How To Evaluate Net Leased investment
In addition to paying rent, tenants pay net lease in commercial real estate. The expenses are what should get paid by the landlord. The expenses are usually divided into three; insurance, maintenance and property taxes. The tenants are given a written lease indicating the items that are to be paid. Read on to know how to evaluate net leased investments.
The first step is identifying the person who will guarantee the lease. Corporate guarantees are usually the most preferred. It is risky to choose individual guarantees. It is important to know how long the lease will last. If a tenant is the same, then a 20 year lease is much preferable than a five year one. It is important that you view all the other options that a tenant has. In case there are no other available options, you can negotiate the lease if the tenant intends to keep staying and the end of the lease is near. To avoid such inconveniences, many people prefer long base terms that have longer options.
Secondly, the location of the property will determine if it is re-leasable in case the tenant leaves. It is common for tenants to pay more than the market rate to get the best locations. For example, fast food is the easiest to re-lease as they are usually similar in size while distribution facilities such as Fed Ex are hard because of the large spaces. It is easier to find someone to replace a tenant who pays way below the market rent.
It is also important to know your exit strategy for net leased investment. You have to know if the deal will bring you money should you decide to start investing. An exit strategy is vital if you notice that you have reached your hold period and there is still no progress. Get to know the resale value for your investment. Just because your business idea is pleasing to you, it doesn’t mean that it is to the investors and if they are not pleased it will limit buyers when you decide to sell the property. Take your time to know all that entails net leased investment to avoid disappointments.
Lastly, find out if there are rent escalations. This involves the frequency and percentage of escalations. There are certain rental categories that offer high rent escalation compared to others. Typically fast food leases tend to increase annually or over an extended period of time while drug stores normally don’t offer rent escalations. It is wise to view the credit rating of tenants. This provides a sense of stability meaning you won’t have issues time to time. There are companies that offer advice on finding property that is right for your investment. It is important to do research to make sure you get profits from net leased investments.