What’s a NNN (triple net) real estate deal?
Mostly, this blog covers apartment investing. That’s because apartments are the easiest part of the real estate game for new investors to enter and also the part that I know best. But there are other parts, some of them pretty interesting.
Take NNN investing, for example. NNN (“triple net”) refers to a kind of commercial lease, one where the tenant (not the landlord), is responsible for paying for all property taxes, insurance and building maintenance, in addition to paying the rent.
Why is this attractive to a landlord? Because it turns a piece of land and a building into as pure an income stream as you can get in real estate. There’s no management, no hassle, no nothing… just a stream of income coming in, year after year after year.
Sounds amazing, right?
Well, there are downsides. First, Many NNN properties are special-use properties like fast food restaurants. Say you own a piece of land and a building that have been turned into a KFC. It’s pretty amazing, until the KFC’s lease ends and they decide to pull out. Then you’re pretty damn worried that you’re not going to be able to find a tenant willing to pay anything like as much as they did. That’s how you get this KFC turned into a pot dispensary.
Second, businesses fail. You can do a NNN lease with a retailer, have the retailer fail, and have that income stream disappear. That’s why most owners of retail properties strongly prefer to lease to what are called “credit tenants”. These are national retailers with many locations. If a particular location doesn’t work out for them, they’re still on the hook for the lease because you can sue them and win if they don’t pay. (Incidentally, this is why you almost always see chain retailers in newly developed multi-use properties, even in places where it’s clear a hit one-off retailer would have been a better choice from a stylistic perspective.)
Finally, buying properties with credit tenants on NNN leases is incredibly expense. Because they’re such desirable investments, very high net worth investors and institutional funds pay high prices to buy them. This drive the cap rate down. So, while you can buy apartment buildings all day long at a 6% cap, buying a property with a true, NNN-lease from a credit tenant costs you more like a 4% cap.
There’s a pretty amazing business done by specialists who buy suitable land, find a national chain that wants to put a location on that land, build the structure to suit, sign a 20 year NNN lease with the retailer, then sell to an investor who just wants to hold for the income.