DECEMBER 20, 2018 | THE PALOMAR GROUP
Any wealth manager will tell you until they are blue in the face that diversification is the cornerstone of any portfolio with a long-term investment horizon. In a diverse portfolio, the composition of multiple assets and asset classes mitigate the risks inherent in each individual investment, improving the risk/reward payoff over time. In wealth management lore you will hear various balancing strategies such as the “60/40” rule, which recommends you place 60% of your money in stocks and the remainder in bonds. It’s a proven strategy built for success, but there are ways to further balance risk and increase investment returns.
Single-tenant net lease real estate (NNN) is one of those methods by offering your portfolio solid, consistent returns from a physical asset that adds tax-reducing depreciation benefits. NNN properties probably most resemble bonds in that they are long-term contractual obligations of a company (the tenant) to pay returns (rent) to the investor (landlord). However, NNN investors can participate in the upside of underlying asset appreciation, as with stocks. So, high-quality NNN investments are somewhat of a hybrid of bonds and stocks that provide your portfolio with the following characteristics:
- Long-term monthly cash flow
- Income growth of around 2% per year on average, in a typical lease
- Security of the company behind the lease
- Participation in asset appreciation
- Physical asset that is depreciable, reducing income tax bills
Bondholders receive guaranteed fixed semi-annual payments and a guaranteed payout at maturity. Stockholders expect price growth and dividends, though neither are guaranteed. Single-tenant net lease investments combine the best of both with contractual payments and growth opportunity. There is no way to be sure which asset class will outperform the others, but a strong portfolio will include interests in all three. A single tenant net lease investment could be the extra diversification your portfolio needs to improve your long-term risk-adjusted returns.