If you went to a coffee shop or restaurant and asked the patrons what they think is the best way to invest in real estate, most of them would probably say flipping homes or renting apartments. That makes perfect sense because everyone needs a place to live.
However, most of them would overlook the real estate opportunity sitting right in front of them — the coffee shop or restaurant they’re eating in. Real estate trends do not often dictate real estate transactions, and that can make it difficult for investors to know where to turn next. After all, everyone needs a place to shop, eat and work. That means commercial and industrial real estate like warehouses and office complexes are great real estate investments too!
Yes, you can work with a real estate agent who will help you find real property, but what type of income-producing real estate do you want? Take a look at how there are other parts of the real estate business aside from real estate development. Plus, learn how the real estate industry can be an amazing place to put your money. Real estate deals allow you to diversify your investments, create a relationship with a real estate brokerage firm and get ahead of real estate wholesalers.
Types of Industrial Buildings
The industrial real estate sector covers an incredibly diverse range of buildings, all of which are designed to suit different purposes. Examples of industrial buildings include:
- Light industrial such as dry cleaners or garment manufacturers
- Heavy industrial such as steel mills, lumber yards and factories
- Flex space
- Distribution centers
Even these types of industrial properties have different subgroups within them. Take a storage facility for example. The first thing that comes to most people’s minds is a place to put their unwanted stuff. However, there are large operations, such as cold-storage facilities, that are designed to serve major shippers of perishable goods. Companies like Walmart Inc. (NYSE: WMT) and Amazon.com Inc. (NASDAQ: AMZN) all need local distribution hubs, which makes industrial real estate very important to their operations.
Industrial properties can also be single-tenant or multitenant. You could have a 20,000-square-foot warehouse and rent it to 1 company that uses it as a logistics hub for its operations. However, you could just as easily subdivide the inside and lease out the space to multiple tenants.
This is one of the many advantages that industrial real estate offers over residential spaces. Not only can you chop and change spaces on the inside, but you can also structure your leases in such a way that your tenant is responsible for some of the tenant improvements or repurposing of your space. By contrast, you can’t start knocking out walls in your apartment building to suit a tenant who needs 3 bedrooms instead of 2 bedrooms.
Regardless of the industry it serves, every business needs a place to operate. As soon as any business becomes too big to operate out of the business owner’s house, the business will need to rent a commercial or industrial space. This creates an incredible diversity of potential tenants for industrial spaces. A list of the types of tenants who might need an industrial lease includes:
- Manufacturing companies
- Shipping and logistics companies
- E-commerce distribution
- Sales and rental of industrial products such as tractors, trucks and generators
- Automotive repair
- Vehicle storage
- Bulk item storage
Types of Industrial Leases
The 3 main types of commercial and industrial leases are:
- Full service: In a full-service lease, industrial tenants pay a flat rent amount that the landlord uses to pay all property-related expenses such as maintenance and taxes — before taking out any profit.
- Net lease: In a net lease, the tenant pays a base rent as well as a portion of 1 or more of the property’s expenses such as maintenance and property taxes. The portion of the expense paid by the tenant in a net lease is subject to negotiation, but it’s usually based on the size of the space being rented in relation to the entire property. So, a net lease tenant renting 30% of the total square footage in an industrial property would pay 30% of the maintenance.
- Triple-net lease: A triple-net lease works the same way as a net lease, but tenants pay a prorated share of all the landlord’s expenses based on the size of the spaces they’re renting. Triple-net and net leases usually have lower base rents than full-service leases to offset the fact that the tenants are paying some of the landlord's expenses.
Industrial Real Estate Outlook
The immediate and long-term outlook for the industrial real estate sector is very strong. The rise of e-commerce platforms may have dented the demand for retail space, but it’s also created an equally strong demand for shipping and logistics hubs. Because of this, many retail properties are actually repurposing themselves to become industrial. The lack of industrial spaces in urban areas (mostly because of zoning restrictions) and the high cost of acquiring new property have combined to intensify the demand for industrial space. For all these reasons, the market for industrial space and industrial buildings is expected to stay robust for both the immediate and long-term future.
Pros and Cons of Investing in Industrial Properties
A partial list of the pros and cons of owning industrial space as an investment appears below.
- Long leases: Industrial leases can be 5, 10 or even 20 years long, as opposed to 1 year for residential leases.
- More income: The cost per square foot for industrial spaces can be very high.
- Net and triple-net leases: These leases allow industrial landlords to pass expenses like insurance maintenance and property taxes on to tenants.
- Flexibility: Industrial spaces can be easily reconverted to suit multiple purposes.
- Long vacancies: The length and cost of long-term industrial leases can lead to longer vacancies.
- More regulation: Industrial properties are subject to more local zoning restrictions and regulations on use.
- Harder to buy: Financing on industrial properties is not insured by the federal government, which means shorter loan terms, higher monthly payments and higher interest rates.
Ways to Invest in Industrial Real Estate
If you’d like to make an investment in commercial real estate, there are a number of ways to do it. You can buy your own building. This will give you the most control over the property and, by extension, yield the most return on your investment. The drawback with purchasing your own property is the cost and difficulty of securing financing.
Generally, the maximum finance term on an industrial property is 15 years. This means you’ll not only need to put more money down to buy the building, but your mortgage payment will also be higher. Another consideration here is that banks will only loan money for the purchase of an industrial property that is 100% occupied. So, if the property you want to buy has vacancies, you will need to pay for it in cash.
If the cost outlay of purchasing a full building is too much for you, you still have some options when it comes to industrial real estate. You can buy into an office or industrial real estate investment trust (REIT). Owning a share of an industrial REIT allows you to get a percentage of a large, diversified portfolio of industrial real estate. It’s a great, low-hassle option because you get the benefits of ownership without the hassle of managing it. However, most REITs also require you to be an accredited investor before you can purchase a share in it. What this basically means is that if you can’t show you have a certain net worth, you can’t buy into a REIT.
If you can’t buy a property flat out but you still want to get a piece of investment real estate, there is another option for you: real estate crowdfunding. Real estate crowdfunding platforms offer you (and other investors) the ability to purchase an equity share in a given property, often without being an accredited investor.
Many crowdfunding platforms have investment offerings for as little as $500. Some even have offerings for $100. Obviously, the dividends won’t be as big as they would be if you owned the property free and clear, but you’ve got to start somewhere. Crowdfunding is a great way to get your feet wet in becoming an industrial real estate investor without having to pledge more money than you’re comfortable with.
Real Estate Crowdfunding for Industrial Real Estate
While there currently aren't any real estate crowdfunding platforms specifically for industrial real estate, some of the top platforms often have offerings for commercial properties. You can browse through the offerings on our preferred real estate crowdfunding platforms to see what industrial investment opportunities are currently available.
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