Triple net properties allow the investor great cash flow opportunities with minimal to no management, perfect for investors who want a hands-off investment.
They usually will have built-in bumps in rent/income every five years, allowing for protection against inflation. Many will also have options to renew the leases.
For clarification purposes, you do not operate the business. You own the building and the land the tenant occupies and out of which it runs its business. The tenant covers the maintenance, the property taxes, the insurance AND utilities. Every month, the tenant cuts you a check for one-twelfth of the year's rent.
The magical factor for most investors is the Capitalization Rate, more commonly referred to as Cap Rate. The formula is as follows:
Cap Rate = Net Operating Income / Sales Price
Net Operating Income is the amount of money the lessee pays to the investor per year.
A Jack in the Box in northern CA is listed for $1.8M. The tenant, Jack in the Box, Inc., pays the owner of the building $117,612 per year. The cap rate is 6.53%.
There are several factors that dictate cap rate and price. There are six years remaining on the lease, which will have an upward influence on risk and therefore, cap rate.
The lease has a corporate guaranty through Jack-in-The-Box, Inc. This means that it isn't a franchisee with just a handful of restaurants upon whom you will be relying on for your return on investment, but a massive corporation with billions in annual revenue. As you can imagine, the security this brings will have a downward influence on cap rate, which when applied through the formula above, will increase the sales price.
There are other factors with cap rate considerations. The aforementioned are just the most easily quantifiable. Please contact me to discuss what other components come into play.
These properties will require AT LEAST a 30% down payment (usually closer to 35%). The lender tends to focus on the strength of the investment and the quality of the cash flow, though a buyer will need to have a credit score in the mid- 600 range. If you do not have a lender who specializes in commercial investment real estate, please contact me for a list of qualified referrals.
Over the term of the lease, the tenant will pay down your loan and you will enjoy further equity building as a result.
There is a WIDE array of companies who do business through Triple Net Leases. These can be found across the country, which means a greater selection. Because of the lack of management necessary with these properties, you can go to where the best deals are. You are not forced to stay local.
Higher credit tenants or longer lease terms (lower risk) lead to lower cap rates. Higher risk, conversely, leads to higher returns. There is an inverse relationship between cap rates and sales prices.