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Triple Net Lease vs. Double Net Lease vs. Single Net Lease - What's the Difference? - YouTube
Channel: REtipster
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Hey, how's it going? I'm Seth Williams
from REtipster.com
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and I'm much cooler online
than I am in real life.
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So what have you owned
a piece of real estate
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where the tenants paid you
thousands of each month
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they pay for all the maintenance
and repair costs.
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They paid for all the utilities,
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they paid for the property insurance
and the property taxes.
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Would you be okay with that?
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Now, what if we took this one step further
and said that this tenant was willing
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to sign a 5, 10, 15, or
even 20 year lease with you?
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I mean this is like the holy grail of what
every real estate investor is after.
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We're talking about long-term recurring
income where someone
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deals with all the most expensive and
annoying parts about property ownership.
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Now it might even sound too good
to be true, but believe it or not,
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there's actually a real
estate investing strategy
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where this is the norm.
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It's called a triple net lease.
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And for all the reasons I just mentioned,
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it's got a lot of huge advantages
to offer the property owner.
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So what's the deal with this
name in triple net lease?
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Well, this type of lease
has this name because
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the tenants are responsible for paying
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the three big costs of property ownership
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that are normally on the shoulders
of the property owner.
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We're talking about property taxes.
That's the first net.
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Property insurance.
That's the second net.
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And all the maintenance and repair costs
for the interior of the building.
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That's the third net.
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And granted with a triple net lease
the exterior of the building,
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like the roof, exterior walls and
the parking lot and landscaping.
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That's still on the shoulders
of the property owner,
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but the tenant covers everything
else on the inside.
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So in a sense, even though they're a tenant,
they're treating the building
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as if it's their own and they're paying the
property owner for the privilege of doing so.
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And it's also worth noting that in
most triple net leased situations,
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the tenant is able to negotiate
below-market rent
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because they're willing to deal with all these
other ongoing hassles and expenses
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of maintaining and running
the property as if it's their own.
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So it doesn't automatically mean that the
the landlord is getting rich off their tenant.
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It just means that the tenant is committing
to taking care of these things
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so that the property owner doesn't have to.
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Some common examples of triple net lease situations might be like a restaurant building,
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local department store, or
a manufacturing facility,
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or any big building
that has one tenant.
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Now, interestingly, there's also a couple
of less common twists on the triple net lease.
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One of them is called the double net lease.
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The other one is called a single net lease.
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And what's the difference between these two
and how they differ from a triple net lease?
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Well, with a single net lease the tenant
agrees to pay the cost of the property taxes
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in addition to the regular rent, but that's it.
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And the landlord may or may not
include utilities with rent
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depending on what they
negotiate with the tenant.
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And in a double net lease, the tenant
agrees to pay both the property taxes
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and the property insurance, in addition to
their regular rent payment.
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And interestingly, there's also
something called
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an absolute net lease or
a bondable lease.
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And this goes back in the direction of a triple
net lease, but it goes even further
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because it adds every other financial risk of
occupying that space to the tenant's plate.
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So the tenant pays for literally everything,
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including the exterior walls,
including the roof,
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including the parking lot,
including all of it.
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So obviously a triple net lease has a lot
of advantages to offer the property owner.
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First of all, a triple net lease represents
a lower risk for the landlord
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by making tenants directly
responsible for these extra costs
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landlords can sleep better
at night knowing that
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they just have fewer variable
expenses to worry about.
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They can just focus on paying their mortgage
and they don't have to worry about
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ongoing property tax hikes or other variable
expenses that might change in the future.
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Because again, that's all on
the shoulders of the tenants.
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Triple net leases also allow for fewer
headaches for the landlord to deal with.
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Every landlord knows what a pain it is to
deal with property management.
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Tenants call him at three in the morning,
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complaining about bad light
bulbs and clogged toilets,
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and asking their landlord to deal with it.
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Triple net leases allow landlords to delegate
these tasks directly to the tenant.
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And of course, another huge advantage of
a triple net lease is the passive income.
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So it's pretty hard to find any
source of income out there,
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whether it's from real estate or otherwise,
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that it is truly completely 100% passive.
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Triple net leases I wouldn't
say are 100% passive,
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but they're pretty darn close because
most of the ongoing hassles, expenses,
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and headaches are the tenant's
problem to deal with.
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Now, with all that said, it's
important to acknowledge
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triple net leases are not
all unicorns and rainbows,
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and they do have some disadvantages
to be aware of as well.
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First of all, vacancies, when they do
come up can be extremely costly.
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And depending on the property, it can
take a while to find a new tenant
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who will agree to the same triple net lease
terms and keep that income flowing again.
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And when a tenant vacates, it can take
some time to find the right replacement
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to sign another triple net lease.
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And some properties can
literally sit vacant for years.
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And this goes back to the importance of
the location of this type of property.
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If you do a triple net lease property, you
want to make sure the location is so good,
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that it's not going to take that
long to find a new tenant.
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An ideal triple net property
will be one that
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the property in its good
location are going to sell itself,
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and that will help ensure that vacancy isn't
a huge problem you love or have to deal with.
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And of course, if you want these awesome
properties in the best locations,
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then guess what?
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These kinds of properties are going to be
pretty expensive to buy in the first place.
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These things aren't cheap.
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Given that triple net tenants are usually
pretty big and the location is so important
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Ii also follows suit that these properties
are going to be pretty expensive
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to acquire in the first place.
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So you need a fair amount of capital
even to play ball on this realm.
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And one often overlooked risk
of triple net properties
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is the risk of unreported maintenance
problems with the property itself.
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Because remember, these tenants,
it's not really their property
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and say, if the roof starts leaking
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or something else goes wrong
in the property that isn't critical
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to their ongoing operations, they
might just not tell you about it.
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And the problem can get worse and worse.
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And again, because they may have
this mentality of a tenant
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and not a property owner,
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it's just not as important to them
to stay on top of these issues.
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And they could go unreported for years
until the problem becomes the big issue
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that guess what? You have to
then deal with and pay for.
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And while it's true that with a triple
net lease, it's the tenant's problem
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to take care of repairs and maintenance.
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A lot of tenants don't have
a whole lot of motivation
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to take care of deferred maintenance
just for the heck of it.
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And if it's not going to financially
benefit them or their business,
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they might just not take care of it.
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And also not tell you about it.
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And along those same lines, it's also entirely
possible that the tenant may just forget to,
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or neglect to pay the property
taxes or property insurance.
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Again, just because your tenant
agreed to pay for these things,
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it doesn't necessarily mean
you can trust them implicitly to do it.
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Tere are certainly ways to monitor this
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and make sure that these
bills are getting paid.
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But again, that kind of starts to detract
from the whole passive income side of this.
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If you have to constantly police your tenants
and make sure that they're doing
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what they said they were
going to do in the first place.
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This is precisely why so
many landlords choose
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to just collect the money for property taxes
themselves, and then pay these bills directly
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rather than just putting it on the tenant
and just trusting that they are going to do it.
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And that's where something
like a single net lease
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or just a regular lease might
make a lot more sense
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depending on the tenant and
how trustworthy you think they are.
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So in conclusion, triple net leases are not
the right strategy for every type of real estate
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and every type of real estate investor.
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But it can be a great strategy if you've got
adequate cash and financing to work with,
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and you're able to find a great
location with a great tenant,
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who's actually going to do
what they say they're going.
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If you can pull all these pieces together,
a triple net right lease property
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can be a great investment and a great
source of income for years to come.
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If you've got some good help from
this video, be sure to hit the like button,
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feel free to subscribe if you so choose
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and go check out the full article
over on REtipster.com linked below.
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And also be sure to
check out this next video,
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all about the difference between
an active and a passive investor.
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I think you'll like it.
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