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Should you invest in a single-tenant or multi-tenant property?

Should you invest in a single-tenant or multi-tenant property?

Should you invest in a single-tenant or multi-tenant property?

To answer this question, it is important for an investor to consider the following aspects:

1. Property management:

  • For single-tenant properties, there are minimal or no landlord responsibilities. All you do is take your rent check and deposit it into your bank account. Sometimes the tenant can pay the rent by connecting it to your bank account; therefore, it becomes a truly passive investment. If you are really busy with your career and/or want to have small ownership responsibilities, this is an investment opportunity worth considering.
  • For multi-tenant properties, even when there is a local property manager, you need to be involved in various decisions about who to rent to and various maintenance issues. Every month you must review the management report.

2. Risks:

  • For single-tenant properties, your investment risk is essentially “putting all your eggs in one basket.” If the tenant does not renew the lease, they could lose 100% of the rental income. There could be a possible depreciation in value if the rent is flat for 20-25 years. When there are a few years left on the lease, you will need to increase the maximum rate to sell. For example, a Walgreens with a new 25-year lease offers a 6% cap. However, with 9 years left on the lease, the limit is 7.5% or 20% amortization.
  • For multi-tenant properties, the risk involved is minimal. If a tenant does not renew the lease, you only lose a portion of the total income and still have money from the other tenants to pay the mortgage.

So for multi-tenant properties, you’re likely to have smaller issues. For single tenant properties, one problem can potentially turn into a big one, as noted above.

3. Lease conditions:

  • For single tenant properties, the lease is usually long, for example 10 to 25 years. It is usually an absolute NNN lease for the most desirable location and NN otherwise. Rent is flat for domestic tenants with a strong S&P rating, eg Walgreens over the 20-25 year term and primary options. For domestic tenants with lower S&P ratings (eg, O’Reilly, Family Dollar), rent is flat during the 10-15 year prime term) and modest 5-10% rent increases during the 5- to 10-year options 10 years For franchisee or mom & pop leases, rent increases of 5% to 10% every 5 years are common.
  • For multi-tenant properties, the lease is usually 1 to 5 years. NNN if location desirable, gross rent or NN or even gross otherwise. Leases typically have annual rent increases of 1% to 3%, or increases of 5% to 10% during options for more desirable locations. Rent could be flat for less desirable locations.

4. Lease guarantee:

  • For single tenant properties, the lease may have a corporate guarantee, eg Walgreens, Rite Aid. The quality of the collateral depends on the corporation’s S&P ratings. As a general rule, the stronger the S&P rating, the lower the maximum rate. The lease could be guaranteed by a subsidiary of the corporation. For example, DaVita’s lease could be under DST Renal, one of several dozen wholly owned subsidiaries of DaVita. Although this guarantee is not as strong as Walgreens, its business stability is probably stronger than Walgreens. When someone needs dialysis services, they have to go there to face serious medical consequences. Thus, stronger business stability could compensate for a weaker guarantee. The lease could be under a single entity LLC, which is not as desirable since a single entity does not have many assets compared to the parent company. Many CVS drugstore leases are structured this way.
  • For multi-tenant properties, leases have various guarantees, from mom & pop to corporations. Attractive locations tend to attract better branded tenants and therefore better collateral. Likewise, less attractive locations must settle for less desirable mom-and-pop tenants with weaker guarantees.

5. Rental facility:

  • For single tenant properties, you must find a tenant in the same line of business. Properties are usually for special properties with specific business requirements, for example banks or restaurants. It’s not easy turning a former Bank of America with a bank vault into a Burger King with a commercial kitchen. And therefore it is more difficult to find a replacement. Because of this, investors tend to shy away from single-tenant properties with a few years of rent.
  • For multi-tenant properties, it is easier to find tenants, especially for smaller units.

In short, single-tenant and multi-tenant properties make great investments. Considering the above aspects that are involved in any investment, you just need to understand the pros and cons and choose the property that best suits your portfolio/investment strategy.

#invest #singletenant #multitenant #property

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