When Apartment Owners Consider NNN Properties

Many apartment owners eventually reach a phase where the goal is no longer acquiring more units but simplifying ownership. After years of managing tenants, repairs, turnover, and expenses, some investors begin asking whether it is possible to remain invested in real estate while reducing day-to-day management. The question often coincides against the backdrop of changing housing regulations, particularly, where cities of San Diego County have increasingly expanded tenant protections, adding additional layers of compliance for property owners and property managers.

One option often considered is exchanging into a triple net (NNN) leased property.

What Defines a NNN Investment

“NNN” in a triple net lease means net, net, net. The three N’s represent the three costs a tenant would be responsible for paying on top of their base rent: property taxes, insurance, and maintenance. For landlords, this means a more predictable income stream. Common NNN investments are single tenant retail such as quick service restaurants, convenience stores, and service-oriented property uses like auto care or medical offices.

Consider this Example

Subject Property: ~1,000SF freestanding drive-thru coffee chain occupied by a single corporate tenant.

Investment Details:

· Purchase Price: $2.6M

· Cap rate: 4.6%

· Annual base rent: $119,000, plus corporate guarantee

· Lease Term: 15 years NNN with 3, 5-year options to extend

· Annual rent increase of 10% every 5 years through initial term and options

Under this example, the tenant assumes responsibility for property taxes, insurance, and maintenance. This means the investor receives the full $119,000 annual rent, plus 10% rental increase for income growth.

Risk Mitigation & Benefits

The corporate tenant’s strong credit rating, market capitalization, and corporate guarantee greatly mitigates a default risk, while the long-term lease with renewal options provides income security extending up to potentially 30 years.

In addition, the property’s value will typically appreciate, alongside the fixed rental income growth, while major capital expenses shift to the tenant.

On its face, the investment will produce $119,000 in Year 1 net income. With 10% rent increases every five years, income grows to approximately $130,900 by Year 10 and $143,990 by Year 15.

Over the initial 15-year lease term, the investor realizes approximately $1,969,450 in total net income, driven entirely by rent increases. Meanwhile, renewal options provide income security extending up to potentially 30 years.

In addition, the investor avoids what would typically amount to hundreds of thousands of dollars in property taxes, insurance, maintenance, costs, which are passed through to the tenant.

The result is a structure where income growth is predictable, expenses are minimized, and ownership remains passive, allowing the investor to focus on long-term wealth stability.

Sounds Ideal, Where’s the BUT? Three Special Considerations

NNN is more of a credit investment than a real estate investment

Unlike apartment units, where income is diversified across multiple tenants, NNN lease performance is tied almost entirely to the single tenant’s creditworthiness. In effect, an investor is underwriting a business, not apartment units.

“Passive” does not mean Hands-Off

Owners must still actively monitor lease compliance, including insurance coverage, property condition, and other tenant responsibilities under the lease. A tenant’s obligation to maintain the property or maintain the correct insurance does not guarantee they will. Since the NNN lease shifts operating control to a tenant, an owner is obliged to ensure a tenant acts responsibly during the term of the lease.

Residual Value & Vacancy Risk

Residual value here refers to the estimated value of the property at the end of a holding period, based on a combination of the income it is expected to produce and assumptions about market conditions and comparable property sales at the end of a holding period.

NNN leased investments are priced based on their income stream, with the assumption that the tenant will continue occupying the property and paying rent over the long term. This expectation supports a higher property value and relatively lower capitalization rate because buyers are purchasing a stable, predictable income stream. This assumption, however, does not always hold and the property could become vacant. In some instances, the tenant could go out of business, or the tenant could, unexpectedly, choose not to exercise a renewal option. What happens then?

In this situation, a vacancy may not be just a temporary loss of income and could reduce the property’s residual value. This can be especially true when the NNN property was built out for a specialized use (for example, a Starbucks or Pep Boys). If that tenant leaves, re-leasing the property may require substantial renovation costs or zoning restrictions may limit alternative uses, and thus reduce the pool of potential tenants and impair residual value.

Conclusion

When carefully selected, NNN properties can offer predictable cash flow, reduced management, and a practical path into the next phase of investing out of apartment units, especially those owners seeking to retain real estate as part of a legacy portfolio. Not to mention the added appeal of owning a property leased to a nationally recognized, high-quality tenant. If you are considering this transition, disciplined due diligence of the tenant, lease, and real estate itself is essential to making a well-informed decision.

Author: Eric Lowe, Company: Pierson Post

Eric Lowe is a real estate broker and founder of Pierson Post, a commercial real estate brokerage based in Bonita, CA. He began his career in real estate as an attorney handling complex real estate transactions across Southern California. As a broker, Eric helps owners decide when and how to sell, designs targeted marketing strategies, and guides 1031 exchanges. He blends high level deal expertise with a boutique client service. Call Eric at 618-813-7583 or email him at elowe@piersonpost.com.