The State of Florida continues to be the most popular state in the country for Americans to move to. Approximately 808 people move to The Sunshine State every day. Furthermore, a large percentage of these inbound residents are affluent Americans that are looking for a better life. As a result, this has not only led to increased demand for residential properties, but also for commercial spaces as well. With this said, adding a commercial real estate investment to your portfolio may be a way to diversify your investment portfolio while also providing additional passive income. In the event that you own a commercial property occupied by a tenant, you may want to consider implementing a triple net lease. (A triple net lease is also commonly referred to as a NNN.) We will describe the benefits of a triple net lease below.
What is a triple net lease & why should you implement it?
First of all, a triple net lease is when the lessee pays a base rent plus property taxes, property insurance and maintenance fees and is responsible for the roof, structure and foundation. This type of lease agreement is ideal for first-time real estate investors as it allows for more of a headache-free passive income opportunity. Some additional benefits of a triple net lease include:
- ensures the responsibility for operating expenses are on the tenant
- provides cash flow stability as typical leases are for 10 to 20 years
- you are typically dealing with companies, as opposed to tenants
- these commercial tenants typically have strong credit scores, thus provide a lower risk to the landlord
- the lease agreement should be structured to account for inflation with future base rent adjustments automatically applied
Other types of net leases
In addition to the triple net lease, there are also other types of net leases that are commonly utilized. For example, there are single net leases and double net leases. These leases are defined as follows:
- Single net lease: the tenant pays a lower base rent in addition to property taxes
- Double net lease: the tenant pays the base rent in addition to property taxes and insurance premiums
As with any type of real estate investment, the location will be critical to the success of your investment. When it comes to commercial real estate, there are many factors to consider in addition to the location as well. For example, we have seen a strong trend towards companies downsizing their commercial spaces and implementing a virtual workspace for their employees. Of course, some types of businesses do not allow for this. Therefore, you will want to ensure that your location can attract the type of business that needs a consistent brick and mortar presence. In addition, it is important to account for economic impacts such as inflation and a recession. With this said, certain businesses such as a pharmacy, auto parts store, or even a fast food restaurant may be more recession proof.
Are you thinking about investing in either residential or commercial real estate in South Florida? We can help. Contact Natasha at Live South Florida Realty, Inc. today! While you are at it, be sure to download our free Florida Home Search app for your smartphone or tablet.