NNN (Triple-Net) Properties are an investment tool for people seeking to break into the real estate industry and earn passive income. They are typically low-risk and don’t require elaborate expertise or real estate experience.
But what makes Triple-Net properties suitable for long-term income prospects? A significant reason is the consistent revenue you can expect from it. This is especially so when considering single-tenant NNN properties for sale. In the arrangement, the tenant gets to pay his/her monthly rent, as well as most of the operational cost as agreed upon in the contract.
However, the asset type does come with its pitfalls – as you might expect with the property market industry. Investors cannot get a uniform positive prospect, as not every NNN property yields the optimum returns. Thankfully, below are the key factors to consider to ensure you get the most out of your long-term NNN property investments:
The Property Location
In the real estate industry, location is everything: it largely determines its current selling value and what it will be in the future. The factor holds with NNN properties for sale, and it goes further to determine how lucrative the investment would be in the long run.
When on the market to buy NNN for sale, there are two location aspects you’d need to consider: the geographic property location and its physical location.
Geographic Property Location
This is the property’s state about the surrounding geographical area. It is the property’s location relative to its city, state, and population. Typically, NNN properties whose geographic location features a medium-to-high city development rate and population growth tend to yield a much better return.
If more people migrate into an area, there would be more demand for living space, which immediately allows you to get more from any NNN property you might have there.
Furthermore, geographic location is essential as it drives economic growth. A high development rate could lead to better employment rates and people with more substantial buying power, which could positively affect your NNN property turnover.
Physical Property Location
The physical property location is equally important. It focuses more on the property’s discrete position relative to people: it answers the question “how accessible?” for potential buyers and tenants alike. For instance, corner locations typically have excellent accessibility, and properties located around them would enjoy a boost in value as a result. Also, areas with anchor features such as a nearby business hub would benefit from more robust traffic and attract people.
For investors seeking out an NNN property, it could be rather convenient to find a tenant for the property as some of them come with an occupying tenant. Most tenancy agreements favor a long-term plan, with a typical 10 to 25-year range. However, you must note that having the right tenant is more important than having any tenant at all, at least from the yield standpoint.
One crucial area that might help you is the tenant’s history in the property’s geographical location. You must ascertain that the potential tenant promptly keeps up rent, insurance, and tax payments.
Also, they must have a clean track record in the property’s area if they’ve conducted their business there in the past. For occupying tenants, you’d need to be sure if they’ve got the excellent longevity character to keep yielding returns after you’ve taken over the property.
Generally, older NNN tenants with longer and cleaner track records are suitable for your investment’s long-term security. Established brands such as Walmart and CVS are sure to pull in the yields on your NNN property investments faster.
1031 Funds is a real estate legal term used to describe the proceeds from a property’s sale, on which capital taxes get deferred when the buyer uses the funds to pay for another property. It got its name from the US Internal Revenue Code’s “Section 1031”.
It means that you could use 1031 Funds to acquire NNN properties for sale and benefit from the accompanying capital tax deferral. However, you must bear in mind that there is a timeline and period around using 1031 funds. The stipulation is that a buyer has 45 days to pick out a new property they like to buy with 1031 funds. This must be after they have sold the old one.
An additional 180 days after the old property’s sale is set to complete the selected property with the funds. This is the “Exchange Period,” and buyers must do due diligence and close the deal within the period.
Therefore, it becomes imperative for you to meet with a real estate attorney to ascertain whether the customary property review and purchase process can go through the exchange period.
Right of First Refusal
Right of First Refusal is one major factor buyers need to be wary of when purchasing Triple-Net properties. It is the right that the original tenant (or property developer) has to acquire the property before another entity.
Right of First Refusal (ROFR) can be a significant issue for investors seeking to buy the property with 1031 Funds. Should the ROFR’s holder exercise the right before you could close the deal on the property, it means that you’d have to find another property. You would have eaten into the exchange period and ran out of time to find an alternative property before the period expires.
Therefore, you must check with the property seller to see if there is a ROFR in place for the concerned property. It should be easier with an NNN for sale by owner listings than a third-party-managed sale. Also, you may need to review the property’s agreement to confirm that a Right-of-First-Refusal doesn’t exist for it.
When a ROFR is in place, ensure to collect a waiver from its holder before proceeding with the purchase process. Observing precautions around ROFR protects you from losing non-refundable funds in the middle of a botched NNN property purchase.
NNN properties for sale are attractive propositions, at least for the regular income streams they promise. They seem to be the perfect real estate investment, as they are low-risk and high-yielding without technicalities. However, NNN property investments aren’t without pitfalls: which you should expect, as no investment is without its flaws.
The factors mentioned above would guide potential buyers and enable them to avoid the pitfalls around making a Triple Net property purchase. They also give insights to allow you to make the most of your investment in the longer term.