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When an investment opportunity presents itself it’s important to understand the level of risk involved. If an investor has been in the game for quite a while, they may be more comfortable assuming higher risk than a rookie investor. Consider how much time you have to manage or oversee your asset of choice. If you have abundant time, you may want a property that requires more hands-on management, and ultimately, a higher return when the time comes for disposition. On the contrary, if time is your most valuable commodity, you will want to purchase a triple net (NNN) asset which is considered a ‘coupon clipper’ because the rent is deposited in your bank account and the tenant maintains the property. Regardless, in commercial real estate investment, the riches are typically in the niches. 

Let’s start by defining a triple net asset (property). A triple net asset is a type of commercial real estate property that is leased under a triple net (NNN) lease agreement. This type of lease puts all the heavy-duty work on the tenant, meaning the tenant takes responsibility for the operating costs of the asset, maintenance,  rent and utilities. The three nets are: real estate taxes, insurance and common area maintenance (CAM). Examples of NNN tenants are quick service restaurants (QSRs) and national coffee shops.

On the other end of the investment spectrum is multifamily investing. Multifamily investment properties can include apartment buildings, condo complexes and the new, growing trend of single-family rental homes. Multifamily investing is the practice of buying and managing a property with multiple units for the purpose of renting to tenants. There are many types of commercial investment properties in between NNN and multifamily, but for this blog, we are focusing on these asset types.

Why buy an NNN asset?

When making the decision to invest in an NNN asset versus a multifamily investment, you may want to consider some reasons why a NNN investment may be more favorable. Common reasons include:

1. Lower management responsibilities: This is the top reason a CRE professional, especially one running multiple businesses, buys an NNN investment. Ownership management responsibilities are nonexistent compared to multi-family properties because property management is the responsibility of the tenant. This results in fewer things to stress about, giving the investor more time to focus on other aspects of their investment portfolio.
2. Stable income stream: NNN leases typically have long-term lease agreements that provide a stable income stream for the investor. These lease agreements usually have rent increases built into them, providing protection against inflation to ensure a steady stream of cash flow over time.
3. Creditworthy tenants: NNN assets tend to have creditworthy tenants, such as national retail chains or larger corporations. These tenants come with strong financial backgrounds and credit ratings, making them more likely to pay rent on time and fulfill their lease obligations.
4. Predictable cash flow: NNN properties typically provide predictable cash flow. The rental income is most often fixed, with rental increases every five years. 

Why buy a multifamily property? 

On the other hand, some investors may prefer a multifamily investment for the following reasons: 

1. Potential for higher returns: Multifamily properties can offer higher returns on investment when compared to NNN assets. Multifamily investments typically have higher cash-on-cash returns and potential for appreciation in value. For the hands-on investor, these properties often have an add-value component to the acquisition. For example, purchasing a rundown property that needs TLC to increase the net operating income in the near future. 
2. Diversification: Multifamily properties offer diversification across multiple tenants, reducing the risk of income loss in the event of one tenant vacating the property.
3. Tax benefits: Multifamily investments offer many tax benefits, including depreciation and the ability to write off expenses related to the property, which can reduce the investors’ tax burden.

Regardless of the investment choice, it is important to always conduct thorough research and analysis before making any investment decisions. If you are not interested in exploring options, our team of knowledgeable CRE professionals at Davis Commercial AZ is available to provide expertise and discuss optimal investment options. Get in contact here to learn more about our services.