Articles

Net-Lease Investments

By Bob Strzalka, CCIM

With a lot of investors looking for a fixed return better than the readily available offerings in Treasuries, CDs and savings accounts, where can one look? A ready answer would be in the world of “Net Lease Investments”, also referred to as NNN or triple-net properties.

A net-leased property consists of the real estate which is owned by the investor and is leased to a “quality” tenant. The tenant makes pre-determined lease payments to the owner and at the same time takes care of all maintenance of the property and handles all related expenses such as real estate taxes, insurance, utilities, etc. The owner takes the lease payments and pays the debt service, if any, as well as any Federal and State income taxes. Whatever is left is his to spend.

Features:

  • The tenant would be a quality and well-known entity such as Walgreens, CVS, Advance Auto, Applebees, Wawa, McDonalds, etc. The choice would be up to the investor. These tenants are typically rated by agencies such as Moodys and S&P.
  • The property comes with the construction completed and the tenant in place. Essentially, it is a turn-key purchase. The lease has been signed and all is “ready to go.”
  • Return (capitalization rate) would range from 5% to 9% or higher. It is possible to finance these properties which would increase your return since the interest on the loan would likely be lower than the rental return.
  • Since this is real estate, you will be entitled to deductions such as interest and depreciation. I have seen cases where the entire income is sheltered for the first few years. When sold, the gain will be taxed at capital gains rates which at the moment are lower than most investors tax bracket. For example if your tax bracket is 34%, you have the benefit or deferring some of your tax which would otherwise be at this higher rate and when you sell your tax liability on the gain would be at 15% to 25%.
  • The property could be anywhere in the country. Since the tenant is taking care of everything, it shouldn’t matter where the property is located. If you travel somewhere regularly, a visit to the property might qualify as a deductible expense.
  • Minimum investment requirement is about $300,000.

Let me give an example of how this might play out. Suppose the buyer is 40 years old and has an appropriate down payment. He can purchase a net-lease property with a quality tenant and a 25 year lease. If we acquire a 25 year loan the investor will have a nice cash flow each year while he is paying down the mortgage balance. At the end of the lease, the loan is paid off and he has a nice nest egg equal to the value of the property at that time. He would then have the choice of continuing to collect the rent with no mortgage payment (a very nice number) or he could elect to sell the property and receive a very large cash payout. Not bad at 65!

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