Single Tenant Net Lease (STNL) assets are illiquid investments with high transaction costs. Attempting to navigate the market requires the help of a seasoned broker, and any attempts to exit the market takes time, the purchasing party will conduct their due diligence on the property during the escrow period. So why do people continue to choose to invest in commercial real estate when there are so many other options with higher liquidity and lower transaction costs?
The simple answer is the benefits out-weigh the drawbacks. First, the returns on real estate compared to other types of investments. Over the last 5 years, the average return on a STNL asset has been 446 bps higher than 10 year Treasury rate. While these assets offer differing risk profiles, investors can expect a larger return on real estate than other financial instruments of similar risk profiles. Without this higher return there is little incentive to acquire a property.
STNL Cap Rates vs 10 Year Treasury Rates
Tax benefits are another reason real estate has been a strong draw for investors. Depreciation expenses can help investors reduce their tax burden. These benefits are enhanced with the accelerated depreciation schedule of some assets such as fee simple c-stores with gas. Writing off depreciation on a 15 year schedule versus a 39 year timetable can cause a substantially different after-tax return on a property.
The tax code also allows for investors to defer taxes through 1031 exchanges. These exchanges allow investors to sell one investment property and purchase a similar property without incurring any capital gains taxes. These transactions are typically used as a wealth builder. This process requires the assistance of qualified intermediary and require the investor to identify and close on a new property within a set timeframe. An experienced broker will be able to guide an investor through this process. The ability for an investor to choose when to pay capital gains taxes can help the investor create a plan and optimize their returns.
Real estate investing sets itself apart from other forms of investment by the value to the land and building. While a tenant vacating is not ideal, investors can re-lease the building or the property can be sold to recover a portion of the investment. Other financial instruments do not offer the same recovery possibilities. While it may be slow and costly to purchase STNL assets, there are many benefits that an investor can enjoy.