If you ask real estate investors what they hate about real estate investment, you will know it’s property management. Hundreds of investors choose to relinquish their investment property just because of rising maintenance liabilities. Once a property starts aging, it may need to be repaired regularly. This increases the investor’s liabilities, and they’re left with no other choice but to sell their property.
Though trading your investment property can earn you hard cash, it may not be the smartest decision as you’ll have to pay taxes on your capital gains. However, if you exchange your old property with a NNN property using a 1031 exchange, you won’t have to pay taxes, plus you’ll be free from the burden of property management for the rest of your life. Before we let you know where you can find NNN lease properties for sale, you may require a bit more information on the NNN lease investment.
Net Leased properties include little-to-no management responsibilities.
A triple net (NNN) lease is a lease agreement under which the tenant pays all major operating expenses along with the base rent. NNN leases are single-tenant arrangements and may lock the tenant for 10-15 years. Different from a gross lease, a NNN lease requires tenants to pay all operating expenses along with the base rent. The operating expenses a tenant covers under a NNN lease includes insurance fee, property taxes, and maintenance cost.
1031 Exchange and NNN Lease Investment – A Win-Win Situation for Investors
In case you’re wondering if it’s possible to mix NNN investment with a 1031 exchange or not? The answer is Yes, it is very much possible. 1031 Exchange, as you may know, allows investors to defer capital gains tax on exchanging an investment property for another like-kind property. As mentioned, only investment properties qualify for a 1031 exchange, and you can’t exchange your primary residence using this tax-deferred exchange (in case you were wondering this too). Therefore, when a 1031 investor invests in NNN properties, they not only shelter their income from taxes but also get relief from property management for the rest of their life.
Let’s apply some math to see how a triple net investment is more beneficial than a gross lease.
Say, your current investment property worth $5 million, which you’ve leased out to a tenant for a monthly rent of $3K or $36K annually. Now, let’s calculate the operating expenses that you pay from your monthly income. Say at the end of a year you spent $1000 on repair, $500 as property taxes, and another $500 on the insurance. So, your profit after subtracting all expenses will be –
Rent = $36,000
Operating expenses = (Maintenance+Property taxes+Insurance fee)
                        = $(1000+500+500) = $2000 or $2K
Profit = $(36K-2K)
        = $34K
So, you’re investing $2k per year from your income. It can be said that you’re paying these expenses from your pocket.
Now, let’s consider the same example under a net lease arrangement. As the operating expenses are paid by the tenant, you don’t need to spend anything from your income. Therefore, instead of earning $34K at the end of a year, you are getting $36K.
Here are some benefits you receive immediately after purchasing a net leased property –
- Freedom from property management is what you get as soon as you acquire a triple net property. From the first month, you start saving operating expenses, which otherwise you need to pay from your monthly income.
- No capital gains tax when you are doing a 1031 exchange. By investing your 1031 proceeds in a triple net property, you save up to 100% capital gains tax.
- You get big multi-national companies as tenants. Brands like CVS, McDonald’s, KFC, etc., look to rent net leased properties.
- It’s a great way to diversify your investment portfolio. Adding a net leased property in your collection can be a huge bonus.
Where to find NNN Lease Properties for Sale?
NNN lease properties for sale are available at select locations. However, locating such properties may not be that easy if you try to do it by yourself. The reason is simple – NNN properties are limited, and NNN investors are many. Even if you somehow manage to locate one such property, there is no guarantee it will fit your budget. That’s why you need assistance from professionals who know this investment inside-out. A NNN expert or your Qualified Intermediary can help you with this. In case you don’t know where to find a Qualified Intermediary, you can reach out to one of our impaneled NNN experts for this.
Find exclusive net leased properties in the property section of the website. You can also connect to one of our 1031 experts, and they will be happy to assist you.