For the pursuit of happiness, investors prefer making investments in triple net lease properties to ensure solid guarantee returns on the investments with zero landlord responsibilities. Triple net lease buyers can invest in leasehold properties or ground lease properties. In this article, we will compare both options and involved pros and cons.
What is a leasehold property? (Building Ownership)
With leasehold, you actually own the improvement, however, not the land. This agreement extends up to the duration that has been agreed upon. After the lease expires, the landlord gets its ownership back unless the lease is extended.
Important things to consider on leasehold properties
When you buy yourself a nnn leasehold property, you’ll be taking over the lease from the previous leasehold owner. So, before making any offer and coming to an agreement, you need to consider the following:
- The number of years left on the lease.
- The internal rate of return for the time you have the ownership
- How will you budget for service charges and related costs?
- The length of the lease which may affect getting a mortgage and resale value.
What is a ground lease property? (Land Ownership)
A ground lease is an agreement in which, a tenant signs and lease a piece of land and develop it for its business and agrees to pay a certain rental rate. Tenant also agrees to maintain the property and pay for insurance, property taxes and all other charges related to the property. At end of the lease all the improvements is turned over to the owner of the property. Most leases indicate that the improvements will be owned by the property owner unless an exception has been made. Since a ground lease allows the NNN landlords to take charge of all the improvements once the lease period is over, the landlord may sell the property at a much higher rate to the tenant or other investors.
Why investors choose ground lease properties vs leasehold properties?
A tenant can build on the property in a prime location that he could not purchase. Hence, large chain stores often take advantage of ground leases in their plans of corporate expansion. Also, a tenant doesn’t have to pay any down payment for securing the land, as purchasing the property would have. Evidently, this frees up enough cash that the tenant can use for other purposes.
Furthermore, the owner of the land can gain a steady flow of outcome from the tenant while retaining ownership of the property. Normally, there is an escalation clause that guarantees an increase in rent and eviction rights that provide protection in case of default on rent or other expenses.
Hence, before making any investment, it is wise to be well aware of all available options with different types of triple net lease properties. This enables you to make best-suited choice. Triple net lease buyers should know all the involved pros and cons before proceeding with Triple Net lease properties.