Section 1031 of the Internal Revenue Code, provides a simple, strategic method for deferring capital gain or recapture tax from the sale of real property. During the process of a 1031 Exchange, the property owner will distribute property that is meant for investment or productive use in trade or business. Once the property sells, the property owner uses the proceeds to acquire replacement property of equal or great value. The 1031 Exchange process is straightforward; following strict guidelines is required to complete the exchange.
Gross Lease Vs NNN Lease –
When operating under a gross lease, the tenant pays flat to rent, and the property owner is responsible for the operating expenses of the property. The landlord has to invest a significant portion of their profit towards property maintenance. This portion of earnings that the landlord is responsible for is often referred to as the landlord’s responsibility. This type of lease leaves the property owner paying for maintenance on a building that they aren’t currently using. A NNN lease eliminates the property management role from the property owner.
NNN Lease Investments: In its purest form (called a triple net lease or NNN lease), the tenant is responsible for all property management and repairs – including everything from paying the taxes to sweeping out the driveway to repairing the roof if needed. The only responsibility of the owner is to pay the mortgage on the property. Unlike a gross lease, a triple net lease requires the tenant to pay for all of the operating expenses and additional property expenses. However, the base rent is slightly lower than a NNN lease.
Is Property Management the only reason investors prefer NNN Investments?
While not having to worry about property management is a huge factor for investors, this is not the only reason NNN investments are preferred. The other benefits of a NNN investment are:
- Consistent Income – The most satisfying part of owning a rental property is the monthly income that increases yearly. A triple net lease requires a long-term commitment that could lock tenants into a contract for 10-15 years.
- Low Default Risk – Since most NNN tenants are established national companies such as Publix, Walgreens, and CVS, the risk of default is slim to none.
As you can see, NNN investment ensures a consistent flow of income. However, like any other investment, it is a risk. Therefore, we recommend consulting a financial advisor or a NNN expert before signing a NNN lease agreement. For consultation and assistance regarding 1031 Exchanges, you can visit NNNInvest.com/1031-exchange or email us at info@NNNInvest.com.