Investing in My 2nd Triple-Net Leaseback Rental Property
For those of you who read about my 1st investment in a triple-net leaseback rental property, I talked about how amazing my returns were. In just 2 years, my total return on investment was a whopping 58%! But as the saying goes, past results don’t predict future results, as you will soon find out about my 2nd triple-net leaseback rental property. And, unfortunately for me, my returns turned out to be quite abysmal.
As a quick recap, I’ve included the definitions of what a triple-net lease (NNN) and a leaseback are below (taken from my previous post which contains even more details):
“A triple-net lease (NNN) is an agreement where the tenant usually pays for the property’s taxes, insurance, and maintenance (outside of regular wear-and-tear) on top of monthly rent. In my case, my triple-net lease agreement also required my tenant to pay for HOA dues, too.
A leaseback is a real estate transaction where the seller of a property becomes the tenant of the property after their property is sold to a buyer. To clarify, the buyer becomes the seller’s landlord. The lease agreement between the seller and buyer is agreed upon as part of the sale transaction. In my case, my lease agreement happened to be a triple-net lease as described above.”
The Honeymoon Phase
For my 2nd triple-net leaseback investment, I purchased a single-family home with the same builder that sold me the home for my 1st triple-net leaseback investment. It was located in the same city but in a different community a few miles away. The deal was exactly the same as my 1st one, so the builder sold me the home and became my tenant for 2 years. I purchased the property from them for $440K with 20% down ($88K) at a 4.875% interest rate. The builder covered 1% of my closing costs, paid 9% of the purchase price, and reimbursed me for property taxes, insurance, and HOA over the course of the entire 2-year lease! Additionally, they were on the hook for maintaining the property while they occupied it. What’s not to like!?
By the end of the 2-year lease, the builder paid me a grand total of $79,200 in gross rent. During that time, the sum of all my mortgage payments came to $44,707.44. So my net rental income was $34,492.56. With an initial $88K investment, my 2-year return was 39.20% which is pretty amazing!
The Home Sale
Well, the way these short-term leaseback deals go is that you’re usually in it for just a couple years and get out right after the lease ends. Once the leaseback is over, you usually want to sell and put your money to work elsewhere, since the property usually doesn’t make sense as a traditional buy-and-hold investment property. It’s certainly a big risk to take, but I decided to jump in anyways since I was barely in my mid-20s.
I’m not a procrastinator, so 3 months before the lease ended, I started to think about selling the property. Soon after I started researching the local market, it was clear that the sales comps were much lower than I had expected. I tried to beat the market anyways since I thought I had the nicest home on the block (I still think I did).
I had my realtor list my property at $469K originally. After a month passed, we dropped the price $10K to $459K. After another month of no interest, we dropped it another $10K down to $449K. 3 months after we listed and no interest, we decided to make a drastic drop of nearly $20K down to $429,900! Guess what? We still didn’t get any interest! After continued marketing over 2 more months, we again dropped the list price just over $20K to $409K. At this point in time, the property had been listed for 5 months!
Finally, after 6 months of waiting, we had a few interested buyers that thought our house was beautiful and listed at a very attractive price. We got into contract shortly after and sold the home after a long 7 months of waiting.. at a $40K loss! Not only that, as a seller, you incur quite a bit of fees especially commission to both the buying agent and my own selling agent. For me, that cost me approximately $18,000, 4.5% of the sale price. So at the end of the day, the sale ultimately resulted in a $58K loss.
To summarize, here’s the timeline of events:
December 2017: I purchased the property for $440K with 20% down (an $88K initial investment).
September 2019 (3 months before the leaseback ends): I listed the property for sale at $469K
October 2019: Dropped the list price $10K to $459K
November 2019: I drop the list price another $10K to $449K
December 2020: The 2-year triple-net leaseback ends, grossing me $79,200 in rent. I also drop the list price $20K to $429K
February 2020: I drop the list price another $20K to $409K
April 2020 (28 months after purchasing the property and 4 months after the leaseback ended): The property is sold for $400K. Selling costs of 4.5% cost me an additional $18K. The sum of all 28 months of mortgage payments ended up totaling $52,158.68.
Overall, my net rental income came out to $27.014.32. With an initial investment of $88K, a capital loss of $58K from the sale of the home, and a $27,014.32 net rental income, my ROI came out to a dreadful -35.18%. But if I factor in principal paydown from my 28 months of mortgage payments, totaling $12,807, the ROI improves to -20.63%.
Hindsight and Lessons Learned
Whenever I review an investment, I always compare it with the stock market and use it as a benchmark. VTI (a total stock market index run by Vanguard), for example, had a starting price of $136.07 on Dec 1, 2017 and an end price of $122.96 on April 1, 2020. This isn’t the greatest sample period for the stock market because, unfortunately for VTI, April 1, 2020 was right after the stock market crash of March 2020! With dividends reinvested, an investment in VTI during this exact period would have amounted to a -5.21% return. But I’d still take that any day over my awful -20.63% return over the same period!
While the property was just a few miles away from my 1st triple-net leaseback property, the location of this one just wasn’t as hot. In hindsight, I fully believe I overpaid for the property, given the overall real estate market continued its climb from 2017 through 2020. Another factor was that I was trying to sell at the end of the year, which is notably a worse season to sell real estate, especially compared to the Spring and Summer months. The last factor that possibly affected the sale of my home may have been due to the rise of the COVID pandemic and the subsequent March 2020 stock market crash. However, I originally listed in September of 2019 and there was close to zero interest then, so I don’t think the pandemic was the biggest factor.
In conclusion, triple-net leasebacks clearly aren’t always winners as my 1st one may have suggested. They are very risky. In fact, my risk tolerance has reduced since then, and it’s possible I may not invest in another one for quite a while (maybe after I reach my $10M FIRE goal?). In other news, my risk tolerance has increased in other ways, since I plan to attempt to flip one out-of-state property per quarter this year. In fact, I have some exciting news to share on that front, so stay tuned!
