Adapted from the April 2025 PREP Newsletter
As I contemplated the subject matter of my letter for this quarter’s newsletter, I realized that I’m personally dealing with a few things that may actually be very relevant to my investors.
I recently sold my Dollar General net lease property, located in New Jersey. It was an investment that I made together with a friend (and current PREP investor) over 10 years ago, and one of the last non-multifamily investments in my real estate portfolio. You might be wondering why I sold this asset, and the decision resulted from my core investment philosophy and fundamental belief in the benefits and rewards, coupled with the low level risk, that come from investing in the multifamily asset class.
I often get asked why I invest specifically in the multifamily asset class, and why I encourage others to invest in it. There are many reasons for that, but for this write-up I will focus particularly on the risks involved in single-tenant investments and how multifamily investing allows you to avoid those risks.
1) Diversified Risk: A single vacancy in a 100-unit complex is a rounding error (and accounted for in the underwriting) and no one tenant can ‘hurt’ you. In contrast, a vacancy in a single tenant property is a 100% loss of income.
2) Passive Income: When you own a single-family home, you are either doing the property management or managing the property manager. Investing in a multifamily syndication offers investors none of those headaches; we take care of it all.
3) Economies of Scale: Managing maintenance across 100 units is easier than managing it across one unit. Larger properties have dedicated management and maintenance teams in place.
Unsurprisingly, I’m currently dealing with a ‘headache’ related to my last non-multifamily real estate investment property - a triple net office space (better known as a NNN) that I also purchased along with a friend years ago. A triple net lease involves an agreement where the tenant pays the base rent, plus the expenses associated with the property, including property taxes, insurance, and maintenance costs - hence the name, ‘triple’ net lease.
When the tenant is occupying the space and paying the rent, this is a great arrangement! The monthly cash flow is consistent and mostly effortless. However, when the lease term reaches its point of expiration thereby allowing the tenant to leave, the property can remain empty for an unknown time duration, causing great loss in income and valuation to the landlord, until such time that another tenant is located.
This almost happened to me. My one and only tenant in my NNN office building, at the expiration of their lease, could not decide if they were remaining or leaving the property and asked for a number of short-term extensions to allow them time to make a decision. This caused me a lot of stress and anxiety, as I could not refinance the property under these circumstances and could not lease it to others, and this period of the unknown left me with many sleepless nights. This uncertainty lasted approximately 1.5 years, and while it had a happy ending (the tenants resigned a long term lease) interest rates moved higher during the period which then cost me a lot more to refinance the property.
I have never had this type of experience with a multifamily property, and frankly, I will never allow myself to be placed in such a stressful situation ever again. Accordingly, now that I am back in a long-term lease with my one tenant, I plan to sell the property to another investor and reinvest the sale proceeds into one of PREP’s future multifamily deals.
In short, investing in multifamily allows us to diversify risk, increase efficiency, and decrease property management workload. Less risk and less stress - sounds like a no-brainer to me.
