What is an ideal investment opportunity?
If you are an investor, one of the most important questions that would confront you is what is the ideal investment and how can you maximize your returns on such investments.
This question has been asked by many people and there are several answers to this question. However, in today’s world there is a new kind of investment which is rapidly gaining popularity. This form of investment is known as net lease property investments.
What are net lease property investments?
These are investment opportunities where a buyer purchases a piece of property from a seller who agrees to pay the expenses related to the property for a fixed period of time. Some examples of expenses that would be paid for by the seller include taxes, insurance and maintenance costs and other costs associated with the property. While some sellers agree to pay for some fixed costs, others might agree to pay for all the expenses related to a property for a given period of time.
When considering net lease property investments, it is important to understand who pays the expenses related to a property. The seller would be responsible for paying all costs associated with the property including all maintenance charges, repairs, taxes and insurance fees related to the property. It is very important to understand who would be responsible for all these costs because they can have a huge impact on your returns.
Types of Net lease property
There are a lot of factors to consider when investing in commercial real estate. Each type of property makes for a unique investment opportunity. However, there are three main types of commercial leases:
This type of lease is commonly used for retail properties. The landlord covers the property taxes, insurance and maintenance costs, while the tenant pays the rest.
Double net lease This is the same as net lease, except that the tenant also pays maintenance costs on the HVAC system.
Triple net lease The triple net lease is same as double net lease, except that the tenant also covers property tax expenses. This type is best to invest in net lease property.
Benefits of investing in net lease property over traditional investments like bonds etc
The benefit of investing in net lease property over traditional investments like bonds, include
Safety: First and foremost, net lease properties are considered safer than traditional real estate investments. This is due to the fact that cash flow is much more predictable than with multifamily or retail properties (which can suffer from high tenant turnover). Additionally, the fact that the tenant is responsible for all operating expenses means that they have a vested interest in maintaining the property.
Higher Yields: By comparison, net lease yields are higher than those of the 10-year Treasury bond. In fact, yields have been steadily rising over the past several years, as most net leases have provisions that allow for rent increases usually tied to inflation (CPI).
Lower Volatility: Net lease investments possess less volatility compared to equities or bonds because rents are generally locked for long periods of time and are not susceptible to typical fluctuations in the stock market or interest rates.
Credibility: The caliber of companies typically occupying triple net lease facilities means that there is a higher level of creditworthiness overall when compared to other investment options. This also means less risk in terms of potential vacancies.
Tax Benefits: Like traditional real estate investments, net leases offer tax benefits.
Predictable Cash Flow with easiness to monitor and plan your finances
With most net lease property investments, you can expect a predictable cash flow over the life of the investment. This makes it easy to monitor and plan your finances.
Source of passive Income
Another benefit of investing in net lease property is that they produce passive income. Unlike traditional investments, you don’t have to actively manage your investment. You collect rental checks from your tenants and make sure the property is well maintained. Because the property manager handles most of the day-to-day business, net lease properties can be managed from anywhere in the world — many investors even manage their properties from their mobile devices!
Since properties appreciate over time, net lease real estate is an excellent way to protect yourself against inflation. If inflation goes up by 5%, you’re still collecting 5% more than you were.
Better Rate of Return (ROI)
Net lease investment provides a greater rate of return compared to other traditional investments like bonds, dividend stocks, real estate, and private equity. The average ROI for net lease is 10%. It can be as high as 15% depending on the property location and tenant quality.
Why traditional investment methods like bonds are outdated
The benefits of investing in a net lease property are quite different from those of investing in bonds and other traditional investments. The difference is that net lease properties offer a long-term, stable income stream that is often at a higher rate than most fixed income investments. Bonds and CDs are not usually risk free as many think, particularly during times of inflation. For example, if inflation increases by 2% in the first year, and then another 3% in the second year, your bond or CD will have lost 5% of its buying power over those two years. However, with a net lease property investment, you can usually increase your rent by more than the rate of inflation, so your purchasing power is maintained.
Investors have always favored bonds as a safe investment, but net lease property investment has now overpassed these traditional investments like bonds. Purchasing a net lease property for investment purposes is a conversation worth having. There are significant advantages to investing in net lease property versus traditional investments like bonds.