Triple Net Lease Investing
Over the last few issues we’ve talked about Orlando’s white hot commercial real estate market. We’ve also discussed a few of the high risk/high rewards deals that some of our clients have recently taken advantage of. In this issue, I want to discuss the benefits of Triple Net Lease Investing AKA “NNN” deals. This
is one of the most popular type of commercial real estate investment. The NNN stands for Net, Net, Net. You will hear some refer to it as “Triple Net” deals.
The Perfect Deal
Triple net lease investing is when a investor buys a free standing building that is leased to a tenant. Triple net deals can be as close to perfect as a deal could get. Investors of all skill level often gravitate to these deals because they provide stable cashflow while the tenant pays for the real estate taxes, all the insurance, and all maintenance of the property.
Benefits of a Triple Net Deal
• no management responsibility
• longterm lease with annual rent escalation
• stable cashflow
• great tax benefits specific to real estate
Art of the Deal
In Triple Net Lease Investing, 50% of the value of the asset is driven by the real estate. While the other 50% is driven by the quality of the tenant and the lease that binds them to the real estate. If you desire a long and lucrative run in Triple Net Lease Investing, you need to master the art of successful due diligence analysis. This is achieved by carefully evaluating the following:
• Evaluate the real estate: Remember LOCATION, LOCATION, LOCATION!
• Evaluate the tenant: Seek the highest qualified tenants with the best financial statements.
• Evaluate the lease: The lease must be clear and concise. It should have teeth to hold the tenant accountable to their commitment with a substantial security deposit or have personal or corporate guarantees. It must have 2%-4% in annual rent escalations to keep up with inflation.
For more detailed information on evaluating the real estate, tenant, lease and all other due diligence analysis, please email me at email@example.com.
The Numbers Don’t Lie
One of our clients recently purchased a building in Orlando for $5.1 million dollars. It had a tenant with 15 years remaining on their lease with 3% annual rent escalations. The landlord has a $433,275 dollar security deposit with the following deal parameters.
$5,100,000 Purchase Price
$1,530,000 30% down payment
$3,570,000 70% loan at 5% APR
(example interest rate)
$19,164.53 monthly mortgage payment
When you subtract the $19,164.53 mortgage payment from the monthly base rent payment of $36,106.25, you’re left with a monthly positive cash flow of $16,941.72. That figure will go up 3% annually while the tenant pays for the real estate taxes, all the insurance, and all maintenance of the property. Under the deal’s annual base rent timeline, the investor will have broken even in 10.3 years. Then the owner/investor will go from making $16,941.72 a month to making $48,523.32 a month because there will no longer be a mortgage on the asset. Over the life of the tenant’s lease, the owner/investor will have collected $8,058,343.41 over 15 years without spending a penny on ownership costs.
Regardless of the size of your investment capital, there is a Triple Net Lease Investment out there in your price range. With benefits like these, it is easy to see why Triple Net Lease Investments are often the most valuable player of an investor’s investment portfolio.