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In unfamiliar times many of our clients look to us for guidance on real estate investing as times are changing and the market appears risky. Real estate investments are a great means of achieving good returns on your money and there are currently many attractive acquisition opportunities for smart investors.
Although much of our advice comes from being brokers for 25 years, we can also provide first-hand knowledge as buyers ourselves. As buyers we are narrowing in on long-term, triple-net leased investments for our portfolio.
A triple-net lease holds the tenant responsible for rent as well as all property operating expenses including taxes, insurance and maintenance. This type of lease is favored by investors – including ourselves - because the landlord’s responsibilities are significantly reduced.
Triple-net-leased investments are a good alternative for providing cash flow while surrendering the responsibilities of management and maintenance. When evaluating this type of deal, it is important to look closely at the tenant and assess their current and future financial strength in order to be assured of the tenant’s ability to meet the terms of the lease.
The analysis of a net-leased investment concentrates much more heavily on the lease rather than on the building and land. However, it is still important to assess the physical real estate as you would in any transaction. A strong location, land size, quality construction, replacement costs, and the ability to re-lease the real estate are essential factors to consider.
Many investors use a capitalization rate to determine the value of an investment. Although it should not be the only measure of an investment, capitalization rate is a simple formula that calculates the ratio between the purchase price and the net operating income. By dividing the purchase price into the net operating income you arrive at a capitalization rate that will help you determine value relative to similar properties.
Each individual should be sure that a triple-net investment meets the specific goals of the investor. Complete due diligence, establishing financing, and understanding any tax benefits are all critical before committing to any long-term investment. But with proper understanding of some critical components - type and length of lease, tenant strength, the physical real estate location, and cap rate – an investor can be sure that a long-term triple-net leased deal is a sound investment.