Commercial real estate (CRE) investors have a lot of options when it comes to placing their capital. Besides the different classes of CRE, including office, industrial, retail, professional, and multifamily, investors also have the option to invest between single-tenant and multi-tenant properties.
When investing in single-tenant (including single-family) vs. multi-tenant (including multifamily) assets, there is no right or wrong answer. It all comes down to the investor’s investing/financial objectives, access to capital, level of involvement, and risk tolerance.
Let’s see how each asset type stacks up against each other under the four criteria.
Investing/Financial Objectives. CRE investors are all in the industry to make money, but some investors are willing to give up a little yield to reduce risk. From a purely financial standpoint, multi-tenant/multifamily offers better returns and cap rates than single-tenant. Here’s how they compare:
Access to Capital. An investor may often be limited to capital for investment, so single-tenant properties like single-family homes may be the only option. The capital requirements for a single or small number of single-tenant properties are less than for a multi-tenant property. If capital is not an issue, then the decision may come down to acquiring several single-tenant properties or one multi-tenant property.
Level of Involvement. On the residential side, single-family homes typically require significant owner involvement from marketing and leasing the rental to maintenance and upkeep. Unless you owned dozens of single-family properties, hiring a third-party property management company wouldn’t make sense. This is because one or only a few single-family properties wouldn’t benefit from economies of scale.
Single-tenant commercial properties are a different story from single-family homes. Single-tenant commercial properties are typically rented by corporate-backed, triple-net (NNN) lease tenants with a strong financial profile and credit, such as Dollar General, CVS, and Chick-Fil-A. NNN tenants are responsible for taxes, insurance, common area maintenance (CAM), capital expenditures, and maintain the property as if it were their own. Little landlord involvement is involved with single-tenant NNN leases.
Multi-tenant properties require the most owner involvement of any property type. It requires active management along with capital investments for maintenance and improvements. Some may view active management as a drawback to multi-tenant properties, but it’s exactly this aspect of multifamily properties that present the best value-add opportunities.
Through property improvements, better marketing, improved management, and reduced expenses, multi-tenant properties present opportunities for increased income and cap rates through increased occupancy, higher rents, and costs reduced. That’s why cap rates for multi-tenant properties, on average, outpace single-tenant properties by 2% in any given market.
Risk Tolerance. On the commercial side, single-tenant properties like NNN leases are typically low-risk because corporate-backed tenants rent them with a national footprint and strong credit. Tenants have brand recognition, and the properties are typically located in prime locations that do well in any economy without wide swings in value. That’s why they tend to be low-risk and more recession-proof.
The potential downside of single-tenant properties, which is especially true with single-family homes, is that unless you own multiple properties across multiple locations when a tenant leaves, there may be a gap between the time one tenant vacates and another tenant comes in. This is known as the “all-or-nothing” risk of occupancy. This can be especially burdensome if a property is secured by debt. You’ll still be responsible for loan payments even as income is put on hold.
Multi-tenant properties don’t have the “all-or-nothing” problem because they benefit from multiple tenants paying rent. Unlike with single-tenant properties, there’s no need to invest across multiple properties across several locations to achieve diversification — no need to panic when one tenant stops paying rent or leaves.
With Multi-tenant properties, CRE investors anticipate a certain level of vacancy at all times and plan financial projections accordingly. In the big picture, multi-tenant properties offer the luxury of existing tenants paying rent when others leave to support consistent income with peace of mind.
Conclusion. Not every type of real estate property is right for every type of investor. Here at Hickory Creek, we favor multi-tenant properties for their higher returns and cap rates. With our experience, expertise, and infrastructure, we’re able to take advantage of bargain properties and make improvements.
We can implement our processes to increase rents and occupancy while reducing expenses to increase income and returns for our investors and us. Multi-tenant hands down provide the best opportunities for profit and high returns.
What if you could invest in the multi-tenant class without the dirty work? For those turned off by the active management aspect of multi-tenant properties, consider indirect investing by partnering with a private investment fund with the management, expertise, and infrastructure to take financial advantage of these assets.
Indirect investing can satisfy an investor’s financial goals of high returns without the time and financial barriers involved with direct CRE investing.
By deferring to the expertise and experience of others through investment in a private fund specializing in multi-tenant commercial real estate, you can enjoy the low-maintenance aspects of single-tenant investments with the high return benefits of multi-tenant properties.
It’s the best of both worlds made possible by these private opportunities for qualified investors. You can avoid the prospecting, analyzing, financing, acquiring, management, and maintenance headaches involved in direct multi-tenant investing by teaming with a trusted partner.
Your decision will boil down to choosing the right fund instead of going through the entire spectrum from acquiring to managing and operating your property.
Invest for Success,