Investing in My 3rd Triple-Net Leaseback Rental Property
Investing in triple-net leaseback rental properties is a very niche area of real estate investing. I’ve done it 3 times in my real estate investing career, and each experience has been different than the other. The 1st one was immensely profitable, the 2nd went terribly bad, and the 3rd you’ll soon find out!
Before I dive into the details of my 3rd triple-net leaseback, 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 Leaseback Agreement
My 3rd triple-net leaseback agreement was for 2 years, where the home builder paid me 8.5% of the purchase price in rent per year. Additionally, they also covered 1% of my closing costs, which pretty much covered all my costs. And as most triple-net leases go, the builder was responsible for reimbursing me for property taxes, insurance, and HOA over the course of the entire 2-year lease! Lastly, they were on the hook for maintaining the property while they occupied it. My only real cost during the course of the lease was my mortgage, which the rent easily covered. What a sweet deal!
This deal was not with the same builder as my first two leasebacks. This time I went with a much larger builder instead of a local, custom builder because I was hoping that this builder would take longer to build out multiple phases and would, therefore, extend their lease agreement beyond the initial 2 years. Boy was I wrong!
No News Is Good News, But Then Came The News
The first 17 months went swimmingly! The builder paid rent on time, reimbursed me for all my housing expenses (except the mortgage), and I used all my monthly profits to pay down the principal on my loan. But 17 months is far from the full 24-month lease period. I had 7 more months to go before the builder informed me that they decided to sell their lots in the community where I purchased the home from them. Instead of building out homes in this community, they sold their lots to a lower-end home builder who had plans to sell new constructions at a much lower price point ($300s) than what I had purchased mine for ($465K).
So what did that mean for me and my lease? For one, that would mean my home would be one of the priciest ones in the area, which would ultimately make my home difficult to sell if I couldn’t find any reasonable comps. Second of all, the builder was still obligated to pay me the whole 2 years’ worth of rent. But they offered me an early termination deal: 3.5 (out of the remaining 7) months of their rent and they’d list my home on the market for 0% sales commission. If I didn’t accept, they’d simply maintain the status quo and pay the rest of their 7 months of rent. However, they wouldn’t sell my home for me, so I’d have to find a selling agent and pay them 3% commission of the sale price.
Well, I ended up declining their early termination offer and decided to continue to collect rent and find a local selling agent. Without going into details, I didn’t think the builder would have done much more than simply list my property on the MLS for me. No open houses, no networking, etc., so I didn’t think a 0% commission would actually benefit me. This is a type of situation where I think you pay for what you get (e.g. paying 3% to a local real estate expert would be worth it).
The Home Sale
To help you understand how the home sale went, here’s the timeline of events:
May 2019: I purchased the property for $465K (25% down, $116,250 initial investment). Builder signs a 2-year, triple-net leaseback agreement with me.
October 2020: Builder offers me an early lease termination deal, but I decline.
March 2021: My realtor listed my property for sale at $469,900, just barely above my $465K purchase price. After one weekend, I received 2 offers on the home, countered one of them at full list price, and thankfully got into contract!
April 2021: Sale completes.
May 2021: This would’ve been my final month of rent from the builder, but I didn’t receive it since I terminated our leaseback agreement once I sold the home.
As you can see, I was only able to list and sell the home at just under $5K above my original purchase price of the home. And for those of you who’ve watched the housing market boom over the past 2 years, a $5K gain is tiny! But because my builder abandoned their new construction plan in my area and sold to a builder who priced their homes $100K under mine, that really hurt the market value of my home. Honestly, I was lucky (and happy) that I even got above my purchase price.
Final Numbers
For most of my real estate investments, I compartmentalize each property’s transactions by assigning each property a specific bank account. That way, bookkeeping and taxes are all pretty straightforward and easy to find.
As I collected rent every month, I actually used my profit to pay down this property’s mortgage. That way there’s no extra cash sitting in my bank account. Why not invest it elsewhere? For simplicity’s sake, not to get the highest ROI (return on investment). Now that the property is sold, all I have to do to calculate my final profit and ROI is take my sale proceeds and subtract my remaining loan balance and original investment amount.
Sale proceeds: ~$437,928 (sale price of $469,900 minus all expenses, including the standard 6% commission, half to the buying agent and half to my selling agent)
Loan payoff: $303,914 (includes monthly principal pay down from mortgage payments and my additional principal pay down every month from my rental profits)
Initial investment: $116,250 (25% down of the purchase price of $465,000)
Profit over 23 months = $17,764 (15.28% ROI)
Not too shabby. I’ll take the win, especially compared to my abysmal 2nd leaseback loss of $58,000! Was it as good as investing in the stock market during the same period? No, but I’m realistic. I can’t get the best return every single time. No one can!
Takeaways
Triple-net leasebacks can be very risky, especially because these lease agreements are relatively short-term. A 2-year lease is not very long, especially because the typical exit strategy is to sell the home immediately after the lease ends. And selling real estate is extremely costly due to commission, so your home needs to appreciate at least 6% over 2 years in order to cover the commission. Most homes in desirable areas easily appreciated 6% in the past 2 years, but mine was an exception.
Nevertheless, I still profited $17,764 with a 15.28% ROI over 23 months, so I’m happy with the win. Today, I’m viewing this investment with a glass half full. The grass is always greener on the other side!
