NNN Provides Alternative to Tenants, Trash and Toilets

Landlords seeking to swap the headaches and horror stories of hands-on apartment management are fueling demand for net lease investment properties.

Buying triple net lease (NNN) properties is often a popular next step for multifamily investors. In fact, owners who are selling apartments and rolling proceeds into a new real estate investment account for nearly half of all 1031 Exchange net lease property sales.

According to research from Marcus & Millichap, an estimated 47% of all net lease transactions are fueled by 1031 Exchange buyers who are transitioning out of apartments and into the more passive, stable income opportunities typically found in net lease property investments. That stat is even more impressive given the substantial size of the overall net lease investment sales market. Data from Real Capital Analytics puts the size of the net lease investment sales market at roughly $68.1 billion.

The huge net lease sales market is partly driven by the steady demand from investors who are attracted to the many benefits of net lease properties including predictable rental income, guaranteed leases by national tenants and zero landlord responsibility, along with the usual perks of real estate ownership such as tax benefits and property appreciation. Certainly, net lease also attracts investors transitioning out of a variety of different types of properties, but apartment owners are clearly leading the charge.

Anyone who has ever owned an apartment property, no matter how big or small, knows that the work involved in the day-to-day management can wear on you over time. As such, there are plenty of incentives for apartment owners to take their chips off the table and reinvest in net lease assets where they can find attractive income opportunities with less hassle. Some of the top reasons why apartment owners choose to transition out of apartments and into net lease investments include:

#1 Active Management

Let’s face it. Dealing with renters is a 24-7 job. Managing apartments requires addressing ongoing tenant issues that run the gamut from calls about a leaky faucet or A/C unit that is on the fritz to complaints about noisy neighbors. No owner wants to receive that call from a tenant late at night that the water pipe is leaking, or toilet isn’t working. Yet those unpleasant calls come at all hours of the day and night, weekends and holidays.

#2 Problem Tenants

Landlords deal with a steady stream of tenant-related issues ranging from late rent checks to police calls to the property. In addition, there are plenty of horror stories about renters who stopped paying rent, dragged out the costly eviction process for months and then left owners with a trashed unit. . In the case of one apartment owner in Chicago, the landlord finally succeeded in removing a rent after eight months of nonpayment. However, the story didn’t end there. The new tenants complained of a strange odor. We’ll spare you the details, but to make a long story short, the evicted tenant had hidden multiple packages of raw meat behind the walls as their ‘parting gift’ before moving out.

#3 Frequent Tenant Turnover

Landlords love it when they can land an “easy” tenant that is quiet, pays rent on time and is content to remain in place over the long term. Unfortunately, those tenants are a rare find. Many apartment owners struggle with high turnover rates, which adds up to more leasing costs and lost income. The average length of tenancy across U.S. is about 2-3 years. Based on those stats even owning a five-unit property means that an owner is replacing one or even two tenants each year. That constant churn can scale up quickly for larger properties, and that tenant turnover can kill profitability, often costing landlords thousands of dollars per month.

#4 Rules and regulation protecting tenants: Owners often face a gauntlet of laws and regulations aimed at protecting renters from being taken advantage of by their landlord. Those regulations can be tricky to navigate, and any missteps can result in fines, not to mention the risk of lengthy and expensive legal issues. Many jurisdictions also have strict rent controls in place that make it difficult to raise rents. So, no matter how fast demand for units rises or how high occupancy levels are, you can only increase rent based on specified cost-of-living increase mandated by city government. According to the Urban Land Institute, there are 182 cities in California, New York, New Jersey, Washington, D.C. and Maryland with rent-control regulations.

In fact, it is not unusual to find long-time tenants (greater than 10 years) in apartments in buildings in cities such as Los Angeles, New York or Washington D.C. that are paying rent that is 50% or even lower than current market rents. Can you imagine the staggering amount of lost income for owners that grows over time and across multiple units?

Each one of the above reasons on its own represents a compelling argument for transitioning to the easier path offered with net lease assets. Add them all together, and it is pretty easy to understand why apartment owners account for nearly half of all 1031 Exchange net lease property purchases. Many are eager to trade the headaches of tenants, trash and toilets for an asset where a single, long-term tenant is in charge of all of the day-to-day management, maintenance and operations.

Net lease owners recognize greater freedom, and they don’t have to worry about losing income due to bounced checks, onerous tenants or rent control laws. Net lease investments deliver steady rental income backed by long-term national tenants of operating businesses – all without the headaches of active management. To learn more about whether a NNN investment property is the right fit for your financial and lifestyle goals contact Andrew Vu at 415-539-1120 for a complimentary strategy consultation.