Single-Tenant or Multi-Tenant – Which is Better?
As a commercial real estate investor, wealth objectives, economic conditions, level of owner involvement, and risk tolerance must be analyzed when buying single-tenant and multi-tenant properties. Weighing the pros and cons of each type of property to determine which is better for your goals is essential to a profitable and satisfying investment.
Types of Single-Tenant Property Investments
Most often, single-tenant properties are tenanted by investment-grade corporations that operate with absolute triple-net (NNN) leases. These tenants, such as Dollar General, Walgreens, 7-Eleven, and Taco Bell, are typically consumer staples in prime locations that do well in any economy without wide swings in value, so they tend to be low-risk, recession-proof, and pandemic-proof.
- Dollar Stores
- Pharmacies & Drug Stores
- Health Care Centers
- Gas Stations
- Convenience Stores
- Child Care & Early Learning Centers
- Car Washes
- Fast-food Restaurants & Drive-thrus
- Quick-service Restaurants
- Auto-parts Stores
- E-commerce Fulfillment Facilities
- Warehouse & Distribution Centers
- Industrial/Manufacturing
Single-Tenant Property Pros
There is very little or no landlord responsibility. Single-tenant properties typically operate with absolute NNNs leases. Tenants pay all their own taxes, insurance, common area maintenance (CAM), and capital expenditures, and maintain the property as if it were their own. In an absolute triple net lease, there is no landlord involvement required, so you can own nationwide locations and simply collect rent while you work and enjoy life without the hands-on management and hassles of other types of properties. The predictability is priceless.
Benefits of single-tenant absolute NNN investments:
- Hassle-free ownership with decades of reliable monthly income.
- Cap rates of 5–7% with potential IRR of 8–10%.
- A long-term, guaranteed lease means no or low vacancy.
- Periodic rent increases built into the lease account for inflation.
- Prime location that’s easily re-tenantable at end of the lease term and valuable.
- Opportunity to build equity over the lease term.
- High-credit corporate lease guarantee appeals to lenders.
- Passive investment shaped to fit lifestyle and investment goals.
- Enjoy life without actively managing and worrying about the property.
Single-Tenant Property Cons
Single-Tenant Property ConsThough there are few single-tenant cons, it really depends on your goals. If you like to be involved in the upkeep of your properties and keep a close eye on them, a single-tenant, triple net property may not be for you. There is also the “all-or-nothing” risk of occupancy, especially if you own just one property. If the tenant leaves at the end of the lease term, there may be a gap without any rental income while the property is on the market and/or undergoing improvements for the new tenant. If there is debt on the property, you are still expected to pay the mortgage and taxes and expenses, such as utilities and maintenance, while obtaining your next tenant.
Types of Multi-Tenant Property Investments
There are some reliable multi-tenant, gross-lease property investments that may fit your objectives. Look for a well-tenanted retail strip center, a two-tenant center, or a distribution center with multiple occupants in a prime location full of consumer staples that haven’t had many vacancies. You can also follow market trajectories and areas of growth.
- Apartment Complexes
- Multifamily Dwellings
- Retail Strip Centers
- 2-tenant Centers
- Shopping Malls
- Industrial Warehouses
- Repurposed Urban Buildings
- Healthcare Centers
- Office Centers
“Despite what headlines may say, the physical office is by no means dead — it is looking to upgrade, though. Investors can expect to see occupancy and rent growth stabilize this year [2022].” – Dan Rosenbloom, Forbes
Multi-Tenant Property Pros
The biggest pro or benefit with multi-tenant properties, like apartment complexes, retail centers, and office buildings is that you have multiple tenants paying rent. This alleviates the risk of only one tenant paying rent and possibly vacating the property. If there is one vacancy at all times, which is pretty common, the luxury of other tenants paying rent will support your income and provide peace of mind.
Additionally, there are property owners who love the hands-on, day-to-day management of multi-tenant properties, so this can be a benefit for those investors. For some, it is a career from which they draw a salary. This may provide additional tax benefits beyond depreciation and business deductions.
Benefits of multi-tenant property investments include:
- Higher rental income and up to 9% cap rate.
- Less likely to be 100% vacant at any one time.
- More tenants cover rental income during vacancies.
- Retail properties with a solid “anchor” may command a higher market value.
The key to finding profitable multi-tenant properties is to partner with a reputable, seasoned buyer’s advisor. An expert advisor will know the market and can see through the hype to get to the heart of a good investment.
Multi-Tenant Property Cons
Multi-tenant properties are riskier and require active management with capital investments for maintenance and improvements. There are also these considerations: short-term leases with lots of turnover, common area maintenance (CAM) reconciliation, liability insurance, the amount of time and effort required, and the inconvenience of emergency calls from some tenants like those in apartment complexes and offices.
High risk and unreliable. Because most multi-tenant properties have shorter leases than single-tenant properties, many with less creditworthy tenants, there’s a higher risk of uncertain, revolving income and vacancies. Due to this unreliability and the inability to project long-term income, lenders tend to lend on a shorter-term basis and at higher interest rates, which may result in an overall lower rate of return.
High maintenance and costly. And let’s talk about maintenance – possibly the #1 drawback with multi-tenant properties. The landlord is responsible for all common areas such as lobbies, hallways, courtyards, sidewalks, seating areas, fitness centers, parking lots, etc. This includes maintenance of lighting and signage, roofs, HVAC and heating systems, and plumbing, and things like snow removal/salting, paving, painting, security systems or officers, lawn care, pest removal and spraying, outdoor grills, pools, tennis courts, decks, windows, siding, and more. This can be inconvenient, time-consuming, and expensive and must be factored into the equation.
Complex leases and unpredictable expenses. Other disadvantages include more complicated lease terms and negotiations, management fees, possible salaries for office and maintenance staff, and cumbersome details in regard to allocating taxes, liability insurance, and the pro-rata amount of expenses to be shared among tenants. The good news here is that most landlord costs can be accurately estimated and factored into the rent.
How to Stabilize Your Single-Tenant & Multi-Tenant Portfolio: Diversify
To stabilize any CRE portfolio, it is wise to diversify. What many investors don’t realize is that you can diversify within your single-tenant or multi-tenant lease investments by using different criteria. For example, you can diversify single-tenant property investments by lease type:
- Absolute NNN leases have no landlord responsibility but do have slightly lower cap rates.
- Modified NNN or what’s also known as a double net (NN) lease properties have minimal landlord responsibilities like roof, parking lot, and structure, and offer slightly higher cap rates.
- NNN ground lease is where you own the land, responsibility-free, and the tenant owns the building and pays for everything. Again, these have slightly lower cap rates due to the least amount of risk.
With either single-tenant or multi-tenant investments, you can also diversify by location, tenant types, asset classes, lease durations, and different industries. A blend of CRE investment types reduces risk and makes for a well-apportioned portfolio. This strategy also covers your bases if one tenant should vacate at the end of the lease term.
To Wrap it Up – Know the Pros & Cons Before You Invest in a Single-Tenant or Multi-Tenant Property
As you can see, it’s essential to know the pros and cons of single-tenant and multi-tenant properties before you invest and weigh those against your risk tolerance, investment goals, and lifestyle. Since there are pros and cons to both single- and multi-tenant properties, purchasing one of these investments can be a complex decision without an obvious answer at first. That’s where Westwood Net Lease Advisors can be of great value.
Our expert team of advisors is here to help you, whether you’re a seasoned or new real estate investor, sort through the details and find a selection of properties that fit your goals. Our buyer representation is always free, from before the property search through closing, and thereafter. Contact us today for a no-obligation conversation about single-tenant and multi-tenant property investing. 314-997-5227
