When it comes to commercial real estate, there are several types of leases. Therefore, you’ll need to be correctly informed on these lease types to choose the best investment option.
A single-tenant net lease (STNL) is a lease agreement type where one tenant rents an entire commercial property while agreeing to handle the property taxes and maintenance. Simply put, the tenant pays property taxes and insurance, plus maintenance and repair costs besides the rent.
The following guide will help you discover what a single tenant net lease is all about, its pros and cons, and why people see it as the most common commercial lease option. You can read here for more information on single-tenant net leases.
Single Tenant Net Lease
Single-tenant net leases are a net lease type where a tenant takes some part or all the building’s operating costs. Here, commercial property is leased to a single renter, usually restaurants, drug stores, and gas stations.
A single-tenant net lease is also called an NNN lease or triple net lease. Thus, the tenant is liable for all three property expense categories: maintenance costs, building insurance, and property taxes.
Unlike a gross lease, where the property owner handles all the property responsibilities, a single net lease absolves the landlord of these duties. STNLs are usually long-term leases lasting between 10 to 20 years. And in some cases, 25 years, with escalators and annual rent increases included.
Comparison Between Single Net Lease and Other Lease Types
In a gross lease, the renter pays only the agreed-upon rent, and the landlord takes responsibility for the property expenses. Conversely, in net leases, the renter handles at least one or all property expenses while enjoying lower rent.
Commercial rental agreements either use the single net lease, double net lease, or the triple net (NNN) lease. Under a single net lease, the renter handles just one of the building’s operating costs. On the other hand, the tenant bears two operating costs under a double net lease and is responsible for all the operating expenses under the triple net lease.
A property’s operating costs include maintenance, insurance, and taxes.
Pros of a Single-Tenant Net Lease
The benefits to investing in a single-tenant net lease are enormous and include the following:
- High-Reward, Low-Risk
Triple net leases are popular commercial investment options for investors seeking high-reward and low-risk properties without property maintenance and tenant involvement.
Single-tenant net leases are ideal for you because you’ll be dealing with a long-term tenant on one property, with a single agreement stipulation between both of you.
- Fast Mortgage Repayment
Investing in an STNL is an excellent way to enter into commercial real estate. Regardless of whether you have the total purchase amount in cash, you can access various financing options.
You might get diverse financing options from complete to partial funding of your single net lease property purchase when you go through reputable advisors.
Financing options help you expand your investment options while considering single-tenant net lease properties for sale. If a tenant agreement exists, you can easily offset your financing costs from your tenant’s monthly rent.
- Tenant Expense Pass-Throughs
A single tenant lease provides you with a steady and reliable income stream, seeing as you’ll receive a monthly payment from your renter while passing along the building expenses to the tenant.
Due to the expense pass-throughs, you won’t have to bother about tax bills, maintenance fees, or repair costs reducing your investment’s profitability.
- Long-Term Renter
Operating an STNL means you only deal with one tenant for your property, usually a long-term renter interested in creating an almost permanent destination for their business in your building.
Because the renter is responsible for the taxes, maintenance, and operating costs, you won’t need to be involved in the building’s upkeep.
Thus, single-tenant lease properties are perfect for investors looking for investment properties without the duties of a landlord.
Unlike investing in residential rental property, buying a single-tenant net lease for sale enables you to create a regular income stream for sometimes two decades. Thus, this investment option guarantees a predictable cash flow.
Specifically, all the property expenses that property owners deal with are no longer the landlord’s responsibility, so your cash flow isn’t affected.
- Full Occupancy
If you buy a shopping center or apartment building, you’ll need a tenant for each unit and retain them to achieve a 100 percent occupancy. Conversely, a single-tenant net lease requires only one tenant, which you can enjoy for more than one decade with full occupancy.
Cons of Single-Tenant Net Lease
Suppose you’re wondering if there are disadvantages to a single-tenant net lease due to the numerous benefits outlined above; YES!! There are pros to STNL investments. They include:
- Single Tenant
While you enjoy a 100 percent occupancy with your single tenant in an STNL property, the disadvantage lies in the fact that your rental income depends entirely on one business.
Once your tenant leaves the building due to bankruptcy or the end of the lease, your rental income drops immediately to zero. Conversely, if you invest in apartment complexes and one tenant leaves, you’ll still have other renters bringing in monthly rental payments.
This single reason is why single-tenant net lease property owners take their time to select a high-quality tenant that’s unlikely to leave quite early.
Most net leases, such as STNL, have a one to two percent annual rent increase built into the lease, which can serve as a significant drawback when market rent surges faster. For instance, if the retail properties rental market value in your area increases by five percent in a year, but your single-tenant net lease includes only a one percent increase, you’ll collect an amount below the current market rent.
Single-tenant lease properties provide investors with a passive investment and predictable long-term cash flow. Although the tenant’s strength partially mitigates property risks in an STNL investment, single-tenant net lease properties still come with their risks.
To learn more about STNL investment, visit the Buy NNN Properties website to get the best professional advice from our experienced brokers. And the best part is, you get to see affordable single-tenant net lease properties for sale in your preferred location.