Three Positives for Net-Leased Investments
Net-leased investments can offer strong advantages over traditional purchases -- including tax benefits, increased leverage and a reliance on a tenant's credit.
- Jan 11, 2012
By Jon England,
Principal, Lee & Associates Kansas
Net-leased investments – where a property’s tenant leases the building and pays a rental rate that is net of any taxes, utilities, insurance and common-areas expenses – can be great uses for capital. The lease length is typically five to 10 years, with an option to renew at a pre-negotiated rental rate. Generally, the owner of a net-leased property receives a monthly rent check and has little to no management responsibilities. Therefore if the roof leaks or the parking lot needs repair, these are not the building owner’s problem. Here are three common benefits of owning a net leased investment as compared a standard stock-market investment:
Tax Benefits: Real estate offers the benefits of cost-recovery depreciation. If the property appreciates in value during the investor’s period of ownership, this is a capital gain. Investors can defer their taxes owed on their capital gain by reinvesting their sales proceeds into another real estate investment property in the form of an IRS 1031 Exchange transaction. This is a great way to build wealth through real estate by reinvesting the appreciated sales proceeds and deferring any tax to a future time.
Leverage: Real estate allows you to use the bank’s money to create wealth. Try to borrow the bank’s money to build a stock portfolio – it’s not going to happen. But if an investor found a $1 million net-leased investment property that paid $90,000 in annual net rent, meaning a 9 percent cap rate, this person could walk into several banks and borrow $650,000 (or more) to purchase this building. Over 20 years this same investor could own this building free and clear of debt and they used a majority of the bank’s money and the tenant’s rental payments to pay it off.
Tenant’s Credit: This is an important aspect of net-leased investments. If the tenant is publicly traded and has an “A” credit rating that would mean that out of all their locations across the country they have never missed a lease payment on one of their buildings. Net leases to companies with good credit are easier to finance and often times require less of a down payment. On the other side, local credit leases may have a perception in the market of higher risk therefore will likely require a higher yield as a result of an investor taking on this risk.
Jon England, CCIM, SEC is an investment sales broker with Lee & Associates Kansas. He has assisted clients in the purchase and sale of net-leased investment properties and self-storage facilities.