As you’ve probably heard, triple-net (NNN) commercial properties are considered a highly lucrative long-term investment in the real estate world presently.
They provide attractive benefits to property landlords such as a passive and steady income stream, tax benefits, long-term tenancy period, few landlord responsibilities, and others.
With these unique advantages, many people are increasingly becoming involved in the market and are searching for well-placed properties with potential.
However, not all NNN assets provide the same financial potential. If you’re thinking about investing in NNN real estate, you need to be aware of all the subtleties so you can pick the best option for your portfolio and overall financial goals.
Consider the following do’s and don’ts before you buy NNN real estate:
1) Pay Attention to the Building’s Placement
The importance of building location in commercial real estate cannot be over-emphasized.
The profit margin of a McDonald’s outlet located inside a city won’t be the same as another branch situated in a small town.
No investor wants to be stuck with a building that isn’t generating profits. So, you need to think carefully about your potential building’s placement.
Consider searching for the best triple-net investments in popular areas. An ideal NNN real estate building location would be near accessible roads, nearby marketplaces, and other essential amenities.
2) Determine the Lease Agreement’s Strength
When you buy NNN real estate property, you are purchasing the lease in addition to the property and land.
If the building is vacant, its value would be lower. Conversely, if the structure is occupied, its value increases as the quality of the tenants improves.
Sometimes, investors purchase NNN properties with the assumption that it’s a pure triple-net lease, when in fact, it’s a modified triple-net or double-net.
To avoid this, it is critical that you thoroughly examine the lease before beginning any inspections, market research, or other due diligence activities.
3) Examine the Tenant’s Creditworthiness
It is not uncommon to buy a triple-net property with an active lease in place. However, before making payment for a commercial real estate building, you need to examine the tenant’s creditworthiness first.
The property’s value can be influenced strongly by the occupant’s capabilities.
Since NNN leases require occupants to handle almost all financial burdens, the tenant must cover rent fees, property taxes, utility costs, and maintenance charges.
To determine a client’s creditworthiness, you can consider using a standard rating system like Standard and Poor’s (S&P).
4) Get Your Financing in Order
When browsing triple-net real estate listings, any potential property owner can see that the prices tend to be on the high side.
As a result, it is essential to ensure that your finances to purchase an attractive property are in place. To do this, you would need to create a budget plan.
While mapping out your budget plan, you also have to determine whether you need a real estate loan or mortgage.
Many financial institutions give mortgages to startups that present attractive business plans showing how they will spend the loan and make profits to repay it.
5) Hire an Experienced Professional
Before you buy NNN real estate, it’s usually beneficial to seek professional advice or guidance from someone who has been in the market for a long time.
A real estate agent can throw more light on real estate terminologies and help you source the best NNN deals available.
Additionally, if you have any questions or issues regarding any property, the realtor can enlighten you adequately.
Although you can search for properties alone, having an expert’s assistance can prevent possible future problems.
6) Educate Yourself
Owning a high-value commercial property has benefits and risks involved. As an interested buyer, you need to be aware of these advantages and drawbacks.
Also, there are many real estate terms you’re going to hear once the buying process begins. However, before then, you can consider conducting online searches to familiarize yourself with the terminologies associated with your investment line.
7) Be Wary of Inflated Lease Rates
Many landlords would be delighted to have a renter who pays a higher rent than the market rate for their long-term lease real estate. However, this situation could be a problem for you.
If a tenant pays more for rent than the actual market price, the sale price will be higher than it should be.
A triple-net property’s sale price is determined by how much cash flow it generates, and if this number is inflated, you’ll wind up paying far more than you should.
Furthermore, when the tenant’s lease expires, they may choose to move to another property. Worse, they may go out of business, leaving you with a property that can only be profitable if the tenant pays a greater rent than the market rate.
8) Find Out the Property’s Potential Profit
Before purchasing a building with a long-term commercial lease, you need to evaluate its earning potential.
Many potential NNN real estate buyers desire to own high-value properties like McDonald’s or Walgreens because of their patronage level and projected future earning capability.
Buying a real estate property only to discover it can’t generate enough profit would greatly distress any landlord.
So to avoid this, you need to do your due diligence by calculating the possible return on investment using various mathematical formulas.
9) Don’t Ignore Established Regulations
Most cities and regions usually have real estate laws and regulations governing the conduct of commercial businesses in the area.
Before you buy NNN real estate, it is necessary to acquaint yourself with the rules guiding the structure’s operations that catch your interest.
You can consider conducting some research to find out the stipulated real estate laws relevant to your property or hiring a professional who can explain the details to you.
10) Don’t Forget to Examine the Building
Conducting a building inspection is another vital factor involved in NNN real estate building acquisitions.
Before you make payment for any commercial property, you should inspect it to check for depreciation.
Examining the property will let you know if you need to make repairs on it or change your lease policy so that the tenant can handle maintenance costs.