When it comes to investing in commercial real estate, one of the key decisions investors face is choosing between single-tenant and two-tenant net leases. Both options have their merits, but there are significant upsides to choosing a two-tenant net lease that can offer stability, higher returns, and less risk. In this post, we’ll explore the benefits of a two-tenant net lease compared to a single-tenant option and provide expert tips from Jacques Laventure on how to maximize your investment.
What is a Net Lease?
First, let’s clarify what a net lease is. In a net lease, the tenant is responsible for not only paying rent but also covering property expenses such as taxes, insurance, and maintenance. This type of lease structure offers less hassle for the property owner and predictable cash flow.
The Single Tenant Net Lease: Pros and Cons
A single-tenant net lease involves one tenant occupying the entire property. This can be a big advantage in terms of simplicity—there’s only one lease to manage, and as long as the tenant is stable, you have a consistent, long-term cash flow. However, if that tenant decides to leave or experiences financial hardship, your property could sit vacant for extended periods, causing a complete loss of income.
Pros of Single-Tenant Net Lease:
- Simplicity with one lease to manage
- Often long-term leases (10-15 years)
- Reliable cash flow with creditworthy tenants
Cons of Single-Tenant Net Lease:
- Risk of total vacancy if tenant leaves
- Long vacancy periods between tenants
- Limited income growth without lease escalations
The Two Tenant Net Lease Advantage
With a two-tenant net lease, you diversify your risk by having two income streams. If one tenant leaves or has financial issues, the other tenant can continue to generate cash flow, reducing the likelihood of a total loss. This setup also allows for greater tenant mix and the potential for higher returns over time.
Benefits of a Two-Tenant Net Lease:
- Diversification of Risk: With two tenants, the property is less vulnerable to complete vacancy. This mitigates the risk associated with a single point of failure.
- Higher Income Potential: You can generate more rent from two tenants compared to one, especially if one of the spaces is smaller but commands a higher price per square foot.
- Shorter Vacancy Periods: If one tenant vacates, leasing a smaller portion of the property (such as one of two spaces) is often easier and faster than leasing a large, single-tenant property.
- Tenant Mix: A diverse tenant mix can also attract more foot traffic and help stabilize the property over time. For example, a Starbucks paired with a neighboring fitness studio or retail store creates synergy between the businesses.
- Leverage for Lease Negotiations: When one tenant is vacating or renegotiating their lease, having a second tenant gives you more flexibility and time to negotiate better terms without a total loss of income.
Maximizing Investment Returns: Jacques Laventure’s Tips
As an expert in real estate and a seasoned investor, Jacques Laventure offers these actionable tips to maximize your returns when investing in two-tenant net lease properties:
1. Choose Complementary Tenants:
“Look for tenants that drive foot traffic to each other. For example, pairing a popular coffee shop like Starbucks with a fitness center or quick-service restaurant can create synergy, boosting both businesses and ensuring higher property value.”
2. Focus on Location:
“Location is everything. Always invest in high-traffic areas or near major retailers. Properties that are near popular retail centers or have easy access to major highways attract tenants with stable business models.”
3. Negotiate Lease Escalations:
“Ensure your lease agreements include rent escalations. These rent bumps—whether annually or every few years—help offset inflation and increase your returns over time.”
4. Perform Tenant Due Diligence:
“Don’t just look at the financials; research the tenants’ business models and industries. You want tenants that are recession-resistant and have strong future growth prospects.”
5. Plan for Vacancy Costs:
“Even in a two-tenant scenario, you might experience vacancy with one tenant. Budget for potential vacancies, including costs like leasing commissions, tenant improvements, and marketing.”
Conclusion
While single-tenant net lease properties have their benefits, a two-tenant net lease offers greater stability and income potential by diversifying your tenant base and reducing the risk of a total vacancy. By carefully selecting complementary tenants, negotiating favorable lease terms, and conducting due diligence, you can maximize your investment returns. Following Jacques Laventure’s tips will help you build a robust and profitable portfolio.
If you’re considering your next commercial real estate investment, take a closer look at the upside of two-tenant net leases—diversifying your income streams and securing more long-term financial security.