Which is Right for Your Clients?
As an investment advisor, it is essential to ensure your clients are positioned in the most suitable real estate investments. When it comes to Delaware Statutory Trusts (DSTs), you have two primary options to consider: single-tenant and multi-tenant properties. Each has its own set of advantages and challenges, making it crucial to understand how each aligns with a client’s investment goals. In this blog, we will explore both options, giving you the insights needed to make informed decisions for your clients.
The Importance of Choosing the Right Real Estate Investment Structure
The choice between single-tenant and multi-tenant DSTs hinges on several factors, including the client’s risk tolerance and income objectives. Understanding how each DST type operates allows you to assess which option better fits a client's overall portfolio strategy. By comparing the two, you can provide a balanced recommendation that reflects both immediate and long-term financial goals.
Understanding Single-Tenant DSTs: Simplicity, Stability, and Predictability
Single-tenant DSTs focus on properties leased to a single occupant, often creditworthy tenants like national retailers, healthcare providers, or industrial companies. Examples include companies like Pfizer, Sysco, McDonalds, and Starbucks. Single-tenant investments are generally more straightforward, offering several benefits that may appeal to clients looking for stability and simplicity.
Advantages of Single-Tenant DSTs:
- Stable Rental Income: Single-tenant properties offer the potential for stable and predictable income streams. Lease agreements typically have long terms, often ranging up to 20 years or more, providing landlords with and investors with the confidence they will have durable income.
- Strong Credit Tenants: Single-tenant properties often attract well-established, nationally recognized tenants with strong credit profiles. These tenants are less likely to default on their lease obligations, even in challenging economic conditions, providing a sense of security for investors.
- Ease of Financing: Financing single-tenant properties can often be more straightforward, as lenders may find them less risky due to the stability of long-term leases and well-established tenants.
Potential Drawbacks:
- Tenant Vacancy Risk: The primary drawback of single-tenant properties is the risk associated with tenant vacancies. If the sole tenant vacates, the property’s income stream may stop entirely, leaving the landlord with an empty property until a new tenant is secured.
- Lease Negotiation: Finding a replacement tenant for a single-tenant property can be challenging and time-consuming, especially if the property is a large facility. Lease negotiations with a new tenant may also involve a lengthy process.
Exploring Multi-Tenant Investments: Diversification and Complexity
Multi-tenant DSTs consist of properties leased to multiple tenants, typically in sectors like multifamily housing, office buildings, or retail complexes. These investments may be more complex but also offer the potential for higher returns through diversified income streams.
Advantages of Multi-Tenant DSTs:
- Diversified Income: Multi-tenant net lease properties provide an added level of diversification. With multiple tenants, you are not solely reliant on a single source of income, reducing the impact of one tenant vacating.
Tenant Mix: The presence of multiple tenants allows for a variety of business types, particularly in retail complexes, which can attract a broader customer base and potentially enhance the property’s value.
Lower Vacancy Risk: While individual tenants may come and go, multi-tenant properties are less susceptible to sudden income disruptions. Leases are typically shorter in term, and the departure of one tenant does not necessarily mean a significant loss of income.
Potential Drawbacks:
- Management Complexity: Multi-tenant properties may require more hands-on management. Landlords are responsible for coordinating lease agreements with multiple tenants, handling maintenance requests, and managing relationships with various tenants, all of which may increase operating costs.
Tenant Quality Variability: Not all tenants in a multi-tenant property may have the same financial stability or creditworthiness. A weaker tenant’s financial issues could impact the property’s overall performance, especially in difficult economic times.
Lease Coordination: Coordinating lease terms, expiration dates, and rent escalations among multiple tenants can be challenging and time-consuming.
Considerations for Advisors: Aligning Investment Type with Client Goals
When deciding between single-tenant and multi-tenant DSTs for your clients, you must consider their risk tolerance and long-term financial objectives.
- Client Risk Tolerance: Single-tenant properties may offer more predictability, but they carry a higher risk if the tenant defaults. Multi-tenant properties distribute that risk across several tenants, which may appeal to clients who prioritize income diversification.
- Diversification Strategies: For clients who value diversification, multi-tenant properties may align better with their goals. However, even within a single-tenant DST, diversification can still be achieved by including multiple properties in different sectors or geographic locations.
Helping Your Clients Make the Right Real Estate Investment Decision
At CAI Investments, we specialize in single-tenant DSTs and can provide tailored solutions that align with your client's goals. If you’re considering these options for your clients, our team can help you further explore the process and select the most suitable DST investments for their portfolios.