Though institutional players have increasingly been entering the net-lease market, advisors say that interest among individuals remains strong, as investors seek the greater control and stability offered by net-lease properties.

Whereas investors in REITs must give up control over the particular properties their money goes into, direct investors can form “mini-REITs” of their own composition, says Rahul Sehgal, chief investment officer for Inland Private Capital Corp. in Chicago.

“Our activity level is way up,” says Jeffrey Gitt, owner of Westwood Net Lease Advisors in St. Louis. Direct investors “like to kick the bricks or tell other people, ‘Look, I own that McDonald’s over there,’” he says. “A lot of people feel good telling their friends they own a McDonald’s rather than a stock certificate.”

Apart from the psychological aspect, direct investors are also drawn to the stability of net-lease properties given the relative volatility of the stock market, as well as the low level of responsibility involved in maintaining sites. Most investors tell Gitt they want to invest directly because they want control, he says.

“Most shouldn’t control anything—they don’t know enough about it,” he says. “But that’s fine, because they’re not really controlling anything anyway. The tenant does everything” in net lease, he says.

Whereas a REIT can become diluted with weak properties, a buyer with upwards of $2 million to invest can find a solid property with an investment-grade tenant such as CVS or Walgreens and a long-term lease, assuring them of a lower risk of default, says Christian Marabella, president of Marabella Commercial Finance in Carlsbad, Calif. “They have control,” he says. “And they can try to sell if they don’t like it and go into another net-lease arrangement.”

Direct investment in net-lease properties typically appeals to older investors who want a stable, low-maintenance investment that can yield money to live on in retirement and to pass on to heirs. Some are looking to get out of apartment ownership, and net-lease properties offer a chance to look beyond their own hometowns and search for better yields elsewhere in the country, Marabella says.

“It opens up the door for them to find something relatively quickly, versus if they had to find other apartments or something like that, where they pretty much have to buy something in their backyard,” he says.

In addition, investors are increasingly attracted to direct investment because workable deals are coming in at lower prices, says Sehgal of Inland Private Capital Corp. Net-lease properties with investment-grade tenants such as Advance Auto and Dollar General are available in secondary and tertiary markets at $1 million, and banks will lever such deals at 60 percent, lowering the equity required of the investor.

“Their whole goal is ultimately to keep getting cash flow from the property,” Sehgal says of the typical direct investor. Some may diversify their investments by adding shopping centers or multifamily apartment buildings to their portfolios.

The growing use of Delaware Statutory Trusts for net-lease investing has also fueled the growing interest among individual investors, Sehgal says. Inland Private Capital Corp. was instrumental in prompting the issuing of the 2004 IRS revenue ruling that dictated the terms of the DST model.

The firm is now seeing more 1031 exchanges than it has since 2007, and it raised more than $30 million last month in equity, Sehgal says. Inland handles upwards of 75 percent of the market share for such exchanges.

The passage of the JOBS Act has reduced the minimum investment required of investors, further increasing the appeal of direct investment and allowing for greater diversification, Sehgal says.