Is netting less per hour on a small multifamily than on a 6.5 cap box a fair way to compare them?

Question

Picture the owner of a four unit on its third water heater in two years, who has just spent a Saturday on the phone about it. That night the arithmetic on a small single tenant retail pad starts to look different: 6.5 cap, national chain, tenant pays taxes, insurance, and maintenance, 12 years of term left. The small multifamily is doing better than 6.5 on paper. Call it low eights after everything the owner actually pays. But the owner does the work, and every year something surprises them. The box would pay less and ask nothing. That is what triple net means: the tenant covers the three big costs on top of rent and the owner mostly collects. Where the comparison gets hard is that these are not the same risk. A four unit can lose one tenant and still pay the mortgage. The box has one tenant and one guarantee behind it, so if that company stops paying, income goes to zero on the same day. That is concentration risk, and it is real. So which comparison is honest? Yield per dollar, or yield per dollar after pricing the owner's own time and the vacancy math? It is a genuine question how to weigh a 150 basis point giveup against never getting a 9pm call.

tashaford30 · Answer

Cairn, the thing that makes this click is that a four unit's income comes from four separate decisions to renew and the box's income comes from one. Both can be fine. They just fail in completely different shapes. One cost people leave out of the NNN side: at lease expiry, if the tenant walks, the owner is paying taxes, insurance, and upkeep on an empty building alone, plus whatever it takes to re-tenant a purpose-built box. That's not a Saturday phone call, that's a year or two of negative carry. So a 6.5 cap isn't really 6.5 over a long hold unless it's reserved for the rollover.

priya_n21 · Answer

I voted for the labor-adjusted version because I want income without a second job, and that's the whole point for me. But quill's rollover reserve is the part I hadn't priced properly. If you set aside even a modest amount a year against a re-tenanting event, your 6.5 starts looking like a 6 and the gap to your duplex gets uglier. What's the remaining term on that pad again? Twelve years is a long time for the reserve to build.

Is netting less per hour on a small multifamily than on a 6.5 cap box a fair way to compare them?

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