Companies that cannot afford to build or buy business space often rent one under lease rate agreement. There are three main types of commercial leases and are computed on two bases, either gross or net. Commercial lease types include the single net lease, double net lease, and triple net lease. However, if you own a property and looking to turn your asset into an investment vehicle, a triple net lease is your best option. This is because the tenant assumes all the responsibility for paying insurance, maintenance, and real estate taxes.
This type of commercial lease has become a stable investment tool for investors looking to achieve a steady stream of income with relatively low risk and minimal management responsibilities. Typically, triple net investment is offered in a set of three or more prime commercial spaces that are entirely leased by a single, long-term tenant with steady cash flow.
On top of stable income, investors get to enjoy attractive financing, long-term lease to a quality tenant as well as tax advantages, which allows investors to defer capital gains through 1031 exchange investment. Triple lease properties are however not risk-proof investments as they are exposed to a wide range of risks, even those with good credit ratings. Unlike the typical real estate investment, commercial lease property demands a high level of understanding. Here are four crucial things you need to keep in mind before investing.
Who’s your tenant?
Understanding your tenant is the first thing you as an investor should be keen on. It’s an important aspect of risk assessment and quality determination concerning the financial and business model status of the tenant. Some of the criteria to use when assessing the quality of your tenant may include operating margins, market penetration, debt to equity ratios, management and the general performance of their industry sector.
When leasing your property out, you are basically financing the tenant’s business by providing capital inform of an asset. This means that their success rate has a direct impact on the success of your investment. Nnn leases are particularly vulnerable because they depend on only one larger tenant. If the tenant defaults on their lease rate it means that your stream of income ceases altogether. Be sure to conduct a comprehensive background check on the tenant to understand the viability of their business and any future liabilities.
State of the property
Property condition plays an important role in determining lease rate. You’ll need to revise the property’s condition if the property has any improvements. Can other tenants use it with little or no conversion cost? Or is it designed for special use? If your current tenant has heavily invested in making improvements, then they are more likely to renew their lease.
Location is a critical element in real estate investments. It’s also one of the main factors tenants consider when seeking to rent office spaces. Although a tenant may be satisfied with the location of your property, times change, and they may no longer find the location ideal for their business.
A tenant will renew the lease if the location continues to meet their products demand. For a retail business, the location has to have ample traffic. Other factors tenants look at in a location include population density, purchasing power, demographics, median income and area’s employment rate. A poor location will adversely affect your ability to attract new and long-term tenants, eating into your profits.
Finally, when entering into a lease agreement, be sure to read and understand the contract in its entirety. This is because not every triple net lease property exempt a landlord from certain duties like roof maintenance, snow removal, and parking lot remodeling. Read and scrutinize the lease contract, understand the lease rate, your responsibility as a tenant as well as your landlord’s responsibility.