What to look for when buying a NNN retail investment?
If you’re looking to add new investment types to your portfolio, one option you should consider involves investing in triple net properties. Triple net properties are among the most appealing real estate investments because they come with few responsibilities, long-term passive income, and low risk. While there are many types of buildings you can invest in with this strategy, a retail investment may be the best option. Before you make a triple net retail investment, you should know what to look out for.
What are NNN Investments?
Triple net investments (NNN) are part of a commercial real estate strategy that assigns the responsibility of rent expenses to the tenant. These expenses include everything from building insurance and property taxes to common area maintenance.
While these investments can be used with any commercial property, the retail sector is a particular favorite of investors who take part in this strategy. To know exactly how a triple net investment works, you might want to understand what the other types of net leases are. The primary net leases include:
- Single net – The tenant is wholly responsible for paying property taxes and base rent
- Double net – The tenant is wholly responsible for paying property taxes, base rent, and building insurance
- Triple net – The tenant is wholly responsible for paying property taxes, base rent, building insurance, and maintenance in common areas
- Absolute net – The tenant must take on all responsibilities, which include structural building maintenance
Know Your Worth and Creditworthiness
Before you look at NNN retail properties, you should have a clear understanding of your worth and creditworthiness. Determine if your net worth is high enough for you to be considered an accredited investor. Triple net lease investors are required to have $1 million or higher of net worth before they can be authorized to make a purchase. This net worth excludes the value of your primary residence.
If you don’t have a $1 million or higher net worth, you could still obtain accreditation with an annual income that exceeds $200,000. In the event that you don’t match either of these requirements, you could invest through a real estate investment trust (REIT) that focuses on these properties.
As for creditworthiness, the tenant will take on the majority of the financial responsibilities, which is why you should find tenants who have high credit scores. Corporate tenants have credit ratings that are set by Fitch, Standard and Poor’s, and Moody’s. If a corporate tenant has a credit score of BBB or higher, the rating will be considered “investment grade”.
Consider the Location
Just like any form of real estate, the property’s location is an important aspect of identifying how effective an investment will be. It’s easier to find tenants if your building is in an appealing location. When assessing a property’s location, consider:
- Accessibility – Properties shouldn’t have one-way traffic, curb cuts, or medians
- Visibility – The property must have high visibility with passing traffic
- Population density – Identifying the population density for the surrounding area makes it easier to estimate how much traffic should be brought in on a daily basis
- Traffic – Consider the location’s evening and daytime traffic
- Demographics – You should know who works and lives in the area surrounding your property to determine which tenants and businesses would be most suitable to the location
Make sure that you also consider the building’s form. If you’re purchasing a triple net property that’s able to house a brewery, you may need to perform extensive remodeling to allow a tenant from a completely separate industry to move in.
Take Property Debt into Account
Properties can have long-term debt that’s unable to be paid off without incurring high penalties. An example of this type of debt involves commercial mortgage-backed securities. These penalties are usually strict and will include clauses that require any new borrowers to take on full responsibility to repay the debt. Before making this investment, it’s highly recommended that you evaluate the terms of this debt, the required equity, and the potential fees that must be paid.
NNN retail investments have the potential to provide long-term returns that are high and consistent. However, you must invest in the right property if you want the deal to be successful. To do so, conduct comprehensive research and make sure your financial situation is sound.