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 considered when buying single-tenant and multi-tenant properties. There are many pros and cons to each type of property – it’s best to weigh those against your lifestyle and investment goals and seek the assistance of an experienced buyer’s advisor before you make any decisions. Read more to learn about single- and multi-tenant properties and the benefits and drawbacks of each.
Single-Tenant Property Pros
Most often, single-tenant properties are rented by corporate-backed, absolute triple-net (NNN) lease tenants with strong credit, such as Dollar General, CVS, and Chick-Fil-A. They 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 and more recession-proof.
Absolute NNN tenants pay all their own taxes, insurance, common area maintenance (CAM), and capital expenditures and maintain the property as if it were their own. Overall, little-to-no landlord involvement is 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.
- Hassle-free ownership with decades of reliable monthly income.
- Predictable returns and cap rates between 5-7%.
- 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.
- 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.
Types of Single-Tenant Investments
For added stability, it helps to diversify within your net-lease investments. Different types of net-leases like absolute NNN, NN (where there are minimal landlord responsibilities; typically just roof and structure), and ground leases; nationwide properties, various tenant types and asset classes, lease durations, and different industries make for a well-apportioned portfolio. A mix also covers your bases if one tenant should vacate at the end of the lease term.
Examples of Single-Tenant Property Types:
- Retail Stores
- Health Care Centers
- Gas Stations
- E-commerce Fulfillment Facilities
- Fast-food and Quick-service Restaurants
- Dine-in Restaurants
- Auto-parts Stores
- Mobile Phone Services
- Dry Cleaners
- Big Box Stores
Single-Tenant Property Cons
Though 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, an absolute NNN 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.
Did you know you can sell certain real estate assets without paying capital gains taxes? A 1031 exchange allows you to invest profits from the sale of one commercial property into one or more similar and often more valuable properties and possibly defer the taxes indefinitely. In effect, your government is giving you an interest-free loan!
Multi-Tenant Property Pros
Multi-tenant properties, like apartment complexes, retail centers, and office buildings offer the benefit of 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 and they draw a salary for doing so. This may provide additional tax benefits beyond depreciation and business deductions.
- 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.
Types of Multi-Tenant Investments
For a bit more stability within this type of investment, diversifying your multi-tenant properties is a wise strategy. Different types of tenants with an array of lease durations and types, including net-leases, and different industries can help with risk and a minimum income expectation.
There are some very reliable multi-tenant businesses – look for one in a prime location full of consumer staples that haven’t had many vacancies, or follow market trajectories and areas of growth, like healthcare centers and e-fulfillment warehouses. The key to finding these 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.
- Retail Strip Centers
- 2-Tenant Centers
- Shopping Malls
- Industrial Warehouses
- Repurposed Urban Buildings
- Apartment Complexes
- Healthcare Centers
- Office Centers
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/lots of turnover, common area maintenance (CAM) costs, liability insurance, the amount of time and effort required, and the inconvenience of emergency calls from some properties like apartment complexes and office centers.
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.
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.
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.
To Wrap it Up – Invest in a Single-Tenant or Multi-Tenant Property?
As you can see, the kind of property investment that’s best for you must take into consideration your personal risk tolerance, investment goals, and lifestyle. There are pros and cons to both single- and multi-tenant properties – it can be a complex decision without an obvious answer at first. That’s where Westwood Net Lease Advisors can be of great value.
At no cost to you, we provide an evaluation and risk-tolerance assessment, explore properties that fit your investment criteria based on actual numbers rather than guesswork, and evaluate tenant financials and credit ratings to find the property that’s right for you. We also work with you to craft the Letter of Intent (LOI) and analyze/negotiate lease details, source legal and financial services, and more. Our team is here for you every step of the way – all the way to closing. Feel free to reach out today for a no-obligation, free consultation to get started. 314-997-5227.