The wise investor is always looking for good opportunities and different ways to protect their assets. In moments where global economies go, at the same time, on a complete stop is when having a good array of investments can save you. While I’m not the biggest fan of massive diversification, some of them are, actually, beneficial. And investing in triple net leases can be your safeguard for the next economic breakdown.
How do you make money investing
When you invest, you have, basically, two ways of making money: 1) cash flow coming from dividends, rents, distributions; and 2) the upside on the value of the invested asset: you bought it for $2 and sold it for $3, you’ve made a 50% profit.
Having a combination of both is important when building your portfolio. While one of them will give you a lot of joy when you sell it, the other will provide you with a passive income to pay your bills or accumulate and make new investments. Right now, we will focus on the second rather than the first.
Passive income with real estate properties
The concept of “passive income” is making money while you don’t have to work for it. Stocks can be a good source of passive income: you will buy them once and make money on the dividends every time there’s a payout. On real estate, it’s the same: you buy the property and collect rent. Buy, we all know that renting a property you own doesn’t comply with the “not having to work” part of passive income. There IS a lot of work.
If you buy a residential property or even a commercial property with regular rent conditions, you will be responsible for managing it (unless you hire someone to do that). A good friend of mine said that owning a property management company is like running a complaint center. You won’t have a call to tell how good you are doing. Rather than that, the subjects often are plumbing issues, electrical problems, infestations, and, sometimes, worse.
If you decide to salve the money - having a professional company to manage your property can cost you between 10-25% of your gross rent, you will need to dedicate a fair amount of time to keep your tenants happy and guaranteeing that they will renew their rent. Even so, you will have to face a problem: default.
I already wrote an article showing how Section 8 properties can save you on that. But, even so, you have the risk that your tenant leaves, looses his/her qualification for the program, or, worst-case scenario, the government decides to end the rent assistance.
So, what to do?
Walmart Wants You
Even though the Triple Net Lease is not exclusive for big corporations, we will be focusing on them for one good reason: we want to reduce your risk of not getting paid.
Companies need to extract the best of their investments. For example, Walmart makes money by buying and selling an infinite selection of products, including sporting goods, home goods, and food. It is not in the company's best interest to allocate millions of dollars in Real Estate properties because this would reduce their purchasing power, lower their margins, and, as a result, reduce their profits. So, what they do? They rather rent than buy the buildings where they decide to set their operations. And there is where you enter.
Rent to Big Corps
Buying a property to rent or rented to a big corporation, such as CVS, Walgreens, Walmart, Burger King, is a great way to invest in real estate. It’s the true passive income if you manage to have a Triple Net Lease.
In this agreement, the tenant is responsible for absolutely everything: property taxes, insurance, and maintenance. You don’t have to do, literally, anything. Referring back to the beginning of this article, the true passive income is that investment you make once and collect forever (or for the longest time possible) without working for it again.
The Triple Net Lease will guarantee you that. But still, there are 2 aspects of the contract you need to be aware of to reduce your risks: who’s the guarantor and how long is the contract?
On the Triple Net Leases for a franchise business, you need to know who will guarantee the rent payment: is the franchise or the franchisee? It’s always better to have the “mothership” guaranteeing you the payments because, in moments of economic disruptions or local markets shakedowns, you want to keep receiving your money.
During the COVID-19 era, the restaurants were very affected, while pharmacies were less. Regardless of that, if you had a real estate property rented to the main corporation, the financial situation of the local businessman, or woman, that run that specific branch would be irrelevant. You would get paid anyway.
Regarding the length of the contract, the longest, the better (for your risk). Commercial rents are like promissory notes: if the tenant leaves before the end of the term, he needs to pay you for the remaining time. If you rent your apartment to Regular Joe, you might have some legal battles to have your money back. But, if you rent to Big Corps, 1) they will be less likely to terminate the contract abruptly, and 2) if they do, you should have more chances to get paid.
So, the next time you enter a CVS Pharmacy to buy cough drops, it might be YOUR CVS store.