Have you tried investing in turnkey residential real estate only to find out there’s no such thing? In residential real estate, “turnkey” usually means a property is already maximized for profit potential, specifically a single-family house with high asset value and tenants already in place. Oftentimes, these properties will be managed by a property management company so it appears that the investor has little to do other than collect a monthly check. What you might not realize, however, is that even with a management company taking care of business, you are still involved in making decisions and footing the bill for taxes, insurance, maintenance, and management expenses (those management companies are pricey).
By contrast, if you want a TRUE turnkey commercial real estate investment, where you pay for nothing except the cost of the property, then turn to triple net (NNN) lease properties.
Triple Net Lease Properties: No Management Responsibilities
Residential properties marketed as “turnkey” actually have plenty of management responsibilities. As the owner, you’ll need to be kept in the loop about property inspections, sudden repairs, vacancies, and other responsibilities associated with owning a property. You must also pay property taxes, insurance, and common area maintenance (CAM). If you do all the management yourself or use a management company, and pay all the taxes, insurance, and maintenance, there’s nothing remotely turnkey about residential rentals.
Triple net lease properties, on the other hand, are the only type of property that is truly management-free. Absolute NNNs are also maintenance-free. You don’t need to hire a property manager or take care of anything, nor do you pay taxes, insurance, or CAM. The tenant — typically an investment-grade, multibillion-dollar company — is responsible for all taxes, insurance, and CAM, as well as all management. In an absolute NNN lease, the tenant also pays for all repairs, operating costs, and any maintenance on the property.
Since NNNs are single-tenant properties with high-quality tenants, there’s no need to worry about whether your tenant will pay. You’ll receive a monthly check like clockwork. You simply collect thousands of dollars in monthly rent (usually with built-in escalations) for 10 to 20 years and live your life.
Types of Triple Net Leases
- Absolute triple net lease: zero taxes, insurance, maintenance costs, or landlord responsibilities for the lease term.
- Triple net lease: tenant agrees to pay operating expenses, net taxes, insurance, and common area maintenance, as well as other fixed and variable expenses.
- Modified triple net or double net (NN) hybrid: zero responsibility for taxes and insurance, but there may be minor landlord responsibilities, i.e., roof, parking lot, structure.
Investment-Grade NNN Lease Properties: Maximum Stability in Any Economy
Triple net lease properties are investment-grade properties with long-term leases. Tenants are major brands with solid credit ratings and low risk of default, such as Dollar General, Taco Bell, 7-Eleven, Montessori, AutoZone, Walgreens, and McDonald’s. New leases are typically 15 years, but often last as long as 20 or even 25 years, with rent escalations built into the lease and the option to extend at the end of the lease term.
Long-term leases like these from multi-billion dollar corporations are often “guaranteed” leases, meaning the corporation pays the rent no matter what — even if the building is damaged and can’t be tenanted. This offers maximum stability and acts as a buffer during tough economic times when residential renters may stop renting and smaller companies might fold. These factors are also attractive to banks and other lenders, making it easier to get better financing terms, potentially increasing your cash-on-cash (CoC) return and preserving your wealth.
NNN Lease Investments Are Easier to Find & Often Easier to Purchase
Residential turnkey properties are harder to find than you’d imagine. There are plenty of residential rentals out there, but few are actually turnkey. While some investors are willing to take on lower-quality properties to add equity through renovation, many are searching for a property that can produce profit right out of the gate, which a NNN property will provide. Additionally, since there are many more residential real estate investors than there are commercial, that means there are numerous investors competing for the best properties.
On the other hand, NNN lease properties for sale are easier to locate. These essential retailers, childcare centers, medical clinics, and quick-service restaurants are everywhere you look. With fewer commercial real estate investors but a wide variety of net lease properties, it’s easy enough to find and purchase a great triple net lease property with steady returns. Also, because there are no management responsibilities, you don’t need to be limited by location. You can purchase a property anywhere in the continental US.
Triple Net Investments: A Great Way to Diversify Your Portfolio
Do you currently own single-family homes, retail strip centers, multi-family properties, or office space and feel you need more stability? Triple nets are an excellent way to balance risk and reward in your portfolio. You can diversify with different triple net asset classes, tenant types, locations, and lease types, knowing these tenants will pay the rent no matter what. With a potential 7–10% internal rate of return (IRR), you’ll gain more with less hassle and time and money spent when compared to other commercial real estate (CRE) and residential rentals. High-quality NNNs provide stability in stable and volatile markets.
While experts in residential turnkey properties suggest building out your portfolio with dozens of properties, one triple net property has the same profit potential without the hassle.
NNN Tax Opportunity: 1031 Exchange Defers Capital Gain Tax & Depreciation Recapture
Triple net lease properties are ideal vehicles for taking advantage of the 1031 exchange. The 1031-like-kindexchange is a tool to defer capital gains taxes when selling one or more investment properties to buy others. Therefore, if you want to sell residential rentals or underperforming properties and buy responsibility-free NNN properties, you can use the 1031 exchange to defer 100% of the capital gains tax, as well as the 25% depreciation recapture tax if you have taken depreciation on the sold properties.
Many CRE investors get to a point when they are tired of the hassles and management costs of high-maintenance real estate eating into their profits and time but don’t sell because they don’t want to pay the taxes on the profits. If this sounds like you, then using the 1031 exchange to purchase one or more easy-to-own triple net lease property investments is a great solution. You’ll not only reap the rewards of NNN ownership, but you’ll also be able to use the multiple thousands or even millions of dollars that would’ve gone to taxes to buy properties that provide income and tax benefits for decades to come.
Additionally, because triple net investments are straightforward transactions, they are more likely to meet the strict 1031 exchange deadlines without the fear of losing the benefit.
Triple Nets Do Not Require Renovations
Nearly all residential and non-net-lease CRE properties require some renovation of the property in order to accommodate new tenants. Triple net lease properties are the only commercial property where the tenant is responsible for all renovations. This saves investors a significant amount of money that would otherwise come out of the property’s cash flow. NNNs are an excellent way for investors to enjoy steady income without requiring a huge chunk of time or renovation outlay in order to be successful.
To Wrap it Up — Turnkey NNNs Vs. “Turnkey” Residential Real Estate
In any economy, strong or otherwise, you want to make the most profit from your real estate ventures with the least effort. When it comes to “turnkey” residential real estate investments, there is no such thing. The only way to predict an accurate cash flow and maximize your internal rate of return is to own turnkey triple net lease properties. There are no surprises, no management, no tax payments, no insurance payments, no renovations, and in the case of absolute NNN lease investments, zero landlord responsibilities. You get reliable monthly income for 10 to 20 years, rent escalations to hedge against inflation, and worry-free property investments that you can own anywhere across the country.
Ready to Learn More? Contact Us for a No-Obligation Conversation
Ready to Learn More? Contact Us for a No-Obligation ConversationAs a savvy real estate investor or if you’re new to CRE investing, engaging a net lease buyer’s advisor is the smartest decision you can make. Our advisors at Westwood Net Lease Advisors know the market inside and out and have off-market, developing, and newly listed property knowledge. We specialize in net lease real estate as well as 1031 exchange transactions and help you get the best investment for your financial and lifestyle goals. We work with you to manage the transaction from before the property search through closing and thereafter, at no cost to you. Contact us today for a no-obligation conversation about your investment goals. 314-997-5227
