream will be much shorter if the remaining lease term is also quite short. As a general rule of thumb, opt for longer leases (ten years and up) or, alternatively, negotiate with the seller for a reduced sale price to offset the cost of releasing at the end of the term.

Next, see if the agreement includes built-in rent increases (escalations) to keep the rental price in line with the market inflation or if the agreed price is fixed throughout the ten to twenty or even twenty-five years of the lease.

Structuring a lease agreement to your benefit is, of course, much easier if you are bringing a tenant into a property you already own under a triple net lease. If you’re instead coming in on a property where a tenant is already operating under a previous agreement, you will inherit the terms of that deal with very little wiggle room for changes.

Before you go ahead with the agreement, make sure the lease specifies that the landlord is free of all responsibilities regarding property tax, utilities, insurance premiums, repairs, and maintenance costs — this type of structure is non-negotiable if you really want to turn this investment into a predictable money-making machine!

Your One-Stop Shop for Commercial Real Estate Investments

With over 1,357 triple net lease properties vetted all over the country and listed by type, location, and tenant, our NNN deal finder directory is your one-stop for finding the perfect investment opportunity.

We have taken out all the guesswork so you can have a customized and 100% free list of properties to research and choose from, with nationwide retail giants like CVS, Walgreens, 7-Eleven, and Dollar General taking the prime spots as the most creditworthy profiles.

Browse our current listings or get in touch today to learn more about what we do and how we can help you achieve the financial freedom you’re after, one savvy investment at a time!

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