Savvy investors are always searching for their next opportunity with promising long-term growth. For many, warehouses are a growing niche that provides stability and diversification. A sharp increase in e-commerce over the last decade has driven the need for more warehouse space. Whether for storage or shipping, warehouses provide an area for companies to house everything they need to do business. In this article, we’ll explore some advantages and drawbacks of investing in a warehouse to help you determine whether it fits your portfolio well.
1. Warehouse Space is Diverse
Warehouses may look the same from the outside but have various uses. There are generally three categories:
- Storage
- Distribution
- Manufacturing
Some warehouses are large enough for all these functions to occur under one roof. Others are designated for just one of these needs.
Warehouses fall into A, B, or C classifications. Class A warehouses are new and built with technology and industry specifications in mind. Rent is usually higher for these types of warehouses. Class B properties are one step down because they’re typically a bit older.
Class C warehouses are aging facilities that lack amenities and updated infrastructure. These are usually properties that are in subpar condition and need upgrades.
2. Income Potential is High
Due to the sheer size of a warehouse, your tenant will have to pay a relatively high monthly price. This is to be expected, which is why most warehouse tenants are large companies with solid reputations that can afford the space.
Further, these leases are usually very long-term, especially when you compare them to residential investment properties. All of this lends itself to the high-income potential that is lucrative, steady, and reliable. The financial gains can be notable if you find the right property and a winning tenant.
3. Location Matters
Warehouses should be near a major highway or railway, if possible. This is especially important if the warehouse will be used for distribution. With this in mind, your investment goal should be to find a warehouse in a growing and thriving region with access to transportation.
Further, a healthy local labor market will ensure your tenants can hire the team they need to be successful. This is crucial because the more successful your tenants are, the more likely they’ll want to stay in your space.
4. Pricing is Important
Work with a real estate agent who has experience in commercial real estate. This is one of the best ways to ensure you buy at the right price. If they’ve been in the warehouse industry specifically, that’s even better! These real estate agents can often assist you in finding off-market properties that present rare and lucrative opportunities.
And don’t forget: you should always search for ways to improve your debt-to-income ratio by refinancing when the time is right.
5. Tenants Make or Break You
Even the best and most advanced warehouse won’t be profitable without standout tenants. You want to carefully select a tenant that will take care of your space, pay rent on time, and stay there for many years.
Long-term tenants lead to stability and predictability, allowing you to focus on other investment opportunities. Look for a company that has its sights set on growth and scalability.
6. Warehouse Tax Deductions Are Helpful
Owning a warehouse gives you access to tax deductions that may help your bottom line. There is no shortage of write-offs, from mortgage interest to repairs, improvements, and depreciation.
Work with a reputable accountant to ensure you take advantage of every deduction. These professionals can also help you understand capital gains taxes and other critical financial impacts of owning real estate investment properties.
7. Fractional Ownership is Possible
Warehouses require a substantial financial investment, especially at the outset. Many investors may choose a deal that allows for fractional ownership and exit options (if deemed necessary).
In addition to brokering a deal with other investors, you can opt for a Real Estate Investment Trust (REIT). These companies provide investment opportunities much like a mutual fund, making it possible for a range of different investors to gain access to valuable real estate deals.
8. Financing Options Are Available
Because real estate requires significant upfront costs, there are reliable investment property loans that can help you get the funding you need. Although interest rates and fees are often high due to the associated risks, this can still work out in your favor if the investment is suitable.
Still don’t have the capital you need? Gap funding closes the remaining gap between what your lender covers and what you need to fund the deal fully. From gap lenders to personal loans and business credit lines, gap funding can help you get to closing.
The Bottom Line: Expand Your Portfolio With Warehouse Investing
If you’re an investor looking for opportunities to diversify your portfolio, warehouses can help. This commercial niche is rapidly growing due to e-commerce giants like Amazon and small retailers alike.
As consumer demand for online shopping continues to grow, this industry could lead to great rewards if you have the patience. Before diving in, consult other real estate experts and financial advisers who can help you make a fiscally responsible decision.
Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation’s leading real estate education platform for home buyers, sellers, and investors.
