Are you looking to invest in commercial real estate? There are several types of commercial real estate including residential, office, retail, industrial, and land. One attractive commercial real estate investment option is purchasing a warehouse, which can have numerous uses including office, restaurant, industrial, furniture or vehicle retail, or any type of big-box retailer. A warehouse can also be broken into smaller spaces that can be used as retail, restaurant, flea market, or almost any other type of business.
Purchasing a warehouse as an investment property is potentially a lucrative strategy for long-term passive income, even though there can be high risks with any kind of commercial real estate investing. After purchasing a warehouse, that property can sit unoccupied for long periods of time while you, the landlord, incur the expenses and try to find a new tenant. However, the rewards are generally higher with less involvement than most residential real estate investments. Warehouses are also considered a more profitable type of commercial real estate than most others and come with several benefits. Some of those benefits are listed below.
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 such as money market accounts, savings accounts, stock dividends, CDs, and treasury notes, bills, and bonds. 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. Triple net leases are usually 10 years or longer, but they can also be anywhere from five years up to 20 years. Because the lease put 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.
What about the rent?
The rent can stay the same during the entire lease, or it can go up in increments every year or few years, often based on inflation. This type of lease is extremely attractive to the landlord because it is so hands-off. Granted, the landlord can be responsible for the structure, roof, and/or the parking lot, but that’s about it. There is no need to bother with changes in rent, lease renewals, maintenance, or the tax responsibility of a regular lease.
One aspect of triple net leases that investors like is that they provide a steady and consistent stream of income for a long period of time (the term of the lease). Another perk is the steady buildup of equity that occurs during the lease term while the landlord is responsible for nothing other than to cash the rental checks.
Sometimes there are disadvantages with the triple net lease. If the market gets hot and rent prices begin rising, the landlord is locked into the rental price agreed upon in the lease terms. Another disadvantage with the triple net lease happens when the costs become too burdensome, and the tenant tries to get out of the lease or renegotiate the rent. To prevent this, the landlord can use a bondable net lease, which cannot be terminated before the lease’s expiration date.
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. Restaurants, for example, will go into an empty space and install high-end flooring, extensive trim work, a bar area, walls to create storage, and many more added features that were not in the original space.
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. For more information on these types of tax deductions, consult your accountant.
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. Consider a 10-year lease of a warehouse compared to potentially having to find new tenants every year for a residential rental property. They are considered very stable and flexible because they are so many possibilities for the wide-open space that a warehouse offers. The economy has been expanding for over a decade and is currently showing no signs of slowing up. Businesses need space, and a warehouse is like a profitable blank canvas with nearly limitless potential.