We all know real estate investments can be a resilient investment option, but not all properties or portfolios are created equal. As is true of all investment strategies, any approach will have its strengths and weaknesses, but in the real estate investing world, a portfolio composed of triple-net lease or NNN properties can be one of the best options to weather economic and market uncertainty.
Such properties often deliver greater income predictability when subject to long-term leases guaranteed by a creditworthy tenant. The reason? The tenant is responsible for most of the expenses related to the property (i.e., taxes, insurance and maintenance), which significantly reduces the risk of unexpected expenses falling to the landlord while still aiding in the potential for long-term appreciation of the property itself and, therefore, the landlord’s initial investment. Dividend.com echoes that logic, calling net-lease REITs with long-term leases an opportunity to add a sense of stability and transparency to your portfolio.
If the triple-net lease is the final word in consistency and stability for landlords, the gross lease sits at the opposite end of the spectrum, promising higher monthly rents to combat additional risks. While a larger monthly rent payment may be appealing at first, gross leases may come with a loss of flexibility and predictability, as well as unexpected expenses.
The answer lies in which party — the landlord or the tenant — is responsible for potentially significant variable costs. Let’s take a closer look at how these two common lease types differ on the cost-front:
That’s not to say that triple-net leases — and investing itself whether you’re investing in real estate, the stock market or cryptocurrency — comes without risk. Despite the fact that triple-net leases tend to offer more stability and consistency than gross leases, landlords are still susceptible to tenant- and economic-related risks. A stable tenant may be forced to relocate headquarters or other key operations following an acquisition, while the rise of industries that just 10 years ago would have seemed like pipedreams (take the gig economy for one) can upend entire sectors of the economy.
For investors seeking predictability, the triple-net lease tends to be particularly desirable as it reduces uncertainties and “what ifs” in favor of clearly understood income and expenses for the duration of the lease. It should come as no surprise then, that our investment strategy places a high value on long-term consistency, with net-lease properties comprising a significant part of our portfolio.
The views and opinions expressed in this commentary reflect Modiv Inc.’s (together with its affiliates, “Modiv”) beliefs and observations in commercial real estate as of the date of publication from sources believed by Modiv to be reliable and are subject to change. Modiv undertakes no responsibility to advise you of any changes in the views expressed herein. No representations are made as to the accuracy of such observations and assumptions and there can be no assurances that actual events will not differ materially from those assumed. The forward-looking statements in this paper are based on Modiv’s current expectations, estimates, forecasts and projections, and are not guarantees of future performance. Actual results may differ materially from those expressed in these forward-looking statements, and you should not place undue reliance on any such statements. These materials are provided for informational purposes only, and under no circumstances may any information contained herein be construed as investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any Modiv program or offering. Alternative investments, such as investments in real estate, can be highly illiquid, are speculative, may not be suitable for all investors, and there is no guarantee that distributions will be paid.