Should You Opt For A 1031 Exchange With NNN Lease Investment?
Section 1031 of IRC ora 1031 Exchange not only allows investors to defer capital gains tax on property exchange but also let them switch to an entirely different investment structure (NNN, DST, and TIC).Say, you own a rental property that you’ve leased to a tenant under a gross lease. At any point in your investment career, you can 1031 exchange it into a NNN property and get rid of day-to-day management responsibilities.
Gross Lease Vs NNN Lease –
Under a gross, as you may know, the tenant only pays a flat rent which is then used by the landlord or property owner to pay off operating expenses associated with their property. Here, the landlord needs to invest a significant part of their profit on the maintenance of the property. Some would call it a landlord’s responsibility. But why should one pay for things that they don’t use? Don’t you think it shouldn’t be this way?A NNN lease lifts the burden of property management from a landlord’s shoulders.
A Triple Net (NNN) Lease is a single-tenant arrangement that requires the tenant to pay all operating expenses associated with the property they’ve rented. Operating expenses a tenant covers under a NNN lease include insurance fee, property taxes, and maintenance cost (together known as the three nets). Therefore, unlike a gross lease, a NNN lease requires the tenant to pay all operating expenses instead of the landlord. As the tenant is also responsible for paying additional property expenses, the base rent under a NNN lease is slightly less than that under a gross lease.
Is Freedom from Property Management Only Reason Why Investors Prefer NNN Investment?
Certainly not. Though relief from day-to-day management responsibilities is what every NNN investor seeks, it isn’t the only benefita NNN investment offers.
- Steady flow of income – The best part of owning a rental property is that you get monthly returns, which grow every year. A NNN lease requires a long-term commitment and may lock the tenant for 10-15 years. Consequently, NNN investors enjoy a steady flow of cash for a long time.
- Low Risk of Default – The majority of NNN tenants are big and established multi-national companies. The presence of business giants such as CVS and Walgreens in NNN investment market ensures a little-to-no risk of default.
As you can see, NNN investment guarantees a regular flow of income. However, it doesn’t protect against losses, like any other investment. Therefore, you must consult a financial advisor or a NNN expert before signing a NNN lease agreement.
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