The deeper your knowledge of your real estate investing strategy, the better equipped you are to maximize your earnings. For folks interested in the potential of income-earning rental properties, how you manage your lease can have a huge impact on your portfolio.
Explore the potential triple net leases in commercial real estate have on your real estate investment strategies with Christina.
How Can Leasing Options Help You Get a Better Return?
Rental properties are income-earning real estate assets that generate their income through the collection of rent paid from the property’s tenant every month. Rental properties can provide investors with a reliable stream of income; consistent rental payments on a monthly basis tap investors into an uncommonly strong, positive cash flow asset.
Rental properties have reliable positive cash flow because they necessarily must generate rental income that exceeds operating expenses. Otherwise, the landlord wouldn’t be able to make a profit off their property.
The strength of a rental property’s cash flow lies in the negotiated lease. By drafting the property’s lease, rental property owners have more control over the potential income their property can produce.
Utilizing the strength of a rental property’s lease for better cash flow is more than a matter of gauging the rental market in the property’s location. Certain property types, like commercial real estate, have different kinds of leases that create a more favorable arrangement for both the property owner and the tenant.
Familiarizing yourself with specialized leases like triple net leases gives investors the opportunity to generate stronger cash flow and maximize the potential of the commercial rental property through the negotiated lease.
What Is a NNN Lease?
Commercial leasing opportunities provide landlords and tenants options to negotiate an arrangement that suits both parties’ interests. A triple net lease, or an NNN lease, is a lease in which the tenant agrees to take on the operating expenses associated with the property in their rent.
Managing a commercial space is quite different from residential properties; commercial properties are held to different standards than residential properties. Businesses are functionally different kinds of tenants compared to folks renting a room in which to live.
As businesses rent commercial space for the purpose of conducting their business to earn a profit, they have the means of negotiating a more nuanced lease. In fact, it may be in their interest to take on more responsibility for the property in order to have a relatively higher degree of control over their business operations. Landlords have more opportunities to come to an agreeable compromise when their tenant is an income-earning business.
How Does a Triple Net Lease Work?
A triple net lease provides the tenant and landlord with a more exacting rental payment each month. Triple net leases include a property’s operating expenses in the rent. The tenant pays for expenses directly instead of the property owner.
Alternatively, gross leases are leases wherein landlords pay operating expenses themselves, then factor their expenses into the rent. That means that the per sq ft of a commercial property will be more expensive than net leases. Net leases pass on operating expenses directly onto the tenant, making the baseline rent on the property lower.
What Is Gross Rent?
Gross rent is the total rent paid on a leased property every month. The base rent generally refers to the baseline cost of renting the space. Depending on the specificities of the lease, gross rent may include additional expenses beyond base rent alone.
In the case of residential properties, many leases will exclude utility expenses like gas, water, or electric in the gross rent; others may include these utilities.
Triple net leases include a commercial property’s operating expenses in the rent paid by the tenant every month.
What Are Operating Expenses?
In real estate, operating expenses refer to extraneous expenses that go into property management. The triple in triple net leases refers to the three primary operating expense types related to commercial properties: insurance payments, property taxes, and common area maintenance fees, or CAM fees.
This type of arrangement serves to create a more beneficial rental agreement for rental property owners and tenants alike. The advantages these types of leases present on commercial real estate make them an increasingly popular option for leasing businesses.
Here’s how triple net leases translate into an advantage for all parties involved.
What Are the Advantages of NNN Leases for Tenants?
- Pay exactly what you need
- More control over the property
Pay Exactly What You Need
By taking on the operating expenses for themselves, tenants guarantee they are paying exactly what they need–no more, no less.
In many rental agreements for commercial spaces, landlords will take on operating expenses, then factor these expenses into the total monthly rent. However, because, in many cases operating expenses are speculative, the factoring in the amount into the rent may exceed what the actual operating expense deems necessary.
For example, operating expenses paid on CAM fees may vary depending on the needed maintenance, changing costs through fluctuating prices of services and utilities, and so on. In many cases, tenants will end up paying more on a monthly basis by accounting for speculative costs of operating expenses.
By turning over operating expenses to tenants, triple net leases are paying precisely what they need to. The costs of the required repairs and other potential fluctuations in cost are managed outright on their end.
More Control Over the Property
Tenants who take on the operating expenses through NNN leases take on more responsibility. However, by taking on more responsibility, they are able to assume more control over the function of the property. For businesses especially, this can be a crucial advantage; taking more control over the property means more control over their business operations.
By taking on CAM fees, for example, businesses can be more selective with the level of quality they receive on their maintenance. Furthermore, the lines of communication are clear when businesses take on those responsibilities for themselves. They are the ones reaching out to third parties over the operation of the property and are able to act more effectively when issues need to be addressed.
What Are the Advantages of NNN Leases for Landlords?
- Pay less on operating expenses
- Less work for landlords
Pay Less on Operating Expenses
By passing operating expenses onto the tenant, landlords increase the positive cash flow of their property.
Cash flow describes the money going into and coming out of an asset. Landlords reduce the money they pay into their commercial property drastically by opting for triple net leases.
The majority, if not all, of their operating expenses are no longer holding back the cash flow on their property. The income generated by their rental property is distilled, meaning property owners get even more out of their property than what they put into it.
Utilizing triple net leases on commercial properties helps landlords and real estate investors with stakes in commercial rental properties optimize their cash flow and get stronger returns.
Less Work for Landlords
Simply put, triple net leases make property management easier for landlords; tenants take on more responsibilities for the property, relieving the landlord of them.
Property management can make property ownership tantamount to a full-time job. Overseeing required maintenance, connecting with third parties to carry them out, filing taxes on the property, and more.
All of these can take up a significant amount of time. More often than not, landlords will turn to third-party property management services to oversee these functions.
Property management is a crucial component of getting a complete return on real estate assets. If the property is not properly maintained, it simply will not net investors an optimized return.
Triple net leases then provide an attractive possible scenario for landlords: they are able to abdicate many of the responsibilities of property ownership with virtually no cost. Tenants take on the expenses themselves because it suits their interests.
Should You Use a NNN for Your Commercial Property?
Triple net leases can be an excellent arrangement for both tenants and property owners. The particulars of a given property can have a huge impact on the type of lease that best suits an asset. Optimizing a real estate asset depends on the details, like the lease type used for a rental property.
To get the best possible return for your real estate investments, consider investing with professionals who have the experience to help you make the right financial decision in your real estate investments.
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Sources:
Cash Flow vs Profit: What’s The Difference? | Harvard Business School