But think a little smaller, like fast food-restaurants, convenience stores and gas stations—and the returns can get bigger. These Commercial Real Estate Investments known as Triple-Net-Lease-Properties, are the best-performing sector of the commercial real estate marketplace. One Investment specialist, who is the head of global managed investments for a large Private Bank, like Triple Net Lease Properties. He serves ultra-high-net-worth clients and tells them it is the sector that lost the least value [during the recession] and rallied the quickest.
Triple Net Lease Properties are usually freestanding buildings in which a tenant agrees to take responsibility for maintenance, taxes and insurance during a long lease—leaving the investor with little to do but collect checks. Investors typically buy individual properties either alone or in limited partnerships with a few other investors, and then lease them out to occupants such as drug store chains, quick-serve restaurants, convenience and dollar stores, medical outfits, and in some cases big-box retailers like Costco. Some others are Walgreens, CVS, Wal-Mart, Target, FedEx, Home Depot, Kohl’s, Kroger and Lowe’s. McDonald’s, Publix, Staples and Burger King are other Triple Net Lease Properties to consider.
Triple-Net-Lease-Properties are generating nice annual returns. Individual investors and small groups of partners generally invest $300,000 to $5 million per building.
Some publicly traded real-estate investment trusts (REIT) concentrate on triple-net-lease properties, too. They returned 16.9% during the first quarter—compared with 11.1% for Dow Jones Equity All REIT Index, which includes all types of commercial and residential property.
Like all kinds of investing, triple-net-lease plays are based on risk: the more you're willing to take, the greater the potential returns. There are several important factors that determine a triple net deal's riskiness: the creditworthiness of the tenant, the location, physical condition and functionality of the property, and the remaining term on a lease (shorter is riskier). Also important: the "occupancy cost" or "health ratio," defined as the percentage that the tenant pays in rent relative to store sales. (The lower the ratio, the better.)
As with most income properties, investors can come out ahead—or behind—on Triple-Net-Lease properties in two ways: through price appreciation and income. The best measure of income potential is the so-called capitalization rate, or the net operating income divided by the purchase price of a property.
A self-professed "conservative" investor, now concentrates primarily on single-tenant properties. They combine prime real estate, a Tenant with stellar credit and minimal management responsibilities.