Single tenant net lease properties are a good solution for investors who to invest in a name brand franchise that offers low risk, steady returns.
Single tenant net lease properties are office, industrial, or retail properties that are leased by one tenant. Because the investment is a net lease, tenants are with excellent credit ratings who lease the property for ten years or longer. The triple net lease tenant pays all operating expenses plus maintenance, taxes, utilities, and nearly all repairs.
The perfect investment for professionals and retirees, single tenant net lease properties are turn-key investments that gain equity over time. They allow you to diversify your real estate portfolio with a hassle-free income property.
Advantages Of Single Tenant Net Lease Properties
Maintain Value
Single tenant net lease properties are able to withstand the ups and downs of the real estate market remarkably well. Instead of juggling between different leases with end dates and tenants, single net lease property tenants have strong credit ratings. Therefore, they are significantly less likely to bail out when economics are shaky.
Long leases mean that tenants are invested in the location as much as the property itself. If you have done your due diligence and choose a stable area, tenants will have a vested interest to remain in the property as long as possible.
Plus, since yearly rent increases are included in the lease, you as the investor aren’t stuck with tenants paying rent at outdated rates.
Passive Income
If you’ve ever had to get up in the middle of the night to answer tenant complaints about a broken toilet, you know how intensive can be managing most residential properties.
And while several types of commercial income properties offer a higher return, all are either riskier or require a management firm to handle the day to day responsibilities.
In addition, these types of properties are vulnerable to market swings, leaving you to scramble to fill vacancies at significant expense.
Risks Of Investing In A Single Tenant Commercial Net Lease Property
Bad Location
Despite their numerous advantages, single tenant net lease investments require a due diligence process like all commercial income properties.
When choosing a single tenant net lease, you’ll want to make sure you are choosing a property in a metropolitan area with high market demand. Large brand-name companies have a hard time of it in smaller towns like Peoria, Illinois or Willcox, Arizona. Even when the property’s location is in a large metropolitan area, you’d still want to make sure about the location of the prospective property.
Contact the city development office to find out if there any new unplanned zoning changes. Take the time to speak to people on the street to find out what business is really like in the area.
It may look like business is booming, but a local store owner might let you know on few of the businesses that are on the verge of closing. Or that some mom and pop deals are making some money but can’t afford to remain in the property.
Specialized Buildings
While the prospect of big-name tenants can lead an investor to a sense of security, some tenants require extensive renovations to customize a property to their specifications. If the tenant ends up not renewing their lease, you could end up with a vacant property that needs a lot of renovations.
Combine the time and money needed to renovate the property with the average time it takes to find a new tenant. If you close on a new lease (around six months), you could be facing a heavy financial drain on your property.
Similarly, don’t be fooled into buying a property only because the previous tenants were a Starbucks or a Burger King.
Find out why the previous tenant left before you consider the property seriously. It’s highly likely the location wasn’t a good one – don’t make the mistake of assuming another franchise will do better.
Being Fooled By A Big Name Franchise
While it may seem that leasing your property to a big name franchise is a sure win, not all parent companies cover the lease payments. Franchise owners are generally just subsidiaries. If they’ve set themselves up as an LLC, the parent company is not required to honor their lease.
To avoid this situation, make sure that whoever signs the lease has the individual credit rating to pay the lease.
Even if they leave before the lease is up.
