9 Benefits of Single-Tenant Net-Leased Properties

Investors seek stability and returns. While many investments lean heavily on one of those objectives at the detriment of the other, some assets provide a healthy blend of reliability and respectable appreciation. Single-tenant net-leased properties can provide that healthy mix, depending on the location and tenant. Although these properties require a lot of capital, real estate funds have made these investments easier for retail investors to access. This article will highlight some of the benefits of single-tenant net-leased properties. 

Introduction to Single-Tenant Net-Leased Properties

Buying properties and finding tenants is the name of the game for rental property investors. These assets tend to appreciate over time, but consistent cash flow helps a landlord cover mortgage payments. Landlords seek reliable tenants because it can take several months of rent payments to catch up to one vacant month. 

Single-tenant net-lease properties bring stable tenants and long-term cash flow together. Businesses need property to establish a local presence and provide services. Gas stations, restaurants, banks and other brick-and-mortar business models need buildings. Some real estate investors buy properties and rent them to these types of companies. The end result is steady monthly payments from reliable tenants on long-term leases. This arrangement provides a dependable and predictable source of rental income for the landlord, and as the business gets more established in that location, it will feel compelled to continue making rent payments to preserve its spot within the community.

Advantages of Single-Tenant Net-Leased Properties

Single-tenant net-lease properties provide investors with several advantages that are difficult to find in other asset classes. Here are some of the top perks.

Growing Market Demand for Single-Tenant Net-Leased Properties

Single-tenant net-leased properties appreciated significantly in 2020 and 2021, along with other real estate classes. That appreciation and strong demand continued in 2022. People who feel like they missed out have an opportunity to enter in 2023 as prices decline and more property owners list their properties for sale.

Rental properties have performed well, with the average rent rising 21.9% from December 2019 to December 2022. Most of this growth took place during the pandemic, but 2022 saw a 3.2% year-over-year increase in rent payments. Higher rent payments indicate growing demand. Real estate prices may come under pressure in 2023, but the limited supply of land and continuous inflation bodes well for the long-term potential for these investments.

Tax Advantages

Owning real estate comes with several tax advantages, especially if it’s an investment property like a single-tenant net-lease property. Each year, investors get to write off depreciation, an arbitrary number that reflects a property’s declining value each year. This is true to some degree because parts of the property endure wear and tear over the years. But investors can use depreciation to minimize their tax bill even if their property appreciates on the market.

Depreciation isn’t the only tax deduction you get in real estate. Mortgage interest rates, property taxes and operating expenses are some of the other deductions readily available for triple-net lease (NNN) investors. Most investments provide few tax advantages. You can save on capital gains if you hold onto a stock for over a year, but the same rule applies to real estate. Even then, you can defer real estate capital gains by quickly purchasing another property under a 1031 exchange.

Income Stability

Residential rental properties also provide income, but those properties usually involve one- to two-year leases. There’s some cash flow, but it’s not as reliable as triple-net lease properties. Single-net lease properties usually feature 10- to 15-year terms, and by the time the term expires, the business has already established itself in that location. Business owners with established customer bases may renew the lease for another 10 to 15 years. One renewal can help you cover the entire mortgage. You can profit from a stable tenant now and expand your profit margins once the mortgage gets paid off.

Growing Equity Over Time

Real estate investors have two paths to equity growth: asset appreciation and paying off the mortgage. Each mortgage payment reduces the loan-to-value ratio, and when that ratio gets down to 0%, it means you own the property free and clear. Monthly payments from tenants will increase your equity position, and if the property is located in a desirable area, appreciation will also bolster your equity position. Having equity increases your choices. You can become debt-free sooner or take out a line of credit against one single-lease property to acquire another property.

Consistent Cash Flow

These properties provide monthly cash flow, something already covered in detail, but expenses remain relatively fixed. Fluctuating expenses can offset cash flow for some business models, but fixed-rate mortgages stay the same. In fact, those fixed-rate mortgages become easier to pay off each year because of inflation. Taxes, insurance and maintenance also don’t move that much, creating an environment for consistent cash flow and reliable profit margins. 

Potential for Rent Increases

Rent has increased in most parts of the United States since the pandemic, but it’s been part of a historical trend. While some years are better than others, rent prices typically increase by 8.85% per year. That’s been the average year-over-year rent increase from 1980 to 2022. Rent increases help investors expand their cash flow and profit margins because fixed-rate mortgages stay the same. Property management and other costs may go up as well, but rent increases can offset cost increases in other areas, especially when the mortgage balance gets wiped away.

Long-Term Leases

Tenants won’t show up to your property just because it’s vacant. Landlords have to invest time and money into promoting their listings to attract new tenants. Some vacancies get filled in a few weeks, while others can take months between marketing and screening. 

Single-tenant net-lease investors don’t encounter those obstacles as often. They only need to fill one vacancy, and tenants commit to 10- to 15-year leases. Given the shortage of land and a tenant’s ability to establish a local presence during that time frame, many tenants decide to renew their leases instead of moving to another location and alienating their customers.

Potential for Appreciation

Your property can appreciate even if it’s empty. Locations can grow in demand, and the limited supply of land bodes well for countering inflation. However, single-tenant net-lease properties have another advantage. If the tenant’s business performs well in the area, the property’s valuation will increase. A reliable tenant provides an investor with more predictable cash flow, and some investors may prefer acquiring a NNN property with a tenant than purchasing an empty property and looking for the tenant. Cash flow feels more assured to prospective investors if you have a reliable tenant with a growing business. Investors may see an opportunity to raise the rent in the future if the tenant is growing rapidly in the area. 

Low Maintenance Requirements

Single-tenant net-lease properties don’t require as much maintenance. There’s less turnover, marketing to fill vacancies and other issues that are more common in residential rental properties. The already low maintenance requirement drops even further when considering the quality of the tenants. Corporations and established businesses tend to purchase these buildings, and these companies have to create a good image for their customers. If the building has a termite problem, customers may not come back. The property owner has to maintain the investment, but most NNN tenants won’t make it more difficult. They are more likely to take care of your property because it is a reflection of their business.

Stable Cash Flow and Appreciation

Net-lease properties offer great potential for investors seeking stable returns. While growth investments may have stronger gains, they are also riskier and come with volatility. The only challenge for aspiring single-tenant net-lease property investors is the capital requirement, but there are some ways to get around that hurdle.

Frequently Asked Questions