Understanding And Evaluating Net Leased Investments
In addition to paying rent, tenants pay net lease in commercial real estate. These are expenses that would otherwise get paid by the landlord. They include, insurance, maintenance and repair, utilities, property taxes and others. A written lease is given to tenants stating what they should pay for. Below are a few factors you need to put into consideration to evaluate net leased investment.
First, you need to find someone who will guarantee the lease. Most people prefer corporate followed by franchisee guarantees. It is risky to choose individual guarantees. The lease structure and terms are of importance. A 20 year lease is much better than a 5 year one if a tenant remains to be the same. It is wise to note down all options that the tenant has. In case there are no other available options, you can negotiate the lease if the tenant intends to keep staying and the end of the lease is near. To avoid this, many people prefer longer options with long base terms.
Secondly, the location of the property will determine if it is re-leasable in case the tenant leaves. Majority of tenants usually pay way above the market rate in order to get the best locations. For example, fast food is the easiest to re-lease as they are usually similar in size while distribution facilities such as Fed Ex are hard because of the large spaces. You will have an easy time to replace a tenant who pays below the market rent.
It is also important to know your exit strategy for net leased investment. You have to know if the deal will bring you money should you decide to start investing. If by the end of your hold period you see no profits, you need to have an exit strategy. It is wise to know the resale market in case you decide to sell your investment. If your business idea is pleasing to the investors, it will add more buyers to your list in case you decide to sell the property. Take your time to know all that entails net leased investment to avoid disappointments.
It is important to know about rent escalations. This involves the frequency and percentage of escalations. There are certain rental categories that offer high rent escalation compared to others. Typically fast food leases tend to increase annually or over an extended period of time while drug stores normally don’t offer rent escalations. It is wise to view the credit rating of tenants. This will give you a sense of stability. If you are confused on what type of property to invest in, you can use the internet that offer consultation services to help you identify the right property. This is why you have to consult and research before getting involved in net leased investment.