Net lease investment has become an increasingly popular real estate investment strategy in recent years. As a form of commercial real estate investment, net lease properties provide investors with stable income streams and lower management responsibilities compared to other types of properties. In a net lease agreement, the tenant pays not only rent but also some or all of the property’s operating expenses, such as maintenance, insurance and taxes. While net lease investments offer many benefits like steady cash flow and hands-off ownership, they also come with some drawbacks that investors should consider before buying net lease assets. This article will analyze the pros and cons of investing in net lease properties.
Net lease properties generate stable rental income with lower management needs
One of the biggest appeals of net lease properties is the stable rental income they can provide to investors. Tenants typically sign longer lease terms of 10-25 years in net lease agreements, meaning landlords are guaranteed their rental payments for the duration of the lease, even during market downturns. Additionally, by pushing operating expenses onto the tenant, net lease owners take on fewer management duties themselves. The long leases and limited responsibilities allow investors to earn largely passive income with their net lease properties.
Net lease assets may have limited upside potential compared to other commercial properties
While net lease investments provide stable cash flow, they also limit an investor’s upside potential. Since net lease properties usually have long-term leases locked in place, landlords cannot raise rents to market rates when demand increases. So they miss out on the appreciation benefits that commercial landlords with shorter leases can capture. Net lease properties also typically require less hands-on management, so there is little opportunity to add value or boost returns through operational improvements.
Net lease properties offer built-in diversification across geography and industry
Net lease real estate investment trusts (REITs) hold portfolios of properties leased to tenants across various geographies, industries, and credit profiles. This diversification helps mitigate the risks of any single tenant’s default. So even if an individual store closes, the REIT can continue collecting rents across its broad portfolio. Investors can gain exposure to hundreds of net lease properties through a single REIT investment, allowing them to reap diversification benefits that would otherwise require large capital investments.
Investors have limited control with net leased properties
While the hands-off approach of net lease investing can be a plus for some investors, others may dislike the lack of control that comes with it. When tenants manage most day-to-day responsibilities and lock in long-term leases, landlords cannot raise rents or repurpose the property to meet evolving market needs. Landlords also rely heavily on tenants for proper maintenance and upkeep. If a tenant fails to maintain the property as agreed upon, the value of the asset could suffer over time.
Net lease properties can provide stable passive income for real estate investors through their long-term leases and built-in expense reimbursements. But the same features that enhance cash flow can also limit upside and restrict landlord control. Investors should weigh the pros and cons of limited control and appreciation versus steady cash flow when considering net lease properties.