Is NNN lease a good first investment?

[Siah Hawton]

I have been looking into investing in the commercial real estate space. Triple Net Leases have caught my eye as a good possible investment. I was wondering if this kind of investing is good for a novice or not? Especially with the perceived high capital barrier for entry along with large debt.

Also, suggestions on how to overcome the fear of making this kind of investment. 

[Benjamin Aaker]

NNN not as well-promoted as it is usually used in the commercial world and residential vastly eclipses it. NNN would be great for starting out on the financial ledger side of things. The risk to the landlord is very small as the tenant reimburses for almost all expenses. Time involved managing is less because many improvements and repairs are the tenant's responsibility.

The other side is the leasing and bookkeeping side. Leasing takes a lot more work because most commercial leases are 5-20 years and go under a lot more scrutiny than a 12 month residential tenancy. A good commercial broker would be handy, at least when starting out. They'll usually require 6% of the rents for the first term of the lease. Bookkeeping needs to be meticulous as you regularly pay bills, then send a bill to the tenant(s) to pay back. Though you can set it up so the tenant directly pays many of these, making a mistake can cause a big headache.

On the capital barrier side: You can buy small commercial properties, but tenants for smaller properties are more likely to demand a gross lease (more typical of residential leases) than a NNN lease.

On the fear question: Start evaluating deals every day. This is a great way to educate yourself on what is happening in the market and the terms that are asked. When you start making offers, you'll get to see the current leases in your area and how they are structured. Preparation is the best way to conquer that fear. Good luck!