Triple net investing refers to a type of commercial real estate investment where the tenant pays all or most of the costs associated with the property, including property taxes, building insurance, and maintenance. This leaves the landlord responsible only for debt service. Triple net lease properties can provide investors with stable, recurring income streams with less hands-on management responsibility compared to other types of real estate investments.
As an investment strategy, triple net investing appeals to investors who want exposure to commercial real estate but with fewer responsibilities than directly owning and operating the properties. The low-cost, low-maintenance nature of these investments allows investors to diversify their portfolios while still achieving attractive returns.
Tenants pay for taxes, insurance and maintenance in triple net lease
In a triple net lease, the tenant agrees to pay all or a portion of the taxes, insurance premiums, and maintenance costs associated with the property in addition to rent. This structure shifts these unpredictable ownership costs from the landlord to the tenant, providing the landlord with reliable and consistent net operating income. Tenants may find triple net leases attractive since they know their total occupancy costs upfront.
Lower expenses increase cash flow for landlords
By transferring property operating expenses to tenants, landlords are able to increase cash flow compared to other types of commercial properties they would own directly. This improves returns, as there is less need to account for large capital expenditures or unpredictable changes in taxes or insurance costs from year to year.
Stable, recurring income even during recessions
The stable income produced by triple net leased properties appeals to investors, especially those nearing retirement. Since the tenant is committed to paying rent and other costs over a long-term lease, landlords continue receiving consistent monthly payments even during economic downturns when rents for other properties might decline.
Allows easy diversification across property types and locations
With fewer management responsibilities, triple net lease investments enable investors to diversify more easily across property types (retail, office, industrial, etc.) and geographic locations to reduce risk. This diversification can also take advantage of sector-specific property trends.
Lower liquidity than REITs or stocks
The primary disadvantage of triple net investing is the low liquidity compared to investing through real estate investment trusts (REITs) or buying stocks. Since each leased property asset is unique, it can take significant time and effort for landlords to find suitable buyers when looking to sell.
In summary, triple net investing provides a way to invest in commercial real estate that produces stable income streams while transferring unpredictable ownership costs to tenants. This lower-maintenance ownership structure allows landlords to diversify their investments with lower expenses and manage their portfolios more passively. However, the tradeoff is lower liquidity compared to other real estate and stock market investments.