You don’t know how many times I’ve heard something along these lines from fellow physicians, “I’d love to own a real estate investment property but I don’t want to be called in the middle of the night for plumbing issues. It’s too much of a hassle.”
If this resonates with you, then a great solution for you might be investing in something called a Triple Net Lease (NNN) property. To help me explain what that is, I’ve decided to write this post in more of a question-answer type format.
What is a Triple Net Lease (NNN)?
A triple net lease is a commercial property in which there is most commonly a single tenant and that tenant is responsible for taking care of any and all issues.
So they take care of “the three nets”:
Net #1 – Property Taxes
Net #2 – Insurance
Net #3 – Maintenance
That means that you as the owner will not get called to unclog a toilet in the middle of the night or deal with monthly utility bills. The tenant is responsible for all of that. Typically there isn’t rapid turnover, so you don’t have to worry about re-renting often and you won’t get called about tenant battles like one tenant playing his music too loud late at night. Hopefully, you’re seeing that it requires very little management.
Hopefully, you’re seeing that it requires very little management. Essentially all you have to do is basic bookkeeping, file tax returns every year, and make the big decisions like when you want to refinance, sell or exchange the property. This makes it very attractive for owners, particularly those that aren’t in the same location or state.
What Are the Typical Returns and Are There Any Risks?
Because these are considered steady, safer-type investments, returns typically are expected to run in the 5-9% annual return range.
Sounds amazing, right? However, just like in any investment there are risks. The main risk is that the single tenant vacates before the term is up or goes out of business. A good number of these leases are written for 20+ years with slight escalations in line with inflation. So you want to make sure you choose reputable companies in good locations that will be around a while.
What Are Some Examples of Triple Net Tenants?
Common triple net lease property examples are pharmacies (Walgreen’s, CVS), the Dollar Store, Gas Stations, Banks, etc.
How Much Capital Do I Need To Invest in a Triple Net Lease Property?
The difficulty with purchasing reputable triple net leases is that they can be relatively capital intensive, ie. expensive. There are smaller triple net leases that are very reasonable however it’s not uncommon to see the property a Walgreen’s sits on in a good location go for 4-5 million dollars plus.
Is There a Way To Get Involved With NNN leases With a Smaller Capital Investment and Possibly Less Risk?
There are funds out there that invest in NNN leases and diversify your risk by creating a portfolio of NNN leases. I like to think of it as a mutual fund that focuses on purchasing stock in NNN leases.
I know of one crowdfunding company in particular that specializes in NNN leases. It’s interestingly named, Rich Uncles. It’s founded by the chairman of the largest commercial real estate company in the country, CBRE. Apparently, he’s the “Rich Uncle” we all wish we had.
They have a fund or REIT that basically only invests in NNN leases. You don’t need to be an accredited investor, minimums are $500, and after a year, the investment can be liquid. Historically they’ve returned monthly dividend payouts around 7% with an expected annual return of 12% over 5 years. Again, though, returns aren’t guaranteed but they seem to choose very conservatively and don’t take on a huge amount of leverage. You can check them out here.
Overall, Triple Net Lease properties may be a very good option for physicians or anyone who wants to invest in real estate, but would rather not deal with the headaches of active management.
Does this sound appealing to anyone? Does anyone have experience with triple net leases? Would love to hear about it.