Broker believes information to be accurate, but
does not guarantee accuracy and will not be held responsible for any
errors, omissions, or misleading information. Copyright 2007 Louis A.
Jenings Jr. d.b.a. C S I
What is a Triple net (NNN) leased Investment and why do I want to consider it for my financial portfolio?Call Louis or Renae Jennings at 407-592-2315 Investment real estate is real estate that you own or lease. Most real estate investors desire to lease their investment real estate to a tenant to generate income to help pay for the expenses associated with owning the real estate. Some typical expenses are the following: Sales taxes on the rental income When a property is leased to a tenant all of the above expenses are typically negotiated as to who will be responsible for the payments. (Either the landlord or the tenant) Most net leased investments require that the tenant be responsible for all of the expenses except for the roof and the outside building walls. A triple net leased investment requires that the owner receives his base rent (Explained later) net of any and all expenses associated with the leased property. A double net would make the owner responsible for the roof and or outside building walls. There are a lot of variations, but the best of the best in a triple net leased investment also known and referred to as NNN. In addition to the base rent, most investors ask for rent increases. These increases are adjusted in accordance with the negotiated terms of the lease contract. A small business tenant will typically pay a 5% annual rent increase. A large national franchise chain like CVS drug stores or Walgreen's may have much smaller increases and they may adjust every 5 to 10 years or more. The reason for this is the risk factor. A small business owner's assets and net worth are also small when compared to a giant franchisor like CVS or Walgreen's. (Home Depot is another giant) Because the lease is guaranteed by the franchisor, and not the small business owner, the investment is much more secure. The base rent is an annual lease charge per square foot to lease the real estate. In addition to the base rent, a triple net lease charges a common area maintenance fee to cover the above listed expenses. This fee is usually calculated on a per foot basis per year. An example would be a base rent of $40 and a CAM charge of $5. If you have a 1,000 square foot building then your annual rent will be $45,000 and the monthly rent will be $3,750. The tenant would then also be charged the state sales tax on the monthly rental income, in our case it will be 7% or $262.50 for a total rent check due from the tenant in the amount of $4,012.50. The above is typical of tenants in a shopping center or small strip mall. Another scenario is leasing to a single tenant like a CVS or a Taco Bell or a Auto Zone auto parts franchisor. In a lease like this, the landlord will typically require a fixed annual rent that is paid monthly and the lease will require the tenant to pay for all expenses directly to the parties that the money is owed. In some cases this will include paying the state sales tax, in other cases, the state sales tax will be paid to the landlord as part of the rent and the landlord will pay it to the state. I prefer the tenant paying all expenses including the state sale tax because it minimizes the bookkeeping and you have only one deposit to make. If you want, this can be done with the tenant's bank making a ACH deposit directly into your account, thus minimizing your work even more. The real beauty of investment real estate is the fact that the land appreciates in value and the building depreciates thus allowing you to reduce your taxable income with the depreciation and grow your wealth at the same time. (When you sell, you will have to recapture the depreciation, but that is another subject that can be answered by your accountant) When you buy a net leased investment, the annual net income from the rent is typically referred to as "net operating income" or "NOI." If you bought a $1,000,000 property that paid the owner an NOI of $60,000, then your capitol rate of return would be 6%. This is often referred to as the "Cap Rate" or "CAP." Now we will look at the Beauty Queen and why you should be investing in real estate. Remember the annual rent increases? Not only does your property appreciate in value but your rental income increases also. This is a win win situation for most investors. There are some triple net leases that are so secure that the tenant does not pay an rental increase. But you still own the real estate and the tenant is paying for all of the expenses and the tenant is also paying you a desirable cap rate. I like these properties for estate planning, something to leave for the children or grandchildren. They can have lease terms of 20 or more years, but the negotiated cap rate is historically a sound investment for the long term investment. Finally, in ending I want you to be aware that all kinds of real estate can be net leased investment. We specialize in commercial real estate, especially retail net leased investment. Other example of typical net leased investments are warehouse industrial properties and also office buildings. Residential building (houses and apartments) are also good sources of rental income, but the lease terms are typically shorter and the risk is higher. Hotels and Motels also qualify, but they are more owner operated and time consuming. We use a Microsoft Excel spread sheet that calculates and shows the returns of both real estate appreciation and also rent increases. It is a simple computer model but it helps you to better understand how your investment will grow over a period of time. And when the lease is up guess who owns the real estate? You. You always did, your tenant made the payments and you (The landlord) benefited with the income and the appreciation. Another thing you might want to research are the 1031 tax exchange rules of the IRS. You can get the publication from the IRS by downloading form 455 or you can see what we have by visiting the following link on our World Wide Web Site http://www.renaejennings.com/Navagation/1031-tax-exchange-go.htm
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