7 Considerations to Make Before Buying Triple Net Property

Investment properties are an excellent way to create passive income. Over the past few years, triple net properties have become extremely popular. These properties are well-suited for both seasoned investors and novices looking to get started. No matter your experience level, it’s important to review the small print of any triple net property before making an offer. If you want to buy a triple net property, consider these factors.

1. Make Sure It’s an Absolute Triple Net Lease

Lease and rental properties are perfect for investors looking to build a passive income portfolio. However, you’ll only earn a guaranteed passive income if the property is an absolute triple net. Before entering into a sale agreement, let a real estate lawyer in san antonio look over the terms.

What traits does a triple net lease need? An absolute triple net lease will require the tenant to pay all additional real estate expenses. These expenses may include taxes, utilities, and maintenance. Investors should obtain a copy of the lease prior to buying the property. Provisions should also be put into place requiring any new tenants agree to an absolute triple net lease at closing.

2. Review Active Lease Terms

The longer a tenant lease, the more passive income the property will create. Before buying a triple net property, review any current leases. Ideally, any active leases should still have at least ten years remaining. Anything less is considered a short-term tenant.

Why does lease term matter? Buying a property with short-term leases means you’ll need to replace the tenants sooner rather than later. Re-leasing unoccupied units are expensive, and your property could sit vacant for months or years until you find a new tenant. Although longer leases are best, you can still purchase a triple net property with short-term leases. However, you should negotiate with the seller for a lower price.

3. Check Out the Tenant’s Credit History

Be sure to review the tenant’s creditworthiness before purchasing a triple net property. Just because a tenant already signed a lease doesn’t mean they have a good credit score. The higher a tenant’s credit rating, the more likely they are to make rent payments on time. Having reliable tenants also ensures you have a steady income stream.

What types of tenants are ideal? In general, publicly traded companies tend to have better credit ratings than newer, private companies. Of course, even the largest, most well-known companies are susceptible to market fluctuations. Before purchasing the property, make sure the seller provides you with all financial information about the current tenant.

4. Consider the Location of the Property

When it comes to buying real estate, location is paramount. Even if you find a triple net property with a long-term tenant, you still need to consider the location. The building needs to be attractive to potential renters, and it needs to be in a prime area. Otherwise, you may struggle to lease the property if your tenant moves out.

The form of the building is another factor to consider. For example, highly specialized properties only appeal to a limited audience. Listing it may require extensive renovations to draw in potential tenants. As a rule, it’s easier and cheaper to find a tenant for a more generic property.

5. Know the Rules of 1031 Funds

Many investors use 1031 funds to buy and sell properties. It’s sometimes possible to avoid the capital gains tax by reinvesting the profits into another property. However, 1031 funds do expire. Be sure you fully understand the rules of 1031 funds before you purchase an investment property.

Investors must identify any properties they intend to buy within 45 days of earning 1031 funds. The IRS then allows an additional 180 days to purchase one of these properties. The clock starts ticking immediately following the sale of the investor’s relinquished property. Tax laws change frequently, so always consult a tax professional before buying a triple net property using 1031 funds.

6. Understand the Rights of First Refusal

Before buying a triple net property, check to see if anyone holds a right of first refusal (ROFR). The ROFR allows the original developer or tenant to purchase the property before anyone else. However, many buyers forget to check about the ROFR status before shopping around for potential properties, which could result in wasted time and money.

An existing ROFR is most likely to become an issue if you are buying a triple net property using 1031 funds. The holder of the ROFR can exercise their right to purchase the property up until closing. When this happens, you may find yourself frantically searching for another property to meet the 1031 funds deadline. Always ask the seller in advance about a current ROFR. If there is one on the property, you may be able to obtain a waiver from the holder to ensure you don’t lose the sale.

7. Seek Legal Guidance

Even though the majority of triple net property sales go smoothly, there is always some level of risk involved. Before entering into a sale agreement, it’s best to let a real estate lawyer look over everything. They will make sure the title is clean and guarantee the property meets all local compliance rules and regulations. A lawyer will even make sure the property doesn’t violate any environmental laws.

Buying a triple net property that doesn’t meet these standards may devalue your investment. If you ever do decide to sell, it may be difficult to find a willing buyer. Working with a lawyer from the start will ensure the property is a solid investment. Furthermore, a real estate attorney can also help draft the purchase and sale agreements. They will also represent you if the sale runs into any pitfalls along the way.

Enjoy the Benefits of a Triple Net Property

While it may seem like a lot of work to purchase a triple net property, your due diligence will pay off in the long run. Triple net properties are perhaps the best way to earn a passive income in the real estate industry. Double checking that the potential property meets all these standards will ensure you enjoy a steady rental income for years to come.