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. administrative property:

• For single tenant properties, the landlord’s responsibilities are minimal to none. All you have to do is take the rent check and deposit it into your bank account. Sometimes the tenant can pay the rent by transferring it to the tenant’s bank account; therefore making this a truly passive investment. If he is really busy with his career and/or wishes to have few responsibilities as an owner, 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 lease to and various maintenance issues. Every month the management report must be reviewed.

two. 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, he could lose 100% of the rental income. There could be a possible depreciation in value if the rent is fixed for 20 to 25 years. When the lease has a few years left, you’ll need to increase the capitalization rate to sell. For example, a Walgreens with a new 25-year lease offers a 6% cap. However, when 9 years remain on the lease, the cap is 7.5% or 20% depreciation.
• For multi-tenant properties, the risk involved is minimal. If a tenant does not renew the lease, you lose only part of the total income and still have money from the other tenants to pay the mortgage.

And so for multi-tenant properties, you are likely to have minor issues. For single-tenant properties, one problem can potentially translate into a big one, as noted above.

3. Lease Terms:

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

Four. Lease Guarantee:

• For single tenant properties, the lease may be guaranteed by corporations, 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 cap rate. For example, DaVita’s lease could be under DST Renal, one of several dozen wholly-owned DaVita subsidiaries. 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 because of serious medical consequences. Therefore, greater commercial stability could offset weaker collateral. The lease could be under a single entity LLC, which is not as desirable as a single entity does not have many assets compared to the parent company. Many CVS pharmacy leases are structured this way.
• For multi-tenant properties, leases come with various guarantees, from family to corporate. Attractive locations tend to attract better branded tenants and thus better warranties. Similarly, less desirable locations have to make do with less desirable family tenants with weaker collateral.

5. Ease of re-tenant:

• For single tenant properties, you must find a tenant in the same line of business. The properties tend to be special purpose properties with specific business requirements, for example banks or restaurants. It’s not easy to turn an old Bank of America with a bank vault into a Burger King with a commercial kitchen. And then it is more difficult to find a replacement. Because of this, investors tend to shy away from single-tenant properties with a few years remaining on the lease.
• For multi-tenant properties, it is easier to find tenants, especially for smaller units.

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