There are many reasons investors decide to buy a single tenant triple net property versus a multi-tenant strip center or industrial /office building when push comes to shove.
Many investors feel very comfortable with the quality single tenant triple net investment due to its simplicity and less troublesome management and leasing responsibilities. But they are putting all their eggs in one basket – if something goes wrong with that single tenant, their income is greatly diminished or even totally eliminated.
Since there will be additional leasing and fix up costs on top of what was lost due to vacancy, their overall return will go down significantly during ownership.
Multi-tenant properties, on the other hand, do not rely on one single tenant surviving, but they depend on a multitude of tenants that can pick up the slack in case an individual tenant goes broke. Multi-tenant building owners always consider some type a vacancy factor knowing full well it’s not practical to think your building is going to stay 100% filled your round.
Having the luxury of other tenants paying income while a vacancy occurs supporting some type of return and your debt service, is a much better choice for many astute investors.
But even the multi-tenant property has its downsides. Management duties, roof and structure replacement costs, leasing, taking care of common area issues, and of course the amount of time and effort these properties require also needs to be considered before purchasing this type of income property.
The norm in the investment property business is that the investor deserves a higher cap rate for multi-tenant properties than single tenant. The additional responsibility and time and effort required means these properties need to show higher returns than single-tenant properties. Simply collecting the rent check from a single tenant and doing little to nothing except the initial purchase is unreasonable to expect, even with a property management company.
Lenders also seem to be more concerned with multi-tenant properties, so they will lend on a shorter term and most likely a higher interest-rate basis. Don’t forget most multi-tenant properties have shorter-term leases and rely on less creditworthy tenants where there is a higher risk of in and out vacancies versus a single tenant occupancy for a longer term lease.
Great location, demographics, properly applied expenses without leaving out certain inevitable costs, reliable tenants and taking into consideration capital expenses for future issues like roof parking lot and HVAC replacement need to be thought before purchasing.