At first glance, multi-tenant properties seem to be more lucrative real estate investments than single tenant commercial properties.
On paper, multi-tenant properties such as shopping centers are often more profitable to own than single tenant properties such as fast food franchises.
However, when the economy recedes and some businesses in a multi-tenant property close their doors, owning the real estate can be more of a burden than a blessing.
To a certain extent, triple net leases insulate investors against the financial fallout of a multi-tenant property that loses tenants. However, while the owner may not be responsible for traditional building expenses, there is typically a mortgage to pay on the property. The fewer tenants the property has, the harder it becomes to achieve the projected ROI. In a matter of months, the owner can be upside down in the investment, paying for it with his own money.
MULTI-TENANT PROPERTIES AND THE RECESSION
Such a bleak portrayal of multi-tenant properties ultimately has more to do with the economy than the properties. When the goal is to swing for the fences and make the most lucrative investment in real estate, buying a well-established multi-tenant property is prime investment option. However, as the economy continues to recover, many real estate investing consultants are steering their clients toward single tenant properties instead of multi-tenant buildings.
Throughout the recession, single-tenant properties have consistently yielded lower capitalization rates than multi-tenant properties. In a tenuous economy, it is easier to realize long-term capital appreciation by having a long-term lease with a single creditworthy tenant than having multiple leases with tenants whose annual capitalization rates inherently vary. Even so, that doesn’t mean purchasing a multi-tenant property is a bad real estate investment.
MAKING THE SAFEST INVESTMENT
Currently, buying a multi-tenant property as a first real estate investment would be a risky move for many investors. A safer idea would be to underpin a multi-tenant property investment with one or more single-tenant property investments. With income from dependable single-tenant properties filling the coffers, taking a chance on a multi-tenant property could be less risky. If some tenants from the multi-tenant property defect, the property owner has a financial cushion.
Investing in a multi-tenant property is a great decision for some investors, but it’s important to assess the prospective value of the investment based on current economic conditions, other assets in the investor’s portfolio, and the wealth objectives of the investor. If you need assistance locating a single tenant or multi-tenant property, or evaluating one you have already found, the experienced property brokers at Westwood Net Lease Advisors is here to help.