A triple-net or NNN lease is a single-tenant arrangement that requires the tenant to pay all operating expenses associated with the property they have leased. Unlike a gross lease, in which, the tenant is only required to pay the property rent, a NNN lease requires them to cover operating expenses such as insurance fee, property tax, and maintenance cost along with the base rent. Therefore, NNN investors enjoy a regular flow of income without any liabilities. As the tenant is also responsible for paying the operating expenses, the base rent under a NNN lease is slightly less than that under a gross lease.
Gross Lease Vs NNN Lease –
Let’s assume you have leased out one of your rental properties under a gross lease. Say, the monthly rent you receive on the property is $0.1m. Whereas, the insurance fee and property taxes sum up to $200k. In case the property requires some repair, the cost will add up to the operating expenses. Say, another $100k is required for the repair. Now, your overall profit at the end of a year would be –
Rent = $(0.1*12)m
Operating expenses = $(200+100)K
= $300k or $0.3 million
Profit = Rent – Operating expenses
= $(1.2-0.3)m = $0.9m
As you can see, under a gross lease, you‘re spending $0.3m from the rent in operating expenses, which ultimately reduces your profit.
Now, let’s assume you have leased out the same property but under a NNN lease. Say, the annual rent, in this case, is $1m. As all the operating expenses are covered by the tenant, you won’t have to spend anything from the rent.
Therefore, your profit under a NNN lease would be –
Profit = Rent = $1m
As you can see, even though you’re receiving lower monthly rent in a NNN lease, the profit at the end of the year is more than that in a gross lease.
Best time to plan a NNN Investment –
There is nothing such as the best time to plan a NNN investment. You can invest in NNN properties throughout a calendar year. However, you must pay attention to a few factors while planning your NNN investment.
- Location – The place where the property is located plays a major role in deciding the future of a NNN investment. A property located at a prime location will definitely guarantee a high flow of tenants. However, the operating expenses and cost of living would also be on the higher side at such places.
- Employment – A place with more businesses and employment opportunities is likely to attract more tenants. Try to find your NNN property in an area where employment is booming.
- Low crime rate – Nobody likes to live in a place that has a high crime rate. You must pay attention to this while choosing your NNN property. Lesser the crime rate, better would be the living condition.
- Expected cash flow – Pay special attention to this when closing on a NNN property. You must calculate in advance how much revenue the property is likely to generate. This can help in determining the future of your investment. You must close on the property that is likely to generate more revenue.
NNN investment requires a good understanding of market trend. It’s recommended that you speak to an advisor before investing in NNN properties. To speak to an advisor, you can call 888-993-2835 or email us at email@example.com