An Introduction to NNN Leasehold Properties
With the shortage of lucrative NNN investment properties in densely populated urban areas and the continued cap rate adjustment for property, more and more people are now eying leasehold NNN properties in the US. Unlike the common net lease investment, the leasehold investor never takes title to the underlying land. The investor only purchases the right to use the property until the lease term expires. At the end of the lease term, the property is given back to the legal owner of the land.
When you buy a leasehold property, you are buying only improvements, (i.e. the structure) and not the land. Leasehold is a kind of property in which a person holds the right to the property for a defined lease term- ranging from a period of 99 to even 999 years. In the event of expiry of the lease period, the ownership of property reverts back to the freeholder or owner of the property. This is in contrast to freehold, where the ownership is completely held by the owner. In this type of property, leaseholder is responsible for the maintenance of everything within the property’s four walls, in addition to rent. The maintenance includes floorboards and plasterwork, but excludes the exterior or structural walls.
Top Reasons for Investing in NNN Leasehold Properties:
- You gain control over the land and the ability to rent it out to someone else
- You can depreciate your entire purchase price, which reduces your tax bills
- As a tenant, you may pay rent in single payment or pay it annually in installments
- As a tenant, you become the owner of the internal building in which you live in
- The lease term could be extended through mutual agreement between tenant and the landlord
- Landlord has less or no management responsibilities, as the tenant manages the building
Major Advantages of Leasehold NNN Properties
For cash flow conscious investors, buying leasehold asset can be a good way to invest in real estate. The added advantage of buying such a lease is that you get control of the land and the ability to rent it out to someone else, which helps you earn a good income. Another benefit of investing in this type of estate, you can depreciate your entire purchase price and thus reduce tax on your cash flow. The third most striking feature of the leasehold properties is the payment flexibility, which means the tenant can pay rent in single payment or pay it annually in installments. Finally, though leasehold interests are not real estate, the IRS however lets you to do 1031 tax-deferred exchanges in and out of them, on the condition that the ground lease has around 30 years of remaining term. This will enable you get high cash flow, while having the benefits of buying and selling without having to pay capital gains tax.
When is the Right Time to Invest in Leasehold NNN Properties
With the shortage of desirable NNN investment properties in the urban areas of the United States, the demand for leasehold properties is going up with the passage of time. If you are looking to invest in these types of real estate assets, now may be the best time to consider investing in a NNN leasehold deals. Unlike the traditional net lease investment, the leasehold investor never takes title to the land, but they do get the right to use the property for a definite period of lease. At the expiry of lease term, the ownership of the real estate reverts back to the owner of the land. That way, investing in these sorts of real estate products is a win-win situation for both the tenant as well as the property owner.
Who is the Buyer and Seller of Leasehold Properties?
The buyers of leasehold properties are mostly 1031 exchange buyers and large funds, REITS or insurance firms that look for higher return on the investment and 100% depreciation for tax benefits. The sellers of these properties may usually include the large funds, REITS, and people who bought them in previous 1031 exchanges. They may also comprise of the owners who wish to keep their land, but don’t mind to sell the improvements at lower prices. They buyers may also be the individuals, who don’t want to manage their properties any more and sell the leasehold, let someone else (tenant or lessee) manage it,and thereby make extra money coming through the rent from the tenant (company).
Things to Consider When Investing in Leasehold Properties
When buying a leasehold property, there are many factors to be kept in mind. It is advisable to spare some time to check out the location of various estates and compare them in terms of price, benefits and features. Ask if it is right property for you. Always negotiate the lease terms carefully. It is much lucrative, if you enter into a long term lease, because it will provide security and a fairly long time to do business. As an investor, you also need to check the background of tenant as well as seller of the property, if you want to move in this type of real estate safely. Finally, make sure to give your building to a tenant with high credit rating, because this will enable to receive higher rent on the specified time.
To be part of successful real estate however, it is essential to have an experienced real estate advisor in complex lease transactions. A good real estate agent will tell you about the varied pros and cons of investing in such properties and also help you finalize real estate deals successfully. Get in touch with our experts at Triple Net Investment Group for your queries and concerns pertaining to real estate.