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An Introduction to Triple Net Lease Investments

This article is an excerpt from chapter one of David Sobelman‘s The Little Book of Triple Net Lease Investing: Second Edition. The book can be purchased here.

Welcome to the wonderful world of triple net lease investments (also called “NNNs” or “net lease properties”). Yes, I know that the term “wonderful” may sound a bit over the top, but frankly most people find the subject to be pretty boring. That is, until they start getting income from these investments. Suddenly, the concept becomes wonderful!

Because net lease investments can be such a vital part of your financial future, I feel you should understand them as completely possible. That’s why I’ve written this book. I want to give you a clear and complete understanding of net lease investments so that, as a real estate investor, you can make informed decisions on such investments.

The Basic Definition

I’ll get into the specifics of net lease investments and their variations throughout this book, but for now it’s just important for you to know the basic definition of a NNN, which is: a net lease where a building tenant agrees to pay a monthly lump sum base rent as well as the:

  • Property taxes
  • Property insurance
  • Maintenance costs

There are several advantages to triple net leases, which are considered one of the more secure investments you can put your hard-earned money into.

Benefit 1: Lower-Risk Income

As an investor, you’re well aware that the financial markets inevitably fluctuate depending on the economy and other factors beyond your control. Your goal as an investor is to “flatten out” that roller coaster ride by putting your money into stable investments that generate income even during the “low points” of those fluctuations.

Many investors consider single-tenant, net-leased properties to be a good choice in any environment because of their bond-like quality. Like bonds, single-tenant, net-leased properties provide steady and predictable returns over time.

But wait, there’s more. Because tenants commit to long-term leases, there’s also lower re-leasing risk.

Finally, you can tailor these investments to your risk-reward expectations by choosing tenants with different credit profiles.

For example, some tenants are rated by national credit-rating agencies while other tenants have only their previous financial performance to recommend them. You can pick and choose among these investments.

Benefit 2: Preservation of Capital

As mentioned above, the financial markets are sometimes unpredictable, with many investors suffering major losses at times. With triple net lease investments, you ensure yourself a much better opportunity of avoiding this money-losing scenario and keeping your capital intact through all the uncertainty.

Benefit 3: Tax Deferment

This is a really great benefit. Via a 1031 or 1033 exchange, you can defer 100 percent of the capital gains tax from the sale of your net lease property. I’ll go in-depth about this subject later in the book because it should be an integral part of your overall financial strategy.

Benefit 4: Relief from Management Obligations

Many of my property-owning investors love this benefit the best. With no management obligations, they don’t have the constant hassle that comes with managing a property – time, money, maintenance worries, tenant management, and so forth. With a triple net lease investment, all these burdens are off your shoulders.

Benefit 5: Providing Estate Assets for Your Heirs

Triple net lease investments can be the “gifts that keep on giving.” With proper estate planning, you can pass them (and the income generated by them) onto your heirs upon your death. In fact, these investments have the potential to generate income for your heirs for years to come. One method of doing this is via the establishment of a living trust. I am not in the trust business, but I recommend that you investigate this subject further with a reputable legal professional.

Benefit 6: Flexibility

At this point, you may be thinking, “Will a net lease property be adaptable enough to fit my specific needs?” While I obviously don’t know your specific needs, I can tell you that these investments are highly flexible. They can meet the financial goals of an individual like yourself, as well as those of partnerships, large institutional investors like real estate investment trusts, life insurance companies, and pension funds.

Benefit 7: Pride of Ownership

This is a pretty subjective benefit, but it’s one that investors love most. That’s because many of them feel a great sense of pride in the properties they own through triple net lease investments. They can watch them blossom and grow like very profitable financial flowers.

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