There is a myriad of investment strategies in real estate that are effective in creating true generational wealth. Triple-net leases are a lesser-known but excellent investment vehicle for investors because they generate steady passive income with very low risk. Triple-net leases come in a variety of options. However, today I want to talk specifically about investing in single-tenant triple-net leases with an investment-grade tenant.
For example…Think Walgreens, CVS, or Dollar General.
What You Need To Know Before You Invest In Triple-Net Leases
Before we dive into how you can benefit from investing in triple-net leases, let’s add a couple of key terms to your investing dictionary…
Triple-Net Lease (NNN): With a triple-net lease, also known as an “absolute” NNN lease, the tenant agrees to pay all property expenses, including property taxes, insurance, maintenance, repairs, utilities, etc., in addition to paying you monthly rent. If they don’t take care of ALL expenses, then it is not a triple-net lease.
Investment Grade Tenant: An investment grade tenant refers to the credit rating of the tenant. An investment grade tenant (or the entity that is guaranteeing the lease) will have a favorable credit rating (BBB- or higher) that lenders will be attracted to. The rating is directly correlated to the ability of the company to repay debt obligations and is given by rating organizations such as S&P or Moody. The higher the rating, the more attractive the tenant is to lenders.
These are two very important terms to know and understand especially when you’re just starting out on your journey into triple-net lease investing.
Top Ways You Benefit From Investing In Triple-Net Leases
Similar to most investment strategies within real estate, there are numerous advantages that come with investing in triple-net leases. For today, let’s stick to 3 reasons you can benefit from investing in NNN leases.
You hear the term “Mailbox Money” thrown around a lot as the ultimate goal of real estate investing. Whereas most investments don’t qualify, a true triple-net lease actually is mailbox money. When set up correctly, NNN leases are 100% passive and you receive a check every month. On top of this, you have zero managerial responsibilities, you don’t have to take any phone calls, and you don’t have to deal with the headaches that come with tenants, toilets, trash, and trouble. If any part of the property, such as the building itself, the parking lot, the HVAC, etc., is in need of maintenance or repairs, it is the tenant’s responsibility to fix it. It’s really an example of what people mean when they say “mailbox money”!
Another great advantage in addition to having no managerial responsibility and getting mailbox money is you have no liability. The tenant is not only required to have the building and their business insured but to cover you as well as an additional insured. Since the tenant pays for this insurance, this is a huge win for you as this is a major expense associated with real estate investing. Even though it’s not required by lenders to have your own insurance policy on these assets, insurance for your entity or holding company is a personal choice. I always advise consulting with your attorney to make sure you are insured to your comfort level.
The last big advantage in our conversation today is the ability of these assets to qualify for non-recourse debt. In case you are not aware of this term, non-recourse debt is where the bank’s only recourse is the asset itself and you are not required to be a personal guarantor. As a result, this gives you a favorable balance sheet which allows you to qualify for further leverage to acquire more assets!
You can see why the tenant is such an important part of the NNN lease investment strategy. An investment-grade tenant is highly attractive to a non-recourse lender. There are a few major reasons for this but the main one being if the location of your commercial real estate has issues, the lease wouldn’t be in danger of default. A non-recourse lender wants to know their investment is very secure. What could be more secure than the lease being paid and guaranteed by a national corporation with an outstanding credit rating acting as the guarantor? The bank is happy and you are happier!
Utilizing Passive Investment Strategies To Build Wealth
Investing in triple-net leases is just one of many diversified investment strategies you can utilize within real estate. It’s completely passive meaning you benefit from steady monthly cash flow (i.e. mailbox money) without having any liability or managerial responsibilities.
If you’re searching for an effective passive investment strategy, I strongly recommend adding triple-net leases (NNN) to your portfolio. It’s a powerful way to diversify your income streams, build wealth, and establish stronger financial security that can last for generations.
To hear more about how you can benefit from investing in NNN leases or the myriad of investment strategies available to you, Click Here to schedule your free consultation call with me today!