When Should You Trade Your Triple Net?

While most investors buy triple-net assets as a long-term hold, they often overlook the exit strategy, notes Sands Investment Group Managing Director Max Freedman.

MaxFreedmanMost investors buy triple-net investment properties as a long-term hold. What is often overlooked is the exit strategy. When to sell an asset may be the biggest decision an investor makes. Key events within the hold period can help indicate it’s time to sell.

The Market

All investors look to buy low and sell high. That’s why timing is everything with any investment because no one wants to “miss the market.” In a seller’s market, many investments see unrealized gains through cap rate compression in the marketplace. We are now experiencing some of the lowest cap rates the triple-net market has ever seen. The additional equity is attributed to the market and this gain can be used to trade up. Investors should seek to increase their position through quality of real estate, credit and lease term. This is the time to use the market to its advantage, unlock the built up equity and reinvest into a stronger investment position.

Lease Term

Lease term is king when valuing net-lease investments. The length of term on the lease is directly correlated with the investor’s risk tolerance on the guaranteed rent, thus affecting the rate of return the investor is willing pay. The tipping point where investors see the premium is at the 10-plus year mark. To increase position, investors can capitalize on the hold period rent increases and reset the clock on a long-term investment. Investors should consider trading while the asset is in its premium lease term and look for an investment with a long-term lease to reset the clock

Credit Upgrade

Credit plays a big role in the risk tolerance for investors seeking net lease investments. The stronger the credit behind the lease the lower the yield for the investor. If a large corporation assumes responsibility of a lease in a buyout or assumption, this focal point in the investment strategy is the time to consider a trade.