If a property owner leases a building to a tenant using a triple net lease, it means the tenant will take up responsibility for the following three keys areas: property tax, property insurance, cost of maintenance. Since the tenant is responsible for these costs, the building owner will receive less rent than they would in a normal lease. However, it also means they will have less overhead costs. In short, the building owner is not responsible for the building’s upkeep.
Most commercial property owners prefer these leases since it absolves them of any responsibilities. These types of leases are great for investors who wish to retire early by the age of 37 years. Below, we will explain how to invest in triple net leases.
Tips to Invest in Triple Net Leases Correctly
Triple net lease investments can be challenging for both the property owner and the tenant. You may think that this type of lease will favor the owner. However, problems can arise if the tenant does not adhere to the rules of the lease agreement. Besides that, the lease agreement could have loopholes that the tenant could exploit. Here are a few tips on how to invest in triple net leases profitably.
1. Always Choose a Tenant with a Great Credit Worthiness
This is amongst the most important tips on how to invest in triple net leases. If you want to retire at 37, you need to ensure you can find a reliable tenant. Always take time to conduct due diligence about their creditworthiness. The best bet in this aspect is to find a big stable company such as a fast food chain or a major bank.
Check their recent business activity, have they closed down any branches recently? What are investors saying about their business model? While you may not be an expert on how to run a big business, there are a few red flags that you can find if you conduct enough research.
When you find a tenant with a state or national reach, interested in your building, this could be a good opportunity. Most of them will allow you to retire in peace without any liabilities at the relatively young age of 37. Always try to avoid startups, whose future looks unsure, unless you examine their business model and you find that it is viable.
2. Clearly Define the Responsibilities of the Tenant
All the responsibilities of the tenant should be clearly articulated in line with state and local regulations. Any variable needs to be thoroughly articulated to avoid a conflict of not knowing who is responsible for what at any time. While you would like to receive payments on time, you also want to ensure that the building is maintained in good condition.
You also want to have a way to verify that taxes and insurance are being paid on time. Otherwise, your building could be taken away from you over unpaid taxes and lack of insurance. Ensure that you prepare a lease agreement that clearly sets out the mechanisms through which this verification can be done.
Do not simply take the tenant on their word. Every investor just wants the best for their building. Remember that the tenant could decide to move their business to another location. You do not want to be stuck with a worthless building that would cost too much to maintain once they vacate.
3. Always include a Severability Clause
If you are thinking of how to invest in triple net leases, this clause is an essential part of any agreement. Sometimes, despite all your efforts, the lease may contain a clause that is unenforceable in law. When this happens, you should have a clause that says this does not invalidate the entire lease.
You want to ensure that you do not end up losing any money because of wrongful wording in some sections of the lease. If you do not have this clause, you may be putting yourself in legal trouble. In some cases, you may find a tenant taking you to court, and you have to pay them huge sums of money.
4. Always Ask for a Security Deposit of At Least 3 Months
A security deposit is important unless the tenant is a nationally recognized tenant with zero risks. You can thus rent your property to them with a $0 security deposit. However, such tenants are rare to find. You should thus ask for a security deposit of at least 3 months.
Thus, if the tenant vacates the property before the end date, the security deposit can be used to lease the property again. It is great for peace of mind by helping to ensure that you are never without an income stream when a tenant decides to depart.
5. Have the Designated Use Clearly Spelled Out
The last but not least tip on how to invest in triple net leases is to ensure that the tenant cannot use it for any other purpose than the intended one. In short, ensure that you limit tenants to only certain activities. Besides that, some businesses could lower the value of the property by giving it a bad reputation. That is not something, which you want if you plan to retire at 37.
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Invest in Triple Net Leases to Retire Early
Triple net leases are a great way for you to spend the rest of your life in retirement. However, you have to ensure that you get it right. For one, you need to choose a property that allows you to pay back the mortgage while still being able to stay clear in profit.
This will only be possible if you are able to identify a profitable building which you can then lease using a triple net lease. You thus have to ensure that you seek enough business advice on how to invest in triple net leases. You also have to remember that if you plan to return early, you need to have enough savings to allow you to live the rest of your life without working.
That will entail living within your means. Do not use your newfound creditworthiness to accrue debt, which will burden you in old age. Instead, use it as a launching pad to invest even more in real estate. Use the experience and connection that you gain to grow your empire.
By the time, you are 37, you could sit back and earn a passive income for the rest of your life. However, this will require a lot of financial discipline and focus. One aspect that you need to make clear is how payments will be made to you.
Most commercial building owners will hire an agent. This way, they only need to check their bank account, and they do not need to waste time cashing in any checks.
Triple net leases are a great investment for anyone who want to invest in commercial real estate. They take away all the responsibilities from you, leaving you with only a passive net income every month.
If you do it the right way, you could be well on your way to retirement at the age of 37. This will allow you to tour the world or devote as much time to your family as possible. If you have any thoughts on the above tips, feel free to leave a comment below.