Looking to increase your income from your rentals? A triple net lease might be the solution. Did you know that there are multiple different types of leases you can create for yourself and your tenants? Though most lease agreements will include many standard non-negotiables — including timely rent payment and property upkeep — there are a few different ways you can approach a lease agreement depending on which expenses are the landlord’s responsibility and which are the tenant’s responsibility.
What Is a Triple Net Lease?
A triple net lease is a type of rental property lease agreement in which the tenant is responsible for all of the property’s expenses. This setup means that tenants not only have to pay rent and utilities as usual, but they also have to pay for any real estate taxes, maintenance costs, and building insurance fees during their lease.
Triple net leases are one of the most maximized lease agreement types for landlords. Similar options include double net leases (where tenants are responsible for property taxes and insurance in addition to rent and utilities) and single net leases (where only rent, utilities, and property taxes are the tenant’s responsibility).
What Is a Net Lease?
In order to understand triple net leases, it’s important to understand the concept of a net lease itself. Net leases are rental agreements in which tenants are required to pay either all or a portion of the property’s expenses, including taxes, maintenance costs, and fees.
Because tenants are responsible for paying more than just their rent and utility costs in a net lease, their rental rate is typically lower than it would be in a standard rental lease.
Net leases are inherently different from standard leases, as standard leases generally only include rent and utility costs in the tenant’s responsibility, with the rest of the property’s expenses falling to the landlord.
However, in both types of leases, rent amounts are decided by the capitalization rate. (Check out our cap rate calculator) This figure is the expected return rate on a rental property and is generally determined by the tenant’s credit and rental history, among other factors.
Pros and Cons
There are several benefits associated with triple net leases for landlords and tenants. These types of leases tend to be more flexible than standard leases for tenants as tax and insurance rates can change.
Additionally, triple net leases guarantee a much higher monthly income than standard leases with few overhead expenses, and the landlord gets to play a less active role in property management. This setup can benefit landlords who manage other properties, work other jobs, or even live out of state.
The primary downside of triple net leases is the high upfront cost for tenants. Additionally, the nature of a triple net lease gives tenants much more leverage when negotiating rent prices and which repair costs or utilities the landlord will be responsible for.
How to Calculate a Triple Net Lease
There are a few different ways to determine a triple net lease amount for your rental property as a landlord. Many property owners simply add together typical property tax, property insurance, individual unit maintenance, and common area maintenance costs and divide this number by 12 to come up with a monthly total.
This type of lease is easiest to navigate when a single tenant is renting an entire building, such as in a commercial real estate setting.