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Why 1031 investors prefer NNN properties over any other asset?

1031 Exchange is a tax-deferred exchange of properties under which an investor is allowed to defer capital gains tax on exchanging an investment  property for another like-kind property.  In layman’s language, if you’re planning to sell out one of your investment properties and don’t want to pay tax on the capital gains, 1031 exchange is what you should do. There could be innumerable reasons why an investor sells their property. One of the most common reasons is soaring operating expenses.

When a property is leased to a tenant under a gross lease, the property owner or investor only gets a flat rent, a part of which is used by them to pay operating expenses associated with that property. However, things change a bit if the property is leased under a NNN lease. The operating expenses associated with a NNN property are paid by the tenant instead of the property owner. Therefore if you do a 1031 exchange with NNN investment, not only you defer capital gains tax but also get relief from property management, and due to this reason only, the demand for NNN 1031 exchange properties has increased over the years.

What is a NNN lease?

A triple net (NNN) lease is a single-tenant arrangement under which all the operating expenses associated with a property are paid by the tenant instead of the property owner. Operating expenses that NNN tenants cover include property taxes, insurance fee, and maintenance cost (together known as the three-net), which means the property owner is just for bookkeeping. As NNN tenants are also required to pay the operating expenses, the base rent under a NNN lease is slightly less than that under a gross lease.

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Is NNN lease only of its kind?

Maybe not. You could find variations in net leases depending upon what operating expenses are covered by the tenant under a particular lease agreement. Say you’ve leased out your investment property to a tenant under a NNN lease. As per the lease agreement, the tenant will pay you the rent plus the operating expenses that include insurance fee, property taxes, and maintenance cost. However, if it’s a double net or NN lease, the tenant will only pay two operating expenses and not three. You’ll have to take care of the maintenance expense in this case. Similarly, a single net or just Net lease requires the tenant to pay only one operating expense along with the base rent.

Are NNN 1031 exchange properties priced high?

Just like any other real estate property, the value of a NNN property depends upon a couple of factors. The area of a NNN property and where it is built are two main factors that determine the value of the property. For an institutional-grade NNN property located in a posh area, you may need to stretch your budget. However, if it’s your lucky day and you have got a NNN expert with you, you may find the same property at a much lesser price.

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