With bank returns at 1%, it is difficult to get ahead without risking our money on some speculative investment. It would be nice to find a secure investment that would pay us a 6% to 8% return with little risk or effort.
There is one type of real estate investment that offers a stable, safe return on investment with no ownership responsibilities.
Buying a triple net lease property is like buying a corporate, Treasury or municipal bond. The investment is secured by a credit tenant over a long lease term, with typical returns ranging from 6% to 8%. Unlike other types of real estate investments, the owner has no responsibilities.
Invest in Brand Name Tenants
Triple net investments are liquid, trading on an active national market. Lease terms are more than 10 years in length and can extend to more than 50 years including options. Best of all, lease payments are guaranteed by brand name tenants, including:
Drug stores – CVS, Walgreens, Rite Aid
Fast-food restaurants – KFC, Taco Bell, McDonalds, Wendy’s
Auto supply stores – AutoZone, Advanced Auto Parts, Firestone, Pep Boys, Jiffy-Lube
These retailers demand properties with good visibility and site identity, in prime retail locations.
In a triple net lease, the tenant is responsible for paying all real estate taxes, building insurance, and maintenance (the three ‘Nets’). The investor has no owner responsibility during the lease term.
Make sure your cap rate reflects your risk
Cap rates for triple net lease properties are lower than most other types of real estate due to their relative safety. But, there are still a few risk factors that you should be aware of before you invest.
First, it is important to research the credit rating of the tenant. Investors prefer properties leased to highly-rated credit tenants.
Second, there is vacancy risk. Triple net lease properties are typically leased to a single tenant. The property will be 100% vacant if the tenant leaves at the end of its lease term. Long lease terms in excess of 10 years are preferred in the market.
Property location is also important. A tenant in a strong location is more likely to renew its lease. It will also be easier to lease up vacant space in a prime location.
Finally, there is the risk that high inflation during the term of the lease will dilute the rate of return. Triple net leases can be flat over the lease term, or have built-in rent increases or ‘bumps’. Rent bumps help mitigate the inflation risk of long term leases.
Triple net lease investments are an excellent alternative to 1% bank returns. Please feel free to contact me if you would like to learn more about triple net lease investing.