Most investors know single tenant net lease properties offer consistent returns over the long-term.
And because tenants are often investment-grade tenants with leases that run anywhere from 10 to 20 years, they’re often a good way to add a steady source of income to your portfolio.
Some investors assume getting higher returns is impossible with net lease properties. However, if you’re willing to be flexible, there are several things you can do to increase profits on these premium properties.
Choose Properties With A Shorter Lease Term
Properties with shorter lease terms are often considered riskier since there is a greater chance the tenant will fail to renew at the end of the lease.
However, if you’ve done your due diligence on the tenant and the location and determine that both are good quality, you might consider making an offer on properties with shorter lease terms. These sell cheaper, have a higher cap rate, and tend to have a higher cash on cash return due to the risk of tenant renewal.
Assessing the viability of a business takes some time, but is actually less difficult than you might imagine.
Check if the business owner has a specific plan to grow their business and if their source of revenue appears sustainable over the long-term. You’ll also want to see whether the business has done any restructuring or laid off employees; any liens or litigation against the business will also reveal its financial health.
Next take a closer look at the industry in general, with specific attention to factors like competition and demographics.
Lastly, asking the tenant directly why they’ve chosen that particular property and location; this will make it easier to predict whether or not the tenant is likely to renew the lease when it expires.
Consider A Non-National Tenant
National investment grade tenants are considered the cream of the crop when it comes to net lease properties, and in an ideal world, there might be nothing wrong with sticking to these well-known companies.
However, there are also industrial-grade tenants that are either smaller or have been around less time than some of the large franchises but have excellent credit. They might also be non-rated commercial real estate tenants that are doing well but are simply too new to have a credit rating.
Don’t automatically rule these tenants out. Instead, take a careful look at their financial records instead.
The first step you’ll want to take is to evaluate the last few years of the company’s profit/loss statements, balance sheets, and tax returns. You should pay particular attention to whether or not they have enough money in the bank to cover the first six to 12 months of expenses.
It takes time for most new businesses to start to turn a profit, and as the owner, you want to make sure they’ll be able to pay rent until then. They should also provide at least three business and personal references as well.
The Price Of A Commercial Property Depends On The Tenant
Another important point regarding local tenants: you’re less likely to be paying more for the property than it’s worth.
When you buy another well-known property with a tenant like McDonald’s or AutoZone, the price of the property will be many times what it would be with a local tenant. Local tenants, on the other hand, tend to be paying market prices, so finding another replacement tenant for the property at a similar price is highly likely.
Do A Demographic And Traffic Analysis
Another important feature of a successful property is one with a high traffic count and good demographics.
Good demographics, by the way, can mean a variety of things… but the strongest sign of an area with potential is one where there is a rapid rise in population growth. Keep in mind that you when tracking population growth for the specific neighborhood you need to look at the rate of growth over a set period of time, preferably about five years.
Of course, when you set out to determine whether there is a growth trend, you’ll want to look at more than just the number of people in the neighborhood.
Factors like the cost of living, unemployment rate, and quality of schools will give you a better-rounded picture of the area. Then take note of properties located at power center outparcels, or hard corners; these are especially valuable to a variety of businesses which means that attracting new tenants should be fairly easy.
In order to achieve higher returns with net lease properties, you can use one or all of these methods, as long as you keep in mind your investment goals, and understand that implementing all of these tactics at one time increases the risk for your property.
However if you’re interested in seriously boosting your returns yet prefer the stability of a net lease, it could be well worth it.