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Investing in real estate has become increasingly popular as investors seek areas that offer stability and minimal risk compared to the highly volatile stock market. Real estate investments tick all these boxes, and the growth in real estate investors attests to this fact. There are various ways to invest in real estate, including Real Estate Investment Trusts (REITs), online platforms, rental properties, and personal properties, each with advantages and disadvantages. While these options may offer attractive returns and tax benefits, commercial real estate investors commonly prefer two popular methods for maximizing their returns: Triple Net Lease (NNN) Property Investment and Multifamily Investing.
NNN Vs Multifamily
NNN Vs Multifamily: What Are They and Which is Better in 2023
What is Triple Net Lease (NNN)?
A triple net lease, aka NNN lease, is a lease agreement on a property wherein the tenant or the lessee agrees to pay all the property expenses, such as real estate taxes, capital expenditures, janitorial charges, area maintenance charges, and building insurance. These are the expenses that the tenant bears over and above the cost of rent and utilities.
In a triple net lease, primarily, the tenant pays all the operating expenses related to the property. Unlike a single net lease, where the tenant is required to pay only property taxes apart from rent, and a double net lease, where the tenant is required to pay property taxes and property insurance apart from rent, in a NNN lease, the landlord can shift the expenses to the tenant. Thus it becomes a type of commercial lease agreement preferred mainly by investors in commercial real estate. Since the lessee bears all the costs, the property owners charge low rents, providing a great investment option with low risk and stable income.
Investments in triple net leases often include a portfolio of three or more high-quality business properties fully leased to a single tenant with reliable cash flow. Commercial real estate may consist of office buildings, shopping centers, industrial parks, or independent structures run by pharmacies, banks, or eateries. The average lease length is between 10 and 15 years, with an agreed-upon increase in rent on an annual basis.
What is Multifamily Investing?
Multifamily investing means investing in a property that can be used to rent to multiple-tenant families. Any property with one housing unit, washroom, and kitchen can be termed a multifamily property. Now a multifamily property can be owned by a single person or even a pool of investors who had invested together to generate an income stream by contributing to the property’s purchase price and other charges once and deriving capital gains from it for a more extended period.
Multifamily properties are generally expensive compared to their counterparts but provide steady cash flows because multi-tenants rent the property. This reduces the risk and makes it one of the safest and most reliable investments in the real estate market.
Multifamily investing offers enticing tax advantages. Utility bills, property management fees, maintenance charges, insurance premiums, and marketing expenses are all allowable deductions for the property owner. In the long term, even though the property’s fair market value is theoretically increasing, the owner can benefit from real estate depreciation and cost-segregation tax advantages as the building and its fixtures age over time.
Triple Net Lease vs. Multifamily Investing
- Cash flows: In Triple Net Lease, the cash flows are steady, but there are fair chances of default since only one tenant is living in the property, and if they fail to pay the rent, the investor’s cash flow might be at stake.
When it comes to multifamily investing, since it is a multi-tenant agreement, even if one tenant fails to pay the rent, the investor is still in a better position as the default will be subsidized by the other tenants’ rent and provides more flexibility for the flow of funds.
- Brokerage: In NNN Lease, if a broker brings the tenant, the brokerage will be given once since only one tenant is required for the property. This is one of the most significant factors behind fewer rentals in a NNN lease property.
Regarding Multifamily properties, the brokerage must be paid to multiple brokers who get multiple tenants. This adds up to the expensive rentals on multifamily properties.
- Requirement for the owner to be the landlord: With a NNN investment, the investor still has to become the landlord and be responsible for the property, but for multifamily investing, it is not necessary for them to be landlords, and hence are free from additional responsibilities.
- Rent for tenants: The rent for the lessee is comparatively significantly less for NNN lease investment as the tenant themselves bears all the operating expenses. Moreover, since the property is smaller compared to multifamily properties, it further lowers the rentals.
On the other hand, since the cost of acquisition is so high, the rentals are also comparatively higher in multifamily investing. Moreover, landlords cover operating expenses, so it demands higher rentals from multiple tenants.
- Stakes: In the unlikely event of any loss, the owner will bear the entire amount of loss in case of an NNN lease.
In the case of multifamily investing, every investor is only liable to the amount proportionate to his investment. This helps in mitigating the risk uniformly.
- Type of Investment: NNN is a kind of active investment where the investor’s involvement is higher, whereas, in the case of multifamily investment, the investors are passive in action.
- Benefits for tenants: In the case of the NNN lease agreement, the tenant can customize the space according to their requirements without making the capital expenditure of purchasing a property.
But in the case of multifamily properties, there are restrictions in customizing the space as per the tenant’s taste since there is the landlord’s involvement in the operations, and the property is under his due diligence.
NNN Lease or Multifamily Investing – Which one to choose?
The article offers a comprehensive overview of Triple Net Lease and Multifamily investing in the real estate market and explains how investors can derive gross value from them. Investing in real estate can be daunting, involving negotiations, property valuations, lease agreements, and property appraisals. Fortunately, there are investment avenues available to suit everyone’s needs. Triple Net Lease investing is an excellent option to avoid taking on all of these responsibilities. At the same time, Multifamily may be a better choice if you prefer to be more involved in the property’s leasing process. Whether you want to invest in residential, retail, office, or commercial space, a real estate investment option is available. Ultimately, deciding which investment is best for you will depend on your financial goals and requirements.
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