Investing in industrial real estate as a beginner

Real estate investors are now shifting towards industrial real estate due to its stability. Investing in industrial real estate is granted as the most appealing sector since the cost of owning is less. However, it can be both financially and mentally taxing to get started with industrial real estate investments without a proper toolkit. Through this blog, we will walk you through investing in industrial real estate as a beginner.

What is Industrial Real Estate?

Simply put, Industrial real estate describes any piece of land or building that is used for industrial activities including production, research, manufacturing, warehouses, distribution, research, storage, and data centers to support e-commerce operations. Besides that, more than one function can be operated in the building depending upon the needs. 

In comparison with other commercial real estate properties, industrial properties are less expensive to own and operate. Therefore, real estate investors can acquire larger assets with lesser capital. Industrial properties are high in demand than residential real estate due to their stability, vast options, larger cash flow, and versatility. 

How to get started with investing in Industrial Real Estate?

You can get started with investing in Industrial Real Estate either directly or with the help of commercial real estate crowdfunding platforms. Here are the factors which you should weigh and keep in mind before investing in Industrial Real Estate.

1. Market Dynamics – 

Higher vacancy rates are always a threat to the real estate market. Therefore, it’s important to research the market with lower vacancy rates and higher demands for space. And, it’s always advisable to own the industrial buildings at a place with limited inventory but a higher demand. Always consult with expertise before purchasing such industrial buildings to ensure possible returns. 

2. Selecting Tenants – 

This asset class generally involves single-tenant properties having longer lease terms. Though you have to face fewer hassles regarding the tenants since it generally involves single tenants. But still, a complete study on the tenant is necessary for the smooth running of these commercial properties. It’s also advisable to keep an emergency fund ready to mitigate any damage brought to the property by the tenants. 

3. Learn Your Lease Terms – 

The tenants of the industrial properties sign longer leases with a time period of 3 to 10 years. Therefore, with such a long time you must know your lease terms accurately. 

In the full-term lease, the tenants are supposed to pay rents including the maintenance and property taxes. Whereas, in a net lease the tenants give only the rents along with a portion of money including the property expenses. Here, the property expenses vary from one property to another depending on their size. The portion of the expense paid by the tenants is negotiable.

The last category of the lease is the triple-net lease. This is also quite similar to the net lease. Here the tenants pay the expenses depending on the space they have rented along with the rent. Longer lease terms provide more security. And the rental rates in a full-term lease are more than the net lease and triple-net lease.

4. Property Management: 

Before purchasing a property you must be aware of the condition of that property thoroughly. If any renovations are required then try to complete them beforehand. And also make sure to keep sufficient capital for expenses required to manage the property throughout the investment tenure. 

5. Location Matters: 

The ideal location for industrial real estate properties is that it must be located near the transport hubs. It’s very important to select the location near the residential areas. As the demand increases due to the short delivery period and also the supply chain enhances. Thus, the location is very much crucial for the proper functioning of the industrial buildings. 

6. Infrastructure Design: 

While you are designing your property you must be careful with the office to warehouse space ratio. You should plan accordingly so that the space is utilized by a large number of tenants. Hence, no vacant space remains back for a longer period.

7. Risk Management: 

Along with various pros industrial real estate does have some cons too. Investment in commercial real estate especially in industrial properties deals with single tenants for a longer lease. If that tenant disappears suddenly then you have to face financial risks of paying the expenses by yourself. And also a vacant property creates risks until a new tenant is found. 

8. Redevelopment Possibilities: 

A complete study on zoning restrictions is mandatory before investing in industrial real estate. If the coverage ratio of the property is less then it allows you to expand it further. Therefore, the rate of passive income generated also increases in the future. So, please be sure enough about the redevelopment possibilities and the potential restrictions. 

9. Industrial REITs: 

Purchasing and managing a property is one way of investment in industrial real estate. But there are other ways of investing in industrial real estate.  With real estate investment trusts (REITs), you can invest passively. Also, you can opt for REIT funds and stocks. 

Industrial REITs are the most flexible form of investment. Through this, you can purchase one share with minimal cost. And you can sell that share whenever you want. Thus, industrial REITs allow you to have a wide-ranging investment portfolio. 

Pros and Cons of investing in Industrial Real Estate:

like the other investment types, industrial real estate also comes with both pros and cons. Let’s discuss both aspects of investment in industrial real estate. 

Pros of investing in indsutrial real estate

  1. Generally, in industrial properties, the lease terms are of 3 – 10 years. Sometimes it can be for 20 years. Thus, a longer lease term provides more security.
  2. Industrial properties ensure more passive income. Since the rate per square foot is more than residential real estate.
  3. While availing of net leases or triple-net leases the property taxes and the maintenance costs are borne by the tenants.
  4. Industrial properties are flexible. You can easily reconvert the space as per the requirements.

Cons of investing in industrial real estate

  1. The longer lease term may result in longer vacancies sometimes. 
  2. Industrial properties can have more regulations and zoning restrictions due to their characteristics.
  3. It’s hard to purchase industrial real estate since it has higher monthly payments and also the interest rate is high.

Is investing in industrial real estate profitable?

The present and future of industrial real estate look promising. The rise of e-commerce platforms has increased the demand for retail space. Thus, the distribution and logistics hubs are also in demand. Due to this demand, the investors are repurposing themselves to become industrial. 

In urban areas, there is a lack of industrial spaces due to regulations and zoning restrictions. But, the high cost of acquiring new property has intensified the demand for industrial spaces. Thus, for the above circumstances, it is expected that the demand for industrial real estate will remain high. Through this sector, the investors can generate a profitable amount of cash flow.

Bottomline

Before purchasing industrial real estate, mind your due diligence and be fully aware of the risks. Though it has several advantages, still it can be a financial burden to you if proper analysis is not done. Investing ṣin industrial real estate has lots of regulations and zoning restrictions. This criterion makes it different from other commercial real estate. So, try to consult with experts to know all the nooks and corners of your industrial space. Thus, getting the right space at the right price.