NEW YORK ( TheStreet) -- The attraction of an income-producing property is that an investor can own a sustainable revenue stream by renting the asset to a strong tenant. To achieve the highest return on that investment, most people insist that a professional manager help collect rents, manage the property and market it -- all of which eats away a substantial portion of the profits.
One asset class that provides the least risk and least management responsibilities is the single-tenant net-leased category, often referred to as the "triple-net sector." Unlike other asset types, the triple-net investor can sleep well at night knowing this low-risk alternative offers a margin of safety unlike any other.
Triple-net properties offer a well-balanced investment alternative whereby the underlying asset value is supported by three primary components. Somewhat like the three legs to a stool, these components enable the investor to achieve less volatility and increased stability.
This first component, or leg to the stool, is credit. Many triple-net tenants lease prototypical facilities in order to gain a competitive advantage in the marketplace.For example, the top-dollar store chains like Dollar General (DG) and Family Dollar (FDO) are located on primary intersections with traffic adequate for the tenant's business model. Many triple-net tenants utilize lease structures in order to leverage the company's balance sheet with minimum corporate cash invested. The tenant's balance sheet and credit rating are an important component to the sleep-well-at-night strategy. However, there are two other important legs to the investment stool. In order to balance the asset choice, the investor should also consider the underlying lease structures. The second important component is the lease term. Most triple-net leases are for between 10 and 25 years. As a comparison, hotels typically lease by the day, mini-storage by the month and apartments by the year. With a long-term lease in hand, triple-net investors spend considerably less time managing and marketing than owners of other asset classes. The third leg to the stool is rental increases. Most triple-net properties have rental increases during the base-lease term, while many of the other asset classes have rental increases that are determined by current market conditions.
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