With a global financial market that is known to be volatile at times, investors are often looking for a stable and predictable place to put their money. Similar to buying a bond, investing in triple net lease properties is one of the smartest and most reliable investment tools available today.
While we know this is a great opportunity for many investors, it can be confusing to those unfamiliar with commercial real estate or 1031 exchanges. Let our experts walk you through the basics of buying and selling net lease properties.
Net Lease: A net lease is a type of lease in which the tenant (lessee) is required to pay for some or all of the property expenses that normally would be paid for the property owner (landlord or lessor), in addition to rent. Net leases are most often associated with commercial real estate.
Gross Lease: In a standard gross lease, a tenant pays a flat, pre-determined rental amount. The landlord pays for all fees associated with ownership, such as taxes, insurance, and maintenance. Most residential leases would fall under this category.
Net Lease Renewal Options: Lease renewal options arise at the end of the initial lease term, giving the tenant the option of extending or renewing the lease at a set rate for specific periods of time. A renewal option does not obligate the tenant to renew the lease agreement. Renewal options come with a wide range of fixed rates and terms. Often leases require renewal or termination notices.
Capitalization Rate: Cap rates are used to estimate returns on an investment. It is defined as the rate of return on real estate investment property based on the income that the property is expected to generate. The cap rate is calculated by dividing the net operating income (NOI) by the price or market value of the property.
Net Operating Income: The NOI can be calculated by subtracting all operating costs from the annual rent on the property. Operating expenses are costs that are necessary to run and maintain the property, such as insurance, utilities, taxes, property management fees, and repairs. NOI is calculated before taxes, and it excludes capital expenditures, principal and interest payments on loans, depreciation and amortization.
Initial Lease Term
Single Net Lease: A single net lease, the least common type of net lease, requires the tenant to only pay property