What are Triple Net Properties and How do they work?

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Tuesday July 2, 2019

What are Triple Net Properties and How do they work?

Triple net properties are those properties for which the tenant pays some or all of the operating expenses of the property in addition to the rent. Triple net properties are the most common type of real estate investment strategies. Such properties are often considered by the investors who don’t want to get stuck with the day-to-day management processes because their tenant is doing that for them 

Types of Triple Net Leases

There are three different types of triple net leases each with their own terms and conditions. All of the net leases have one thing in common that tenant is taking care of some or all of the management processes.

1. Single Net Leases

Under single net lease terms, the tenant pays the rent and some of the property’s taxes along with the utilities. In that case, less risk is shifted towards the tenant. The landlord takes care of the building expenses and some external costs.

2.Double Net or NN Leases

The only difference between Single Net and Double Net leases is that in addition to the monthly rent and the property taxes, the tenant pays insurance premiums of the property as well. The landlord remains responsible for the building and external expenses like bearing walls, electricity, plumbing, etc.

3. Triple Net or NNN Leases

This is the most common type of lease agreements. The pays all or some of all the property’s operating costs including internal and external expenses are paid by the tenant including the fixed rent. The property’s taxes, insurance fees, maintenance costs are all tenant’s responsibilities. How much money would be payable by the tenant is determined on the basis of the space occupied by him. For instance, if someone has occupied 1000 square feet of a 10,000 square feet building, he would pay 10% of the property’s taxes, insurance, and other operational costs. NNN leases are more transparent than other leases as the tenants can operations they are being charged for.

Benefits and Risks associated with Triple Net Properties

The Benefits

The reason most investors are now considering investing in triple net properties is the potential benefits these properties can offer. The advantages of investing in Triple Net properties are

1. Income

Since it is the tenant who is taking care of all the necessary expenses, the investor’s cash isn’t drained in the operational costs and he enjoys a stable income stream.

2. Predictability

Upon the signing of the triple net lease agreement between the parties, the costs which both the investor and the tenants have to pay are fixed at that time. Which means that when you invest in these properties, you know how exactly your cash flow is going to be until the end of the term.

3. Location

The area where your property is located has a direct impact on its performance. So if your investment property exists in an area which is known for its predictable growth rate, your property’s worth will automatically increase.

4. Low Pricing

Entry costs for investing in triple-net properties are relatively low because they are mostly single-tenant places. The cost of triple net properties start with as low as $500,000 and investors can start getting their returns right away.

The Risks

1. Single Tenant Dependency

Since most triple-net properties are occupied by single families or individuals, there should be a backup plan in place if they move out. For example, if the property is vacant and you are unable to find a new renter quickly after, the property taxes, insurance premiums and other external costs suddenly become your responsibility and you might not be ready to bear all those expenses at such as short notice.

2. Tenant Rights

Don’t forget to do proper due diligence before renting out your property. Thoroughly understand the owner and tenant rights to save yourself from future inconveniences. Also, look out for any past problems the property might have faced so that they would not become an issue for you.

3. Interest Rates

The rising interest rates have a negative impact on the properties’ value. When interests are high, the value of triple net properties would decrease. Though interest rates have been very low since the last few years. The problem is that you can’t have the surety that they would not increase. 

Conclusion

Every real estate investment opportunity has its own advantages and disadvantages. Same is the case for triple net properties. Our job is to provide you with the benefits as well as the risk factors associated with triple net properties. In the end, it’s up to you to decide what kind of opportunity best suits your financial situation.

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