Hey, how's it going? I'm Seth Williams from REtipster.com
and I'm much cooler online than I am in real life.
So what have you owned a piece of real estate
where the tenants paid you thousands of each month
they pay for all the maintenance and repair costs.
They paid for all the utilities,
they paid for the property insurance and the property taxes.
Would you be okay with that?
Now, what if we took this one step further and said that this tenant was willing
to sign a 5, 10, 15, or even 20 year lease with you?
I mean this is like the holy grail of what every real estate investor is after.
We're talking about long-term recurring income where someone
deals with all the most expensive and annoying parts about property ownership.
Now it might even sound too good to be true, but believe it or not,
there's actually a real estate investing strategy
where this is the norm.
It's called a triple net lease.
And for all the reasons I just mentioned,
it's got a lot of huge advantages to offer the property owner.
So what's the deal with this name in triple net lease?
Well, this type of lease has this name because
the tenants are responsible for paying
the three big costs of property ownership
that are normally on the shoulders of the property owner.
We're talking about property taxes. That's the first net.
Property insurance. That's the second net.
And all the maintenance and repair costs for the interior of the building.
That's the third net.
And granted with a triple net lease the exterior of the building,
like the roof, exterior walls and the parking lot and landscaping.
That's still on the shoulders of the property owner,
but the tenant covers everything else on the inside.
So in a sense, even though they're a tenant, they're treating the building
as if it's their own and they're paying the property owner for the privilege of doing so.
And it's also worth noting that in most triple net leased situations,
the tenant is able to negotiate below-market rent
because they're willing to deal with all these other ongoing hassles and expenses
of maintaining and running the property as if it's their own.
So it doesn't automatically mean that the the landlord is getting rich off their tenant.
It just means that the tenant is committing to taking care of these things
so that the property owner doesn't have to.
Some common examples of triple net lease situations might be like a restaurant building,
local department store, or a manufacturing facility,
or any big building that has one tenant.
Now, interestingly, there's also a couple of less common twists on the triple net lease.
One of them is called the double net lease.
The other one is called a single net lease.
And what's the difference between these two and how they differ from a triple net lease?
Well, with a single net lease the tenant agrees to pay the cost of the property taxes
in addition to the regular rent, but that's it.
And the landlord may or may not include utilities with rent
depending on what they negotiate with the tenant.
And in a double net lease, the tenant agrees to pay both the property taxes
and the property insurance, in addition to their regular rent payment.
And interestingly, there's also something called
an absolute net lease or a bondable lease.
And this goes back in the direction of a triple net lease, but it goes even further
because it adds every other financial risk of occupying that space to the tenant's plate.
So the tenant pays for literally everything,
including the exterior walls, including the roof,
including the parking lot, including all of it.
So obviously a triple net lease has a lot of advantages to offer the property owner.
First of all, a triple net lease represents a lower risk for the landlord
by making tenants directly responsible for these extra costs
landlords can sleep better at night knowing that
they just have fewer variable expenses to worry about.
They can just focus on paying their mortgage and they don't have to worry about
ongoing property tax hikes or other variable expenses that might change in the future.
Because again, that's all on the shoulders of the tenants.
Triple net leases also allow for fewer headaches for the landlord to deal with.
Every landlord knows what a pain it is to deal with property management.
Tenants call him at three in the morning,
complaining about bad light bulbs and clogged toilets,
and asking their landlord to deal with it.
Triple net leases allow landlords to delegate these tasks directly to the tenant.
And of course, another huge advantage of a triple net lease is the passive income.
So it's pretty hard to find any source of income out there,
whether it's from real estate or otherwise,
that it is truly completely 100% passive.
Triple net leases I wouldn't say are 100% passive,
but they're pretty darn close because most of the ongoing hassles, expenses,
and headaches are the tenant's problem to deal with.
Now, with all that said, it's important to acknowledge
triple net leases are not all unicorns and rainbows,
and they do have some disadvantages to be aware of as well.
First of all, vacancies, when they do come up can be extremely costly.
And depending on the property, it can take a while to find a new tenant
who will agree to the same triple net lease terms and keep that income flowing again.
And when a tenant vacates, it can take some time to find the right replacement
to sign another triple net lease.
And some properties can literally sit vacant for years.
And this goes back to the importance of the location of this type of property.
If you do a triple net lease property, you want to make sure the location is so good,
that it's not going to take that long to find a new tenant.
An ideal triple net property will be one that
the property in its good location are going to sell itself,
and that will help ensure that vacancy isn't a huge problem you love or have to deal with.
And of course, if you want these awesome properties in the best locations,
then guess what?
These kinds of properties are going to be pretty expensive to buy in the first place.
These things aren't cheap.
Given that triple net tenants are usually pretty big and the location is so important
Ii also follows suit that these properties are going to be pretty expensive
to acquire in the first place.
So you need a fair amount of capital even to play ball on this realm.
And one often overlooked risk of triple net properties
is the risk of unreported maintenance problems with the property itself.
Because remember, these tenants, it's not really their property
and say, if the roof starts leaking
or something else goes wrong in the property that isn't critical
to their ongoing operations, they might just not tell you about it.
And the problem can get worse and worse.
And again, because they may have this mentality of a tenant
and not a property owner,
it's just not as important to them to stay on top of these issues.
And they could go unreported for years until the problem becomes the big issue
that guess what? You have to then deal with and pay for.
And while it's true that with a triple net lease, it's the tenant's problem
to take care of repairs and maintenance.
A lot of tenants don't have a whole lot of motivation
to take care of deferred maintenance just for the heck of it.
And if it's not going to financially benefit them or their business,
they might just not take care of it.
And also not tell you about it.
And along those same lines, it's also entirely possible that the tenant may just forget to,
or neglect to pay the property taxes or property insurance.
Again, just because your tenant agreed to pay for these things,
it doesn't necessarily mean you can trust them implicitly to do it.
Tere are certainly ways to monitor this
and make sure that these bills are getting paid.
But again, that kind of starts to detract from the whole passive income side of this.
If you have to constantly police your tenants and make sure that they're doing
what they said they were going to do in the first place.
This is precisely why so many landlords choose
to just collect the money for property taxes themselves, and then pay these bills directly
rather than just putting it on the tenant and just trusting that they are going to do it.
And that's where something like a single net lease
or just a regular lease might make a lot more sense
depending on the tenant and how trustworthy you think they are.
So in conclusion, triple net leases are not the right strategy for every type of real estate
and every type of real estate investor.
But it can be a great strategy if you've got adequate cash and financing to work with,
and you're able to find a great location with a great tenant,
who's actually going to do what they say they're going.
If you can pull all these pieces together, a triple net right lease property
can be a great investment and a great source of income for years to come.
If you've got some good help from this video, be sure to hit the like button,
feel free to subscribe if you so choose
and go check out the full article over on REtipster.com linked below.
And also be sure to check out this next video,
all about the difference between an active and a passive investor.
I think you'll like it.