Both NNN properties and multi-tenant residential properties can be quality investment opportunities. The advantages of one versus the other are derived from the short term and long goals of the investor. If we dig a bit deeper we can find out that the main differences are management intensity and stability.
Is It Better Than The Multifamily Residential Property?
Better ROI:
NNN properties allow an investor to realize a stable highly predictable ROI over the entire term of the lease. I like to equate it to a fixed rate mortgage. The tenant is responsible for maintenance, taxes, and insurance which can fluctuate (usually increase) over the lease period. This gives the owner/investor a steady predictable income for the entirety of the lease. As stated in a previous response, there can be a risk depending on the credit rating/worthiness of the tenant. While most NNN properties are single tenants there are many multi-tenant NNN investments across the nation.
Lower Risk:
Recently, there has been a trend among retail property owners to have new tenants sign NNN leases or the absolute net lease. This retail trend is seen both in small strip centers as well as large power centers. In regards to the risk of a single-tenant NNN lease the main factor is the credit rating/worthiness of the tenant. This rating is usually reflected by the asking price/cap rate offered for the property. Usually the higher the credit rating the lower the cap rate.
With corporate backed leases the credit rating of the company can mitigate some of the location based risk of the property. If, for some reason, an individual location goes "dark" (vacant), as long as the corporation is still in business they will be obligated to keep paying the lease. The other main difference between the 2 investment types applies to the future sale of the property. NNN properties have very little value-add upside. Other than changes to the economy or a shift in investment strategy NNN properties are valued solely on ROI. Therefore, without upgrading a tenant or significant rent rate increases a property's value stays relatively flat.
Multi-tenant residential properties on the other hand can be very management intensive. Residential leases are typically shorter term and therefore the properties have a higher turnover of tenants. This requires owners to spend more time on finding new tenants and maintaining the residences.
Occupancy and rental rates are more dependent on local economies and employment levels. If high occupancy levels are kept the risk of a loss of income due to a tenant leaving is mitigated by the larger number of tenants. However, the shorter lease terms for residential tenants can lead to a more negligent tenant.
Good Resale Value:
Finally, in regards to the future sale of a multi-tenant residential property there can be a significant value-add upside. These properties are often offered for sale when they are underperforming. Through strategic capital investment, increasing occupancy, better targeted marketing or a local increase in the economy and employment rates the value of a multi-tenant residential property can greatly increase.
