Gets overlooked in the universe of real estate investing. When evaluating potential property, calculating the expected return is easy but understanding the associated risk is difficult. What is a real estate investor with lower tolerance for risk to do? Sands Investment Group will best guide you about NNN investments.
Single Tenant Net Lease (Stnl)
Single tenant net lease properties are a good option for investors doing 1031 exchange, who no longer want the day to day burden of being a landlord. STNL properties may be great investments but they are not without risk.
STNL properties are freestanding, specialist buildings leased to household name brands under long-term triple net leases . Single tenant net lease investments are referred to as NNN properties. The NNN actually refers to the nature of the triple net lease, which requires the tenants to pay insurance , property taxes and maintenance on the property.
STNL investments are appealing as they require limited ongoing landlord responsibilities and provide the owner with the long-term, predictable stream of rental payments.
Risk 1: Vacancy
STNL properties are 100% occupied or hundred percent vacant . With only one tenant, if the company goes out of business or leaves, the rent goes to zero and the owner is responsible for the insurance, taxes and maintenance.
Risk 2: Location Matters
Don’t get thrown away with a huge profile tenant or above average returns, a property promises to generate. STNL properties are real estate investments. A vacant building that was previously to tractor supply or dollar general is difficult to re- lease at the same rent if it’s located in truth.
Even if property is located in a large Metropolitan area, you still have to pay attention to location. How much is the next bidder willing to pay eight years from now for an Applebee’s in a marginal neighborhood that has only two years left on the lease?
On the other extreme assuming an STNL has a really good location, but the tenant for whatever reason doesn’t make it decides not to renew the lease. Even if other tenants are in line to lease the property, former Wendy’s or branch bank is not considered generic real estate. This highlights the next status for next risk.
Risk 3:Specialized Buildings
STNL properties are designed and built according to requirements of a specific tenant. Re- leasing an STNL property to different types of tenants can take a long time and cost the landlord a significant amount of money.
The more specialised the building is, the greater is the amount the next tenant will expect the landlord to contribute in upfront tenant improvements. Even if the building is in an A+ location, marketing and lease negotiations easily mean no rent for 6 to 12 months. This can be challenging for an absentee investor who is residing far away from the property and does not have the capital necessary to attract the best tenants.
For these reasons, investors who consider a NNN property must be vigilant in understanding a tenant stability to pay the rent. STNL buyers particularly those in 1031 exchange 45 days identification period do not pay much attention to the lessee on the hope for paying rent. This is the major risk of which NNN investors should be aware.