If you’re looking to expand your investment portfolio, commercial real estate can be a very lucrative option, especially if you rent out the property to tenants in order to establish regular passive income from rental agreements. There are single-tenant properties, like purchasing an entire condominium and renting out the other side, or there are multi-tenant properties like apartment complexes, so which investment property is right for you? As you might imagine, there’s no one-size-fits-all answer, and it really depends on your interests and goals.
With that in mind, we want to showcase some of the pros and cons of single- or multi-tenant properties so you can determine which investment may be right for you.
Pros And Cons Of Single-Tenant Investment Property
Let’s start by looking at some of the benefits of investing in a single-tenant property. Some factors that make them enticing to investors include:
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Low Maintenance - You’re only managing one property, which will require less care and maintenance than a larger complex.
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Selective Renting - Although it’s illegal to discriminate against potential renters for certain reasons, renting out just one property allows you to be a little more selective with who you choose to rent to, as you only have one property to fill.
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Reliable Income - If you choose a great tenant and agree to a specific lease agreement, you can know that you’ll always have passive income coming back to you each month.
However, it’s not all sunshine and roses when it comes to single-tenant investments. For starters, your revenue stream is limited because you only have one tenant. The potential growth in value is also limited given that it can only hold one tenant. Finally, if your tenant leaves and you have difficulty filling the vacancy, your finances can take a hit as you will no longer have that income stream but you’ll still be responsible for paying the mortgage and insurance on the property.
Pros And Cons Of Multi-Tenant Properties
Many of the pros associated with multi-tenant properties play off of some of the cons of single-tenant properties. For example, some of the pros of investing in multi-tenant properties include:
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Larger Income Source - The more renters you have, the more money that will be coming in each month.
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Greater Potential For Value Increase - As the multi-tenant complex becomes a profitable asset in your portfolio, the property value can significantly increase. Not only could you make money by leasing out space in the complex, but the value of the property itself could skyrocket as it becomes a successful venture if you ever want to sell the complex in the future.
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Less Issue If A Renter Leaves - If you have 60 tenants in 60 apartments, you’re not going to be in as much financial trouble if one tenant leaves than if you have a single-tenant property and that tenant terminates their lease agreement.
Similarly, multi-tenant properties have some potential downsides, and they too play off the potential pros of single-tenant investments. For example, there will be more maintenance and upkeep costs with larger units, and you may need to outsource this management or maintenance work to someone else, which eats into your take home amount. Also, the overall quality and dependability of your renters may take a hit as you work to fill more vacancies, which could lead to potential headaches down the road. There’s also the possibility that should an economic downturn force multiple tenants to move elsewhere that your finances can take a more significant hit. There’s greater potential for profit, but there’s also more financial risk involved with multi-tenant properties.
To get a better understanding of what type of investment may be right for you, or for assistance with your next commercial acquisition, reach out to the team at Commercial Partners today at (612) 337-2470.