Single tenant net lease (STNL) investment is a popular strategy among commercial real estate investors. It offers a low-risk, long-term investment opportunity with steady cash flow and minimal management responsibilities. However, like any investment, STNL investment comes with its own set of potential risks. In this post, we'll explore some of the hidden risks associated with STNL investment and why you need to be prepared to take them on.
The success of an STNL investment depends heavily on the tenant's ability to pay rent and maintain the property. If the tenant defaults on the lease, it can lead to lost income, legal disputes, and potential difficulty in finding a new tenant. Additionally, if the tenant goes out of business, it can be challenging to find a replacement tenant quickly.
The location of an STNL property is critical to its success. If the property is located in an area with low demand, it can lead to difficulty in finding a new tenant and potentially lower rental rates. Additionally, if the property is located in an area with high vacancy rates or declining economic conditions, it can lead to difficulty in maintaining the property's value and potential challenges in selling the property in the future.
STNL leases typically have long-term lease agreements with built-in rent escalations and renewal options. However, if the tenant chooses not to renew the lease at the end of the term, it can result in lost income and potential difficulty in finding a new tenant.
STNL properties are often considered "specialty properties" due to their unique characteristics and the specific needs of the tenant. If the tenant's business model changes, it can result in changes to the property's value and potential difficulty in finding a new tenant with similar needs.
STNL properties often require financing to acquire, creating financing risk. This includes the risk of interest rate fluctuations, potential difficulty in securing financing, and refinancing challenges. Additionally, STNL properties may have lower loan-to-value ratios, requiring investors to have a significant amount of capital on hand to acquire the property.
While STNL investment can be a lucrative venture, it's important to be aware of the potential risks involved. Tenant risk, location risk, renewal risk, asset risk, and financing risk are just a few of the potential risks that investors should consider before making a commitment. To mitigate these risks, investors should conduct thorough research and due diligence, work with experienced professionals, and have a solid risk management strategy in place. By being aware of these risks and taking proactive steps to mitigate them, investors can increase their chances of success in the STNL investment market. So, are you prepared to take on these hidden risks and play the high-risk game of STNL investment?