Did you know that investing in warehouse real estate is more profitable than most of the other forms of commercial real estate? We are all aware of the fact that real estate investing has been a popular passive income strategy for quite a long time. One of the best and safest ways to make money in real estate is to invest in warehouses, which are a type of commercial real estate.
Warehouses are forecasted to be the next big investment in real estate. Local and global retailers who were forced to shut down physical stores and venture into online platforms will continue increasing storage demands for their product inventory in the new normal. Warehouses are generally low-maintenance properties. Additional costs for new fittings and structural improvements are commonly shouldered by the tenant.
BENEFITS OF INVESTING IN WAREHOUSE REAL ESTATE
Warehouses are considered a more profitable type of commercial real estate than most others and come with several benefits. Some of those benefits are listed below.
Versatility
This is one of the largest reasons people are moving towards investing in warehouse spaces. The possibilities for what you can do with the space are limitless. Some people use their warehouse as an opportunity to gain extra revenue by renting out the space, whether it’s a person using the space for storage or a company putting their overflow in your warehouse space, there’s plenty of opportunity to make some money.
Increased Income Potential With Lower Volatility
Because of the sheer size of a typical warehouse, the income potential in rent from a warehouse is significantly higher than it would be for most types of residential real estate. Warehouse rental income also produces higher incomes than other income streams found in a typical investment portfolio. Additionally, rental income from warehouses is extremely stable, unlike other kinds of income streams found in an investment portfolio. If you are considering purchasing a warehouse, it does not matter whether the market goes up or down, the rent for a warehouse will remain constant.
Triple Net Leases
What is a triple net lease? It is a type of lease that makes the tenant responsible for rent in addition to maintenance costs, insurance premiums, and taxes associated with the property. Because the lease puts so much financial responsibility in the hands of the tenant, that burden is offset by a lower rent. The tenant also benefits by being in one location for such a long time, therefore building trust and recognition at that location. Yet another benefit is the freedom the tenant has to decorate or make changes to the property to fit the needs of the business and reflect the business’s brand.
Passive Income
Money collected from a rental warehouse truly is a passive income where you are doing very little. After the initial investment and preparation for a tenant, a warehouse becomes mostly hands-off, especially with a triple net lease. That income stream is steady and constant for the length of the lease terms, which is usually 10 years or more. That is a very convenient way to make money and build equity.
Property Appreciation
The value of the property will increase by doing nothing at all. When a lease agreement expires for a warehouse, the value of that warehouse will be significantly higher than when the lease was written. One reason for this is increased equity from the money being paid into the principal of the loan for the warehouse. Another appreciation is from the increased rent that can be charged when starting a new lease after the old one expires. And the third method of appreciation is from the upgrades tenants often apply to the property to support their own business.
Benefits from Tax Deductions
Several tax deductions can be taken related to owning a warehouse as a commercial real estate property. Owners of a warehouse can deduct for depreciation and mortgage interest and other tax deductions, including expenses of maintenance, repair, and management. They can also deduct activities related to real estate such as conventions, conferences, and trainings.
DOWNSIDES OF INVESTING IN WAREHOUSE REAL ESTATE
Mainly, property owners and investors should be aware that there’s always a vacancy risk when it comes to warehouses or any other type of property.
Tenant Risk
While one consistent tenant for many years is considered advantageous, there are also some downsides. For instance, if that tenant runs into financial trouble and can’t pay rent, the investor will still need to meet their debt obligations.
Long-Term Vacancy Risk
Sometimes it can be difficult to find a new tenant after a completed lease. For example, if a tenant vacates a purpose-built industrial facility, such as a manufacturing building, the owner might need to invest a significant amount of capital to make the property compatible with other tenants and their different types of businesses.
Maintenance and repair costs
Warehouses are really enormous spaces to manage and handle. The tenants will look after their own side of the maintenance of the property, but you will still come across maintenance bills that need to be picked up. There would always be a need for maintenance upkeep all the time due to the work capacity. Maintenance can include things like leaks, the repair and maintenance of assets like air-conditioning systems, heaters, vents and anything else that doesn’t fall under the tenant’s responsibility.
Oversupply Risk
The anticipated future demand for warehouse space means that many real estate investors are building only fulfillment centers. If too many of this industrial property type are constructed and the market softens, it could significantly impact occupancy and rental rates, while also reducing property values.
Less “Flipping”
For investors who prefer to gain quick profits and flips, the long-term nature of warehouse real estate can be a drawback.
CONCLUSION
In conclusion, a warehouse is a good investment for several reasons. Compared to other commercial investment properties, they are mostly hands-off and stress-free. They are considered very stable and flexible because there are so many possibilities for the wide-open space that a warehouse offers.
If you have some cash that you are looking to invest, or just trying to diversify your portfolio, buying warehouse spaces is the right move. Investing can be intimidating, especially if you are a beginner. Low risk ventures are the best options for people just starting out and warehouse spaces offer great benefits. It’s a growing industry with so much potential to not only pay back the cost of purchasing, but also make you more. Warehouse spaces are something you’ll want to invest in.
As informed investors we should understand the risks associated with real estate investing and that there is no guarantee. Please do your due diligence.
