I do want to note here that there are several other effective ways to invest in real estate that you may want to consider. I also wouldn’t necessarily use a large amount of leverage in a real estate investment, as mentioned in the article below — though that is a popular real estate investment strategy.
Before investing in any category that you are not familiar with, consult a fiduciary financial advisor and tax professional.
Did you know that investing in warehouse real estate is more profitable than most other forms of commercial real estate? Let’s explore the unique benefits of warehouse real estate investing.
Real estate investing has long been a popular passive income strategy. One of the best ways to make good money in real estate is investing in warehouses, which are a form of commercial real estate.
Some people limit themselves to investing in residential real estate to avoid the higher risk associated with commercial real estate investing. Commercial real estate, like warehouses, offers significantly higher returns compared to its residential counterpart. You can invest in warehouses through real estate crowdfunding if you don’t have the funding to go direct.
Top Benefits of Warehouse Real Estate Investing
1. Triple net leases
One of the main reasons warehouses are a great investment option is the “triple net lease”. In this type of lease, the tenants pay for three more things in addition to the rent:
- Repairs and maintenance costs for the property
- The property’s insurance
- The property taxes
These triple net leases are usually 5-20 years long, and the rent is set to increase after every few years. The long lease periods give the investor peace of mind as they don’t have to worry as much about frequent lease renewals or changes in rent.
Also, the investor knows the exact amount of money they will receive each month.
One disadvantage with triple net lease, though, is that it is less flexible. If the lease is for a 10-year period and the rent costs in the neighborhood increases during the second year of the lease, you can’t change your property’s rent until the end of the ten years.
However, apart from having a fixed rent income for the lease term, triple net leases are generally more favorable to the investor than traditional residential leases.
2. High level of versatility
Investing in warehouse space doesn’t necessarily mean that the warehouse must be used for storage. The space can be modified to be used for almost any business purpose. For example, manufacturers can convert warehouse spaces into production sites for their goods.
You can also convert that warehouse space into a club, restaurant, office space, or subdivide it as small retail spaces. The warehouse space is flexible, and you can convert it into what you think will be most profitable for you.
For this reason, investing in warehouse real estate can be more than just the storage aspect.
3. High income potential
Warehouses tend to offer higher income, compared to residential real estate.
The size of the property is bigger, and there are more tenants in the property. This means that there will be more income and fewer costs for the investor. If you compare commercial properties with other investments like stock dividends, commercial property can offer higher returns.
Commercial real estate income or dividends can range from 5% to 15%. Warehouse investments tend to fall under the higher percentages in this range.
4. Appreciation in the value of the property
Like other real estate investment options, warehouses tend to appreciate in value — from both internal and external causes.
One example of an internal factor that will influence the value of a warehouse is proactive management. This includes introducing cost-effective improvements on the property, which improves both the usability of the property, as well as the attractiveness of the property.
External factors that affect the value of the property include variations in supply and demand for warehouse space. As the local business and real estate market grows, more people need real estate but space becomes more scarce — so the value of each property increases.
5. Lower volatility
Investing in warehouse real estate can offer more stability than most other investments, such as bonds and stocks, among others. The stock market can often be volatile and risky, but commercial properties can experience a more steady appreciation in value (though it’s also subject to economic risk).
The demand for warehouse space is growing, and it’s expected that this trend will continue over the coming years.
Experts also predict that there will be an increase in the crossover between retail and warehousing property. This will increase the demand for these properties, which is a great earning opportunity for investors.
6. Reliable source of passive income
Due to the long-term leases, investors receive a fixed amount of passive income every month. This recurring amount of money for 5-15 years for the duration of the contract is largely passive once the property is leased up with tenants, other than monthly management and maintenance.
Before leasing out the propoerty, spend some time and resources to ensure that your warehouse space is attractive and desirable to potential tenants.
This will ensure more demand and a stable flow of income for the following years. This is where crowdfunding can work to your benefit as sites like CrowdStreet offer unique investment options beyond your typical commercial real estate opportunities.
7. Tax benefits
There are numerous tax benefits available in commercial real estate: interest deduction, depreciation deductions, non-mortgage tax deductions, and more.
Let’s look at a few of these deductions in more detail.
The investor is allowed to deduct annual depreciation from their income tax.
Depreciation is the wearing out of physical properties. Commercial properties, just like every physical asset, undergo depreciation. However, the IRS currently allows property owners to calculate depreciation of commercial property for a period of 39 years. Investors can deduct from their annual income tax to cover the depreciation.
For example, an investor who buys a commercial property worth $5 million, can deduct an average of $128,000 every year as a depreciation deduction. So this is a great opportunity for tax savings.
Mortgage interest tax deductions
When it comes to commercial properties, an investor will also enjoy tax deductions for mortgage interest paid in a given year.
For example, if an investor has a mortgage that they pay $8.000 per month, including $1,500 in interest, they can deduct $18,000 every year. For investors using high-interest financing like a construction loan, this can be a significant deduction.
Non-mortgage tax deductions
Apart from the above deductions, there are also some other costs that an investor is allowed to deduct from their yearly income taxes. These may include property maintenance costs, repair costs, as well as specific property management costs.
Also, investors can deduct the cost of certain things like seminars, conventions, conferences, and others, which are related to real estate investment.
Conversely, general improvements of the property such as new furnishings or renovations, are not deducted in the year they are incurred. Instead, they are depreciated over the normal life of the specific property.
8. Ability to accumulate equity through leverage
To leverage simply means to invest borrowed capital, with an anticipation of getting profits that are higher than the interest required for the loan.
This means that investors can invest a small portion of the total acquisition price of a certain property, finance the rest, and do the same for several other properties. This method allows you to enjoy higher returns on investments than if you bought the property outright with cash.
You can, therefore, buy more properties with less money, and potentially increase your equity as you pay the loans. If you want to try to invest on your own, always use a financial model to understand your investment returns. You can use my free downloadable investment property model to get started.
Conclusion on investing in warehouse real estate
When it comes to investing in real estate, many people tend to be drawn more by residential properties. However, commercial properties are more profitable than residential ones in many ways.
I hope this introduction to warehouse real estate investing inspires you to consider it further. Always do your own research and consult a fiduciary financial professional before making a major investment decision.
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