If Someone Wanted To Compare An Apartment Building Investment And Net Lease Investment, Which One Is Better Or What To Consider?

The following Q&A was completed as part of our conversational Commercial Real Estate FAQ Interview Series, we hope you find it helpful:

Investment in apartment building or multifamily properties and investment in triple net come from some very similar places and drivers while being completely different investments. Both investors wish for secured income from a diversified source, but the two different investment types use the same concepts only with different words. With a multifamily property, you’re looking the credit of the tenant rather than the credit of a company, but you’re still focusing on the economics of that lease. 

Richard Wilson: If someone wanted to compare an apartment building investment versus a net lease investment – I guess one is very active, one is more passive, in an apartment building you might be able to boost NOI by adding revenue in a few ways or do better property management and your income is going to fluctuate month to month quarter to quarter – when an investor is looking at where to allocate to, you talked about diversification earlier in this interview series, so would you say that when an investor is looking at these two types, it’s not really which one is better, it’s very different in that if you do want diversification it might be good to consider both? Or would it be a major negative trade-off of one versus the other? Maybe if an investor is looking at that option. 

Peter Von Der Ahe: I think they’re completely different investments, but I think the drivers for the investors themselves are very similar because one of the benefits of investing in multi-family is you have a 100 unit property, you have 100 different rental streams. So if you have a problem with 2 or 3 them, the investment is still going to perform fine, it’s most likely going to continue to cash flow, and that’s a problem you can solve and move on. So I would say one of the number one reasons why people like multi-family is because of the risk dynamics; people need to live somewhere, it’s not going to get evaporated by Amazon and your income is diversified amongst many tenants. So you’re looking for income, and you’re looking for security of income. Those are the same things that people who invest in triple net properties are also looking for. So they marry together and it’s the same concepts, it’s just different words. Now you’re talking about the credit of the tenant, and you’re talking about how is the lease structured and what are the economics of the lease. 

Richard: Sure, okay.