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E27: How to Build Lifelong Cash Flow with Triple Net Leasing
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In this episode, commercial real estate broker Dan Lewkowicz talks about triple net leasing - an often overlooked asset class that can generate significant passive income.
Dan is the Senior Director at Encore Real Estate Investment Services, a boutique net lease investment sales firm. He shares his expertise on evaluating deals, understanding lease structures, and the tax benefits of owning net leased properties.
Whether you're a seasoned investor or just starting out, learn how this attractive sector could help grow your portfolio!
Here are some power takeaways from today’s conversation:
00:00
01:51 - Dan’s real estate background
07:23 - Triple net lease explained
09:44 - Double net lease and other types of leases
10:28 - Evaluating net lease deals
19:41 - Their buyer profile
21:59 - Real estate market trends and stability in the net lease space
28:31 - Tax benefits of ownership
31:46 - Risk factors to consider
35:17 - Net lease investing and property management
Options for syndication and passive income
Episode Highlights:
[07:23] What is Triple Net Leasing?
Dan explains how triple net leases can generate stable cash flow with minimal obligations for owners. Tenants are responsible for taxes, insurance, and maintenance, allowing landlords to collect rent with no expenses. He compares a sample net leased property like a Wendy's, bringing in $125k annually in rent, to a similar small multifamily. While the multifamily would have $65k in yearly expenses, the absolute triple net leased Wendy's would have zero expenses, making it highly passive for owners.
[10:28] How to Evaluate Net Lease Deals
When analyzing a potential net lease property, Dan looks closely at lease terms like guarantees, sales reporting, and replacement costs. He assigns a cap rate based on factors like credit, term, and rent levels to determine fair value. Key considerations include the size and financial strength of the tenant guarantor, sales performance at the location, and the ease of replacing rental income if the tenant leaves. With the right due diligence, investors can make well-informed purchase decisions on net leased assets.
[31:46] Risk Factors and Rewards
Bankruptcy is a risk factor for investors to consider, though it remains relatively rare for strong tenants. Dan cites recent examples like Rite Aid undergoing bankruptcy proceedings and Walgreens' credit downgrade. Deferred maintenance on properties can also impact value if unaddressed over time. However, Dan notes that net lease cap rates have proven stable even during difficult economic periods, making the asset class attractive from a risk-adjusted return standpoint. With the proper due diligence like periodic property inspections, owners can mitigate issues. Additionally, the long lease terms on quality properties provide stable cash flow for generations. For the right investors, net leasing offers both rewards and security through diligent ownership.
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