Intro
Single-lease or single-tenant rental properties leased on long-term triple net leases have become an increasingly popular commercial real estate investment vehicle.
With a reputable corporate or franchisee tenant being responsible for occupancy costs under a 10-25-year lease, these freestanding assets provide reliable and low-maintenance passive income.
If you are an investor exploring commercial real estate sectors, here are 20 compelling reasons to consider adding single-lease rental properties to your broader investment portfolio:
Single-Lease Rental Properties
Some images are from Freepik
Check these out!
- Mortgage Calculator: No. 1 Invaluable Asset
- 11 Investment Strategies for Investors in 2023
- Unique Selling Proposition: Standing Out in a Crowded Market in 2023
Reliable and Low-Maintenance Passive Income
The primary appeal of single-lease properties is the stable, low-maintenance passive income. With a single tenant responsible for the triple net expenses like taxes, maintenance, insurance, and repairs, landlords receive predictable cash flow with minimal costs after the initial lease-up.
Unlike residential rentals with high turnover, your responsibility as a landlord is limited mostly to structural repairs and replacing the roof or HVAC (Heating, Ventilation, and Air Conditioning) if needed over decades of ownership.
The long-term tenant handles all other operating expenses and upkeep. This makes single-lease rentals hands-off investments once leased.
Long 10-25 Year Lease Terms Provide Cash Flow Visibility
Single-lease properties come with long initial lease terms, generally 10-25 years. This provides unmatched income visibility and stability compared to shorter multi-tenant retail and office leases of 3-5 years.
The lengthy lease lock-in also greatly reduces the risk of vacancies and re-leasing costs during your holding period.
In triple net leases, tenants are also responsible for costs like advertising and commissions to re-lease the property upon expiry, further minimizing landlord expenses. Consistent income visibility enables easy underwriting and financing.
Pre-Defined Contractual Rent Escalations Offer Inflation Protection
Triple net leases contain pre-defined annual rental increases during the lease term, often linked to CPI (Consumer Price Index) or set at a fixed percentage like 2%.
This provides steadily rising income over decades to offset inflation, without having to renegotiate rents periodically like in traditional multi-tenant CRE (Commercial Real Estate) properties.
The typical 2-3% annual rent bumps also enhance collateral value year after year for future refinancing or sale. This income growth combined with appreciation can produce leveraged total returns over long hold periods.
Reputable Corporate and Franchise Tenants With Investment Grade Credit Ratings
The tenants in these specialized properties are usually established national and regional corporations or franchisees with strong credit profiles.
Major chains like Walgreens, Chick-fil-A, AMC Theatres, and Dollar General are common tenants. Their investment-grade credit ratings and scale make them reliable rent payers.
Working with recognized brands reduces risks associated with smaller businesses prone to volatility. These tenants treat the locations as integral revenue-generating assets with the incentive to renew upon lease expiry.
Properties Built For Tenant’s Specific Operational Needs and prototypes
Single-lease buildings are purpose-built to the tenant’s specifications and layout requirements. They serve specialized needs like prototype fast food restaurants, retail stores, car dealerships, medical clinics, bank branches, etc.
This specialized design limits alternate uses upon vacancy, so tenants prefer to renew their lease rather than find and build out a new customized location.
Because of tailored improvements like kitchens, lighting, parking, signage, etc., relocation costs for tenants are much higher compared to moving out of a vanilla box retail or office suite. This incentivizes lease renewals upon expiration.
Tenants Have Significant Sunk Costs Into Their Locations
In addition to building customizations, tenants have invested heavily in localized marketing, brand awareness, customer relationships, and workforce training at existing single-lease locations. Moving would require re-incurring all those costs.
If the location has operated for years, the tenant has also established valuable customer goodwill and habitual traffic flows that are difficult to replicate at a new unproven site. This provides a strong economic incentive for the tenant to renew leases at established locations.
Recession Resilient Compared to Multi-tenant Retail and Office
Unlike smaller business tenants, established corporate tenants renting single-lease properties have tended to honor lease obligations consistently even through recessions.
In downturns when multi-tenant retail and office landlords contend with vacancies and falling rents, single-lease owners continue collecting steady rental income.
Real estate secured by stronger national tenants proves more resilient than speculative projects, especially for strategically located properties that tenants rely on for their core businesses. This makes single-lease an attractive asset class for risk-averse investors.
Locations With High Traffic, Access and Visibility
Single-lease properties are strategically positioned to maximize tenant visibility and customer access, often at signalized corners, mall/strip center out pads, and busy commuting routes.
For retailers, restaurants, banks, pharmacies, etc., convenient curb appeal, traffic flows, signage, and parking are critical for their customer-facing facilities.
Prominent high-visibility locations often leased long-term can be challenging to replicate in built-up areas.
Owning the hard corner may provide enduring value. As the area densifies, the property’s positioning only gets better.
Strong Potential for Appreciation in Property Value
While single-lease buildings primarily provide stable income during the lease term, the underlying land and location typically appreciate over the decades of ownership.
As nearby areas get built out further, zoning evolves, infrastructure improves, and demographics grow, the core real estate becomes more valuable.
Though tenants often renew at expiration, each renewal represents potential upside by re-leasing at higher market rents. Upon sale, investors may pay greater pricing per square foot than the original purchase cost.
This illustrates how single-lease buildings serve as both income and capital growth vehicles.
Lower Volatility Investment Across Market Cycles
The reliable triple net lease structures make single-lease real estate significantly less volatile than speculative multi-tenant office and retail.
Their income and valuations do not fluctuate severely through property cycles. This contrasts the boom and bust risks associated with malls, multi-family housing, and unleased offices.
While single-asset tenant risks exist, diversifying across 20-30 properties in different sectors substantially reduces cash flow volatility. If a tenant vacates, the rest of the portfolio provides ballast. Geographic diversification also mitigates market-specific risks.
Portfolio Diversification With Moderate Correlation to Equities
Adding single-lease real estate diversifies an investment portfolio beyond just stocks and bonds. It provides exposure to a hard asset class not as highly correlated to the public equity markets.
Though not completely isolated from economic conditions, single-lease mitigates downside risks relative to many other asset categories.
Institutions like pension funds and REITs have recognized these portfolio benefits by dedicating allocations to single-tenant net lease properties over the past decade. Individual investors can also prudently incorporate single-lease assets for diversification.
Inflation Hedge Through Rental Escalations
The pre-defined contractual rent increases in long single-lease agreements provide an inherent inflation hedge.
As inflation rises, so do the rental incomes from these properties. This helps preserve investors’ real returns over the long run.
In contrast, multi-year leases in apartments, retail, and offices often cap pass-throughs of property tax, maintenance, and insurance cost increases. This results in negative real rental growth after inflation. Single-lease rent bump provisions are more favorable.
Opportunities to Add Value Through Lease Renewals
The initial lease terms lock in stable income, after which there may be opportunities to negotiate improved terms upon renewal. In growing markets with rising rents, landlords may lease at higher rates reflecting changing market conditions. Terms can be updated favorably when renewing.
There are also opportunities to negotiate higher expense reimbursements, lenient landlord responsibility clauses, rental bumps, and master lease structures for enhanced tenant credit. Savvy investors can create value by working closely with tenants on renewals.
Master Leases Further Mitigate Tenant Credit Risks
When available, single-lease properties structured on master leases with the corporate parent entity can provide the strongest protection against tenant credit risk. If the operating subsidiary fails, the lease obligation passes to the corporate guarantor. This additional security brings credit tenant lease (CTL) benefits.
Master leases are more common among major national brands and franchisors. Regional franchisors using master leases can also make attractive small-to-mid-market investments with added safeguards.
Passive Ownership With Flexibility on Property Management
One of the top appeals for real estate investors seeking passive income is the minimal landlord responsibilities after leasing single-tenant buildings. If you prefer completely passive ownership, single-lease requires almost no daily oversight once rented.
However, you retain full flexibility in choosing a property manager if desired, or self-managing. This distinguishes single-lease from multi-family apartments or malls where professional third-party property management is mandatory. The passive or active option caters to any management preference.
Fixed Management Costs With No Scaling Challenges
Unlike scaling multi-tenant assets where adding buildings increases administrative complexity exponentially, single-lease properties have fixed manageable costs regardless of portfolio size.
With limited landlord duties, personnel and systems infrastructure needs do not balloon as portfolios expand.
Unless lease expirations align simultaneously, renewals are staggered requiring only occasional individualized tenant interactions.
This allows a substantially larger portfolio scale without a substantially larger headcount – an ideal formula for efficient passive income.
Avoid Headaches and Churn of Multi-Tenant Management
Leasing and managing dozens of small business tenants across multiple sites inevitably involves high tenant turnover, costly vacancies, challenging collections, time-intensive maintenance requests, and tighter property management margins. Franchise tenants offer a completely opposite experience.
With corporate backing, single-lease tenants stay long-term while paying rent reliably. Limited maintenance needs to provide favorable risk-adjusted returns at scale.
The simple passive nature is a key selling point for investors averse to traditional retail/office headaches.
Ideal for Section 1031 Tax-Deferred Exchange Investors
The long-term lease cash flows make single-lease properties a suitable replacement asset for investors executing 1031 tax-deferred exchanges. By swapping out multi-tenant assets with high oversight needs, single-lease provides stable passive income while deferring capital gains.
Unlike vacant land, single-lease buildings with existing rents qualify as “like-kind” investment property.
Investors using 1031 exchanges to defer taxes should evaluate applying proceeds from multi-tenant dispositions toward single-lease acquisitions.
Lower Tenant Turnover Reduces Costly Capex Spending
In traditional small shop retail and mixed-use offices, tenant spaces turnover every 3-5 years on average. This requires costly refreshing tenant improvements(TIs) like floors, paint, lighting, etc. for new occupants.
Single-lease tenants stay 10-25 years, in contrast, avoiding recurring TI capex.
Replacing HVAC units or the roof once every 30 years is far less intensive than continually renovating spaces.
The long locked-in leases keep recurring capital costs minimal for simplified underwriting and higher cash yields to investors.
Ideal For Investors Seeking Cash Flow Stability
Between the corporately guaranteed income, triple net lease (NNN) expense structure, long leases, rent bumps, low volatility, and inflation hedges, single-lease real estate arguably provides the most stable and predictable cash flows among major property types – ideal for conservative passive investors.
Those nearing retirement who value minimized risk over maximizing total return may find the steady durable income from single-lease properties better aligns with their investment objectives compared to more opportunistic and intensive asset categories.
Due Diligence Factors to Evaluate
While the benefits are numerous, careful due diligence evaluating factors like tenant credit, lease analysis, rent coverage, debt terms, diversification, market demographics, and property condition is important for prudent investing in single-lease assets.
Investors with long-time horizons who prioritize stable passive income should strongly consider allocating a portion of their real estate portfolio to single-lease properties leased to financially secure tenants on long-term triple-net leases.
This niche sector can enhance returns while decreasing portfolio volatility.
Conclusion
Single-lease net lease properties offer a compelling set of benefits for passive real estate investors seeking stable growing income with minimal management responsibilities.
By providing durable income secured by corporate tenants, single-lease diversifies portfolios beyond just stocks and bonds.
However, prudent due diligence is still required to evaluate risks like tenant credit health, markets, and lease terms.
Constructing a properly diversified portfolio across 20+ single-lease assets can mitigate potential downside risks.
For buy-and-hold investors, allocating to recession-resilient single-lease rentals leased at favorable rates can enhance total returns while decreasing volatility.
Frequently Asked Questions
What is a single-tenant property?
A single-tenant property is a commercial building that is entirely leased to one tenant, as opposed to a multi-tenant building with smaller spaces rented to multiple tenants.
What is a triple-net lease?
A triple net lease is a lease agreement where the tenant pays base rent plus taxes, insurance, maintenance, and other operating expenses for the property. This minimizes costs for the landlord.
What types of tenants rent single-tenant properties?
Typical tenants are national and regional corporate chains, franchises, and well-funded small businesses like restaurants, retailers, banks, convenience stores, pharmacies, and medical offices.
What maintenance costs do landlords have?
Landlords are generally responsible for structural repairs and replacing the roof, parking lot, or HVAC occasionally. Tenants cover all other operating expenses and maintenance.
How does financing work for single-tenant properties?
Single-tenant properties can qualify for long-term mortgages from lenders given the stable cash flow. The lease term should exceed the loan term so it can be refinanced.
What lease terms are typical?
Initial lease terms average 10-25 years for single-tenant buildings. Extensions up to 10 years are also common. This provides long-term income stability.
How many properties should an investor own?
15-25 single-tenant properties in different sectors provide ample diversification. Investors may start with 5-10 and build over time.
