You, the investor, have found a potential property that you are ready to invest in, now what?
One of the most important steps in Triple Net (NNN) investing is performing a due diligence inspection. Due diligence is simply researching a potential investment for viability before moving forward. There are too many steps to go through them all, so I will highlight the basics in no particular order.
Once you have identified an investment, you should first request a copy of the current lease. The lease will tell you how much time is left and what (if any) increases are to be expected. In order to maintain the value of a NNN investment, there should be pre-planned rent increases. Increases typically range 2-3% annually to keep up with the pace of inflation. If not, the value of the property (lease) will decrease over time. The value of a NNN lease is directly connected to the cap rate (see Cap Rate Blog for more information).
Next, you should review the owner’s Profit and Loss (P&L) statement for at least the past three years. It will show what the owner has invested in the past; thus, giving you an idea of what will need to be invested into the property after purchase.
In addition to reviewing P&L, evaluating the creditworthiness of the tenant is equally
important. You can accomplish this a few different ways depending on the structure of the company. Most commonly, one would use a credit rating agency such as Standard and Poor’s.
Inspecting the physical structure of the property is always a good idea.
For best practice, hire a professional contractor that you trust who is familiar with the type of building you are interested in. He or she will give you an idea on how much “life” the building and other improvements have left; which will save you money in the long run. Also, you will want to check into the upkeep of the neighborhood in general.
Inspecting the building and neighborhood lead us to the next piece of vital information: Is the property located in the path of growth, midlife, or decline? Researching demographics, trends, and talking to city planning and zoning boards will give you a solid idea of the growth patterns. You may not wish to invest in an area that is on the down slope.
Finally, here are some general points that you may want to consider.
- What is the reputation of the tenant?
- What are their plans? A simple interview with the tenants (if possible) will reveal most if not all of the questions as to whether they are planning to leave after the lease is up.
- Ask the current owner if they have ever had any issues with the tenants paying rent on time. This sounds too simple, but it will prevent a lot of headaches if you know in advance that there is an issue.
NNN investing is a relatively easy and pain free source of income that can provide security for investors, IF you hire the right broker and conduct the appropriate due diligence every time.