Most people with a bit of financial know-how understand what a lease is. But what kind of lease is an NNN? There are some key differences between standard and NNN leases that consumers need to know. We've researched the subject to answer every question you have.
An NNN lease transfers the responsibility of many financial aspects of homeownership (or commercial property ownership) to a tenant instead of the landlord. An NNN lease can mean more responsibilities for a tenant, but it can also be a good deal in some cases. An NNN lease means:
- The tenant must pay property taxes.
- The renter has to cover insurance fees for the property.
- The tenant is responsible for property maintenance and expenses.
- The landlord may not handle renters' concerns except those outlined in the contract (if any).
There's a lot to consider when agreeing to a triple net lease. Read on for more details on NNN leases, including the legal definition and whether this type of contract is a good investment for you.
How Does a NNN Lease Work?
In a standard property lease scenario, the landlord is responsible for a lot of finances behind the scenes. But with an NNN lease, the tenant takes over the payment of real estate taxes, maintenance, and insurance for the property.
Not every landlord offers this type of lease. Not all renters will qualify, either.
Though landlords and rental agencies tend to require credit applications from prospective tenants, an NNN lease can have stricter requirements. After all, if you skip out on the bills, the owner of the property may face penalties or ruined credit.
Read our related post on what credit score you need to rent a house for details on creditworthiness for renters.
Most NNN leases cover commercial properties, not single-resident houses or apartments. As a consumer, you could rent an entire apartment building under an NNN lease, then move in tenants. Another example is a person or business renting a commercial property, then sub-letting the property to multiple companies.
What is the Definition of a Triple Net Lease?
Technically, though we call it a "NNN lease," it's still pronounced triple net lease. So, what is a net? Wikipedia explains that the nets are the everyday expenses associated with homeownership. In the case of the NNN lease, they're property taxes, insurance, and maintenance.
In contrast, a gross lease involves the renter paying a flat amount each month for rent only. Some properties include certain (or all) utilities in this flat rate.
Most NNN leases apply to commercial properties. Investors tend to offer these leases because it's a low-risk form of income for them.
Is NNN Lease a Good Investment?
With the availability of other lease types—like single-tenant net leases or double net leases—what makes the NNN a favorable option? Most of the time, the rent amounts are lower with this type of contract. Since the landlord doesn't have to pay taxes, insurance, or maintenance costs, they typically give renters a lower monthly rate on the property rental.
Lower rent is always desirable for tenants!
But another benefit is that you're in control of making maintenance decisions. For many renters, waiting on a landlord to schedule repairs can be frustrating. If it's up to you to schedule and pay for repairs, you can do it on your timetable.
You might also enjoy peace of mind knowing that things are paid up. After all, not every landlord makes their property tax payment on time or follows up with insurance stipulations.
If you want more control—as well as a lower rent payment—an NNN lease might be a good investment.
What About a Bondable NNN Lease?
While an NNN lease can be a good deal for tenants, a bondable NNN lease is different. Such a contract makes it impossible for the renter to terminate their lease. It's a catchall contract that mandates that the lessee keep paying rent (and the nets) until the contract ends.
For landlords, a bondable option is great, because it means their renters can't flake on the contract. Well, they could, but the landlord would have legal recourse.
For renters, however, this might not be a smart option. A bondable lease would mean you couldn't ask for a discount on rent if something goes wrong with the property.
It could also mean you end up paying for a home or apartment that's unlivable, depending on what goes wrong and when.
How Much Does NNN Add to the Lease?
The amount you'll pay for nets under an NNN lease can vary widely. You'll need to factor in property taxes, insurance costs, and maintenance expenses.
How Much Are Property Taxes?
Property taxes amount to an average of 1.19 percent on a national scale, while states like California charge .77 percent of a property's value. Rates also vary by county, as well as the property's assessed value.
For a house that's valued at $250,000, the annual California property tax equals $1,860. Most counties collect taxes twice a year, so you'll need to save $155 per month to be prepared for such payments. That is if the landlord doesn't require a six-month payment up-front. Such details will be in your contract.
Want to know more about property taxes? Read about whether property taxes are state or federal in a related post.
How Much Does Insurance Cost?
In addition to property taxes, you'll be paying insurance costs on the property. Insurance rates vary by state and county, too, and can depend upon the insured party's creditworthiness.
Rates vary from a few hundred dollars per year to a couple thousand. In areas that are vulnerable to fire or flood damage, insurance coverage often comes with a hefty price tag.
Read the contract carefully before signing; you might need to pay the insurance premium as well as renter's insurance to ensure your belongings are covered.
What Do Renters pay for Maintenance Costs?
Maintenance costs are the most unpredictable variable in an NNN lease. Your contract may specify what services and scenarios you must pay for. If it doesn't, you should make sure such terms are added before you sign.
Typical maintenance costs can involve:
- Yard maintenance, whether DIY or hired
- Pool cleaning and upkeep (as applicable)
- Roof repairs
- Maintenance, repairs, and replacement for HVAC components
- Carpet or flooring cleaning or replacement
- Plumbing fixes or service calls
- Electrical work and inspections
Keep in mind that the landlord can penalize you for not maintaining the property as agreed. They may even order services and then bill you for them if you fail to adhere to the contract terms.
What Does the Landlord Pay in a Triple Net Lease?
What a landlord is responsible for with a triple net lease depends on the contract involved. For landlords, especially, the risks tend to be low. However, the terms of the agreement stipulate what the landlord must pay for in specific scenarios.
For example, the contract might state that the tenant pays a set amount of property tax. Property taxes can fluctuate, though, and the landlord might be on the hook for paying the difference if the amount changes during your lease.
Plus, if the tenant doesn't respect the contract, a landlord might be forced to fund maintenance or other aspects of property ownership in the meantime.
Still, the greatest potential benefit lies in the hands of the landlord. When it comes to triple net leases, consumers must read carefully, only sign contracts that are clear and legal, and follow through with their responsibilities. With an agreeable landlord—and agreeable terms—you might find that a triple net lease is an excellent deal.