Single tenant net-leased investments have become one of the most in-demand type of property investments. These investments are especially ideal for those who are want a solid return on their investment, yet do not want to deal with the multiple costs and intensive management requirements that are attached to other types of commercial property investments.
Single tenant net-lease properties are also an ideal turn-key investment for those who to work with a well-known, solid franchise company. Tenants in single tenant net-leased properties have stellar credit ratings and are committing to long-term lease agreements, guaranteeing investors long-term returns on their investment that gains equity over the life of the lease.
What is a single tenant net-leased investment?
A single tenant net-leased investment refers to a retail, office, or industrial building that is leased by only one person or company. In addition to signing a lease of 10 years or more and paying rent, the occupier is required to pay for several other building expenses, such as which means the tenant pays for property taxes, insurance, and maintenance, repairs, property taxes, and insurance premiums.The typical single tenant property renter is either a franchise owner or a national tenant (also referred to as investment-grade tenant).
How do single tenant properties differ from multi-tenant properties?
Unlike single tenant properties, multi-tenant buildings have several different tenants. With multi-tenant properties, landlords deal with multiple leases and have more responsibility for property maintenance. Multi-tenant properties often result in more costs for owners since they are required to take a more active role in the maintenance and management of the property. Owners are also responsible for property taxes and insurance premiums.
There is also the added burden of a higher tenant turnover rate in multi-tenant properties and the costs associated with not only finding and screening new tenants, but the remodeling and cleaning of each unit every time a tenant moves out and a new tenant moves in.
What are the benefits of investing in single tenant properties?
Single tenant properties can result in several benefits for investors. For example, these properties offer stable and predictable cash flow. New leases often span at least 10 years, so investors can expect to have a guaranteed income for a while.
Another major benefit of investing in these properties is minimal landlord responsibility. The tenants who occupy these properties are typically responsible for paying taxes, making necessary repairs, and covering other operating expenses. They might also pay these expenses directly, so the investor does not have to worry about coordinating payments.
It is important to remember that property maintenance responsibility is not just things such as landscaping, cleaning, and routine upkeep. As the property ages, an owner can incur major costs for repairing or replacing items such as the roof of the property, parking lot repair and/or replacement, HVAC systems, plumbing systems — the list goes on. In a single tenant investment property, the tenant is responsible for all those repairs, unlike other types of property investments where the owner is responsible. Instead of spending time and money tending to the property, the investor can concentrate on other business ventures.
Investing in these properties may also offer better financing terms. This is because a single tenant net lease is backed by the tenant’s credit instead of the value of the property.
Another benefit of single tenant properties is that they offer more of a fixed income option than multi-tenants properties. The financial return of multi-tenant properties relies more on the shape of the real estate market when it comes to return of an investment. If the real estate market is thriving, then it is more likely leases will renew and spaces will rent out. However, if the real estate market dips down, there are often vacancies, negative rent growth, and other costs for investors to deal with.
Single tenant properties offer a return no matter what is happening with the real estate market because leases are fixed- and long-term.
What are the risks of investing in single-tenant properties?
As with other investments, there are some risks involved in single tenant properties. For example, if you rent space to a company that goes out of business or relocates, you no longer have rental income from that property until a new tenant moves in. With no other tenants in the building, you would be solely responsible for covering taxes, insurance premiums, and other operating expenses until you find another tenant.
However, many business analysis show that single tenant property investments have relatively low risks. One analysis examined 100 single tenant transactions from all over the country. The breakdown of the tenants was 30 from franchises and 70 were national tenants. The value of these investments ranged from approximately $300,000 to $9 million. There were only six tenants out of the 100 who either failed to pay rent or filed for bankruptcy. Of those six, five were franchise tenants and one was a national tenant.
How are single-tenant properties valued?
Single tenant properties differ from traditional real estate investments and this is reflected on the way their value is determined. There are several different factors that go into determining the property’s value, including the length of the lease and the rent escalations over the term of the lease, the tenant’s credit. Even if the real estate market in the property’s area yoyos, the property itself will still maintain its value because that value is not just determined by the real estate itself like other types of investment properties.
How does financing work for single-tenant properties?
As long as the tenants are stable and have a good credit history, obtaining financing for single-tenant properties shouldn’t be difficult. However, investors should plan to put a down payment of at least 30%.
Can anyone invest in single-tenant net-leased properties?
Single tenant properties are quite popular these days and many people are interested in investing in them. In fact, investors can range from very wealthy business owners to individuals who want to take advantage of 1031 tax-deferred exchanges.
Is Single Tenant Lease Right for You?
If you are an investor looking to expand your real estate portfolio without expanding your time commitment, then single tenant lease investments may be the ideal solution for you. At Calkain, we have been in the single tenant lease market since 2005 and are considered an independent and innovative leader within the net lease investment community.
At Calkain, we understand that it is not just the location and lease structure that determines the success of your investment, but also the viability of the tenant to fulfill that lease. That is why our research team puts together a Semi-annual credit rating report. This report highlights many of the major tenants in the net lease sector and provides current ratings based off of Standard & Poor’s and Moody’s ratings. The report includes information such as credit movement for tenants – either positive or negative, and also includes information regarding the tenant’s plans for store growth or reductions.
Our headquarters are located in Hendron, Virginia and we also have offices in Tampa, South Florida, Atlanta, and Boston. If you would like more information about single tenant properties, contact Calkain today.