To answer this question, it is important for an investor to consider the following:

1. Administrative property:

• For single-tenant properties, the owner’s responsibilities are minimal or nil. All you have to do is take the rental check and deposit it into your bank account. Sometimes the tenant can pay the rent by transferring it to their bank account; hence this is a truly passive investment. If you are really busy with your career and / or want to have little responsibility as a homeowner, this is an investment opportunity worth considering.
• For multi-tenant properties, even when there is a local property manager, you have to be involved in various decisions about who to rent to and various maintenance issues. Every month you have to review the management report.

2. Risks:

• For single-tenant properties, your investment risk is essentially “putting all your eggs in one basket.” If the tenant does not renew the lease, they could lose 100% of the rental income. There could be a potential depreciation in value if the rent is fixed for 20-25 years. When you have a few years left on the lease, you will need to increase the capitalization rate to sell. For example, a Walgreens with a new 25-year lease offers a 6% limit. However, when there are 9 years left in the lease, the limit is 7.5% or 20% depreciation.
• For multi-tenant properties, the risk involved is minimal. If a tenant does not renew the lease, he will lose only part of the total income and still have money from the other tenants to pay the mortgage.

Therefore, in the case of multi-tenant properties, you are likely to have minor issues. For single-tenant properties, one problem can potentially translate into a large one, as noted above.

3. Lease Terms:

• For single-tenant properties, the lease is typically long-term, for example 10 to 25 years. Typically it is an absolute NNN lease for the most desirable location and NN otherwise. Rent is fixed for domestic tenants with a strong S&P rating, for example Walgreens for the 20-25 year primary period and options. For national tenants with lower S&P ratings, e.g. O’Reilly, Family Dollar, rent is fixed for prime period 10-15 years) and modest rent increases of 5-10% during options 5-10 years. For franchisee or family leases, rent increases of 5% to 10% for every 5 years are typical.
• For multi-tenant properties, the lease is typically 1 to 5 years. NNN if the location is desirable, gross lease or NN or even gross otherwise. Leases often have annual rent increases of 1% to 3%, or increases of 5% to 10% during options for more desirable locations. Rent could be flat for less desirable locations.

Four. Lease guarantee:

• For single-tenant properties, the lease may be guaranteed by corporations, eg, Walgreens, Rite Aid. The quality of the collateral depends on the corporation’s S&P ratings. As a general rule of thumb, the stronger the S&P rating, the lower the capitalization rate. For example, DaVita’s lease could be under DST Renal, one of several dozen wholly owned subsidiaries of DaVita. While this guarantee is not as strong as Walgreens ‘, its business stability is probably stronger than Walgreens’. When someone needs dialysis services, they have to go there to face serious medical consequences. Therefore, greater business stability could compensate for a weaker guarantee. The lease could be under a single entity LLC, which is not as desirable since a single entity does not have many assets compared to the parent company. Many CVS pharmacy leases are structured this way.
• For multi-tenant properties, leases have various guarantees, from family members to corporations. Attractive locations tend to attract better brand-name tenants and therefore better warranties. Similarly, less attractive locations have to settle for less desirable family tenants with weaker collateral.

5. Ease of tenant:

• For single-tenant properties, you must find a tenant in the same line of business. Properties tend to be for special purpose properties with specific business requirements, for example banks or restaurants. It’s not easy to turn a former Bank of America with a bank vault into a Burger King with a commercial kitchen. That is why it is more difficult to find a replacement. Because of this, investors tend to shy away from single-tenant properties with a few years left on the lease.
• For multi-tenant properties, it is easier to find tenants, especially for smaller units.

In short, single-tenant and multi-tenant properties make great investments. Given the above aspects that are involved in any of the investments, one only needs to understand the pros and cons and choose the property that best suits their investment portfolio / strategy.