Why You Should Invest in Commercial Multi Tenant Real Estate

Before we delve into the benefits of investing in multi tenant property, it's important to understand the difference between single-tenant and multi-tenant properties. Single-tenant properties are leased to only one tenant occupying the building or complex. These properties are often leased to large corporations, such as banks, restaurants, or pharmacies, and can offer an investor security from a long-term lease (often 10 years or more) and rent payments from a creditworthy tenant.

Multi tenant properties, on the other hand, have more than one tenant, each leasing a portion of the same building. This type of property can offer better diversification for investors, the ability to increase rents sooner when market conditions change, and a better risk/reward scenario. For example, although a 10-year lease with a single tenant may sound like a long time, if the tenant vacates at the end of the lease, your income stream will become zero.

When investing in multi tenant properties, there are two main approaches: passive and active investing. Passive investing involves investing in a property and letting a professional real estate management company handle the day-to-day operations. However, active investing involves actively managing the property yourself and responding to your tenants’ issues.

Active investing can offer more control over the property. However, actively managing the property requires more time and effort, which may not be suitable for all investors.

Passive investing can be a great way to generate passive income without having to actively manage the property. However, choosing a reputable management company is crucial to ensure the property is well-managed for the long term. For example, Kenwood Management exclusively manages all properties they own to enhance returns for their investors and provide welcoming environments that help small businesses thrive.

How do stocks compare to commercial real estate as an investment strategy? While stocks can offer attractive returns, they can also be more volatile and unpredictable. Multi-tenant buildings, on the other hand, offer stable cash flow from contractual lease obligations and the potential for long-term appreciation.

Investing in multi tenant commercial opportunities can also offer tax benefits, such as deductions for property taxes, mortgage interest, and depreciation.

Now that we understand the difference between single and multi tenant commercial real estate, let's discuss the benefits of investing in multi tenant properties. Here are five reasons why commercial properties with multiple businesses are the best investments.

1. Diversification

Investing in a multi-tenant property offers diversification for an investment portfolio. Compared to a single-tenant property, which only has one tenant from one industry, multi-tenanted properties enable investors to spread their risk.

Generally, multi-tenanted properties are leased to tenants from numerous industries. A typical multi-tenanted property might be leased to businesses that represent 15 or 20 different industries. If one industry, such as defense contracting, experiences challenges from reduced government spending, then the tenants from other industries minimize the overall investment risk. 

Much like a mutual fund, multi-tenanted properties generally enhance an investor’s risk/reward outcome.  

2. Stable Cash Flow

Even during inflation, properties with multiple tenants offer more stable cash flow because the income is spread out among numerous tenants. If one tenant leaves a multi-tenanted property, there are still other tenants providing rental income to the investor. This stability can be especially attractive to investors seeking a consistent source of passive income.

3. Lower Vacancy Risk

Over the long term, multi-tenant properties offer an investor a lower vacancy risk compared to single-tenant buildings. If one tenant leaves a multi-tenanted property, there are still other tenants occupying the property and paying rent. 

However, in a single-tenant situation, losing that one tenant means an investor loses all income for that property until another tenant moves in. Moreover, even though you don’t have a tenant, the property still incurs expenses for taxes, insurance, and utilities.

Investing in multi-business buildings can help mitigate the risk of vacancy and reduce the impact on the property's cash flow.

4. Potential for Higher Returns

Buildings with multiple tenants have the potential for higher returns over the long term because the income is spread out among various tenants. Building owners also have the potential to raise the rent for one or more tenants more frequently compared to a single-tenant property. This can lead to higher cash flow and potentially greater appreciation over time.

5. Tax Benefits

Investing in multi-tenant properties can offer significant tax benefits, such as depreciation.  These tax benefits can help to lower the overall tax liability and increase an investor’s after-tax income.

A property’s location is important for the success of commercial multi tenant real estate investments. Investing in a property located in a strong market can help to mitigate risk and increase the potential for higher returns. Here are a few reasons why the market is critical for commercial multi-tenant investing success (even if it's not where you live).

1. Strong Market Demand

A strong market, which is generally characterized by growing population, a diversified employment base, and increasing household incomes, will have a high demand for commercial properties. This can help to increase the potential for higher returns on your investment.

2. Favorable Economic Conditions

A good market for your investment dollars will typically have favorable economic conditions, such as low unemployment rates and a growing population. This can lead to increased consumer spending and demand for commercial properties.

3. Access to Financing 

Investing in a property located in a strong market can make it easier to secure financing from lenders. Lenders are more likely to finance properties located in strong markets because they are perceived as less risky.

Before investing in commercial opportunities, it's important to know your goals. For example, are you looking for passive income, or do you want to actively manage the property yourself? In addition, what is your timeline for investment, short-term versus long-term, and expected returns?

Knowing your goals will help you to choose the right investment strategy and identify properties or a commercial investment firm that aligns with your investment goals.

To get started with multi-tenant property investment, you don't need to purchase an entire building on your own. Although different from a REIT, investing through a management company (or Real Estate Sponsor) keeps your financial commitment level low while experiencing the benefits mentioned earlier.

However, choosing the right commercial real estate investment company is crucial to the success of your investment. Here are four steps to help you choose the right commercial real estate investment company.

1. Research the Company's Track Record 

Before investing in a commercial Real Estate Sponsor, research their track record. Look for a company with a proven track record of success in managing and investing in commercial properties.

2. Evaluate the Company's Investment Strategy

It's important to understand the company's investment strategy and how it aligns with your investment goals. Ask questions about the types of properties they invest in, the markets they operate in, and their approach to managing the properties.

3. Consider the Company's Fees and Expenses

Investing in a commercial real estate investment company will come with some fees and expenses. It's important to understand these costs and evaluate whether they are reasonable.

4. Look for Transparency and Communication

Choose a commercial Real Estate Sponsor that values transparency and communication. They should be open and honest about their investment strategy, the projected returns, the performance of their current properties, and any fees and expenses associated with the investment.