Triple Net Lease Properties: Pros And Cons: Fill & Download for Free

I’m assuming you mean switching from RESIDENTIAL real estate to COMMERCIAL real estate.There are pros and cons to both. The primary advantages of commercial real estate is that most commercial leases, at least in the United States, are what are commonly called “triple net” leases. That means the tenant is generally responsible for all of the expenses related to the property, including repairs and maintenance and property taxes. As a landlord, having one or more triple net tenants means that you just collect your rent every month and the tenant deals with any surprise expenses or tax increases. Of course, a certain amount of tenant oversight may be required to ensure that they are properly maintaining your asset (the building or unit they are leasing.The downside of commercial investing is that the commercial real estate market is much more cyclical than the residential market. When times are good, it may be easy to lease your commercial space. But during downturns in the economy, your space may sit vacant for months or years. There may be no market for it at any price. That’s not true in the residential market, because people always need a place to live, regardless what the economy is doing. During bad economic times, rents may fall (especially at the high end) and vacancies may rise a bit, but you can pretty much always rent residential units if the price is right. As a result, residential investing tends to have a more stable and predictable income over the long term.I wouldn’t say one is better than the other, they’re just different. If you are well-capitalized and able to ride out the periods when your commercial property is (or might be) vacant, you can do very well with commercial property. But if you absolutely, positively need that rent money every month, you may want to stick with residential properties.

The economic viability of the property is entirely dependent on the tenant meeting their lease obligations. If you have a reliable tenant, then all is well. But if the tenant defaults, then the property's revenue goes to zero while many of the expenses continue...until you can replace the tenant. Replacing a commercial tenant is often a time-consuming (months or years) and costly (Tenant Improvements, Leasing Commissions, Abated Rent). There are pros and cons to single tenant properties.

NNN properties are very appealing from a commercial investment standpoint due to the many advantages this type of deal can offer to both property owners and tenants.Guaranteed, Long-Term Occupancy: A NNN lease is structured to offer long-term tenant occupancy (which is often upwards of 20 years), which is beneficial to an investor because it removes the risk and losses of a property sitting vacant between tenants.Low-Risk Investment: In a triple net lease, the tenant absorbs all the costs associated with the property, from taxes and insurance to regular upkeep costs.Reliable Income Stream: A NNN lease helps secure a reliable income stream from your investment property. Deals are structured to include a consistent amount of rent each month, over an extended period, and passing along all the property expenses to the tenant helps protect your investment from unknowns and surprise costs.Equity: Many investors add triple net lease properties to their portfolios as a conservative, low-risk strategy to create more equity. Often, investors will hang on to a triple net property and use it as an equity builder for at least 5 years, and then sell the property when the market peaks, population spikes, or when they’re ready to use that equity in their next investment.Little to No Landlord Duties: With a triple net lease in place, you’re not tied to the property with your time or money as a landlord. Low-touch management frees up your time for other ventures and ensures you’re not locked into landlord duties for the property.Pros of a Triple Net Lease-TenantsThough tenants in a NNN lease accept more financial responsibility for the property than in other lease types, triple net leases are also quite advantageous for tenants in numerous ways.Lasting Business Location and Footprint: A long-term NNN lease provides tenants with a great opportunity to create a recognizable and long-lasting location for their business.Location: Triple net lease properties typically offer a great, accessible location for a business. These properties will usually be proximal to other popular businesses, which helps a tenant gain traffic and exposure to customers who frequent other businesses in the area.Tax Benefits: In a triple net lease, the tenant is responsible for property taxes. However, they can build these costs into their business operating expenses to achieve tax benefits for their business.Cons of a Triple Net Lease-Property OwnersWhile an NNN lease can offer an array of great advantages for investors and tenants both, there are some limitations inherent in these deals that keen investors will want to keep in mind when considering a NNN lease.Earning Caps: While a NNN lease provides a consistent revenue stream each year on your investment, that amount is typically fixed for the term of the lease. This means you can’t increase the rent if property values in your area spike which can limit your earning potential in times of growth.Vacancy Risks and Rollover Costs: Though triple net leases are long-term, there is the risk of a tenant defaulting which can result in losses as you try to fill the vacancy. While you can limit this risk by vetting tenants and their businesses thoroughly, this is always an inherent risk.Cons of a Triple Net Lease-TenantsTenants should be aware of NNN lease limitations that could impact their success in a location, including:Assuming Property Expenses: In a triple net lease, the tenant will be responsible for the majority of the expenses that go into the operation and upkeep of their business location. Tenants must have a strong credit profile to gain an NNN lease, but they should also be prepared to finance the expenses of building operation, in addition to the other expenses that go into running their particular business.Tax Liabilities: Because the tenant is responsible for annual property taxes in a triple net lease, this also means that they will be prone to all the liabilities of taxes as well, including fines and penalties for late or incorrect tax remittance.Identify Your Triple Net Lease Pros and Cons With a Net Lease AdvisorFrequently, when an investor comes in on a triple net property, there is already a tenant agreement in place which outlines all the specifics of the deal, complete with clauses that outline exact financial responsibilities of both the tenant and the property owner.By purchasing a property with an existing triple net lease in place, you inherit the terms of that deal as they’re outlined. This means that you should pay very close attention to every detail of the existing lease before deciding to purchase the property, so that you know ahead of time if you will be responsible for any insurance premiums or major structural repair costs (which are often distributed between landlord and tenant or are the responsibility of the property owner). Working with an established net-lease advisor can help you navigate triple net lease terms and choose the properties that will bring you the most benefit.