How to Buy a Warehouse as an Investment
This article will examine:
- warehouse properties as an investment vehicle
- the pros and cons of investing in warehouses, and
- how to invest in warehouse real estate.
As a commercial real estate investor, I have helped others to purchase, sell, and finance warehouse properties. I will be glad to share my knowledge with you in this article.
Let’s see how to successfully invest in warehouse space.
Why Invest in Warehouse Space?
Pros of Buying a Warehouse as an Investment
Warehouses are industrial properties that can be used by different types of tenants. Trucking, distribution, manufacturing, and online fulfillment companies are just some of the tenants actively looking for warehouse space. This makes investing in warehouses a good way to diversify an existing commercial real estate portfolio.
Warehouses are usually constructed as a shell building supported by a strong foundation and pad. Utilities can easily be added and walls constructed to create new uses for the property. It’s no problem to add office space to a basic warehouse creating a flex space property.
The simplicity of these properties means lower maintenance costs. This can make buying warehouse space a good option for people who are just getting into commercial property investing.
Online vendors need fulfillment or distribution centers that are located close to their customers. Purchasing warehouse space that meets this demand is a good long term investment.
In many areas, industrial neighborhoods are becoming gentrified. Mills, factories, and warehouses are being renovated to create residential units. Sometimes the cost of these existing properties is less than the construction cost to build foundations, walls, and roofs today. In gentrified upscale markets, a good investment can be created by buying a warehouse to convert to loft apartments or condos.
Warehouse properties are a stable source of passive income that real estate investors are looking for.
Cons of Buying a Warehouse as an Investment
Most warehouses are single tenant properties. If the tenant leaves, your income stops altogether until you re-tenant the space. Warehouse investors should keep adequate reserves to handle these periods. You can mitigate this risk by turning a single tenant warehouse into a shared (also known as public or coworking) warehouse used by multiple tenants at the same time.
Warehouse properties are long-term investments. They aren’t a good prospect for short term investors who like to flip properties.
What Are Warehouse Types?
These are warehouses that store products that are delivered as needed directly to customers. Distribution center tenants are primarily B2B (Business to Business) oriented, dealing with business customers.
Fulfillment centers mostly deal with retail customers. These are individuals who have, for the most part, purchased goods online. Their purchased items are delivered directly to them from the closest storage facility that has that particular item.
Retail and Commercial Storage Space
Storage space warehouses provide additional storage for stores and businesses. The backup inventory is periodically transferred to the physical location, the store or business, not to the individual purchaser.
Manufacturing warehouses hold facilities that make or customize products. These can include anything from large equipment to small tools, parts, or products.
Manufacturing warehouses are usually larger buildings with significant utilities, overhead structural support, loading docks, and parking areas. These properties need to be near major highways and sometimes air transportation.
Some products will spoil or become damaged if they are stored in hot or humid conditions. Perishable goods such as food items need a cooler environment. Sensitive equipment, gauges, or controls can be affected by high humidity.
Climate controlled buildings have a higher cost, with a corresponding higher rental rate.
A Smart Space has the technology to identify and record incoming goods for storage, place them in a predetermined space, and retrieve them when needed without a person handling them.
Sensors and scanners read labeling like barcodes on the packaging that tells the system what the item is and where it goes. Robot forklifts and other unmanned equipment take the goods to their assigned place. When an order comes in for that item, the system sends a robot to get it for shipping.
Although the expense of outfitting a warehouse with these systems means that the tenant company often prefers to own the facility, leasing is still an option. If a tenant is willing to upgrade an investor’s property with smart technology, it may be worth offsetting their rent accordingly.
Basic Shell Space
This is the simplest structure to build and maintain. Basic shell construction typically uses span construction so that there are no columns to interrupt the storage floorplan. This is a versatile space that can be altered in the future if market conditions warrant it. These are a good first investment for beginners.
A Flex Space property is a combination of warehouse and either office or sales area. A distribution company, for example, can have their offices in the front of the building with large open warehouse space in the rear.
Home design showrooms are often found in flex space locations. This allows them to have a warehouse area with an inventory of materials and fixtures for sale to the customer’s builder.
A shared, or public warehouse is one that is leased to multiple tenants. The fixed costs are shared by the tenants which can reduce their overall storage costs. Young companies can take advantage of the savings while growing their business.
What to Look for When Buying a Warehouse?
Now, let’s discuss what to consider when buying a warehouse for the best investment.
Location always comes first when buying real estate. A warehouse property that’s located in an industrial area may be more affordable than one on the interstate, but it may not have the accessibility that tenants need.
Carefully consider whether or not the property has the features you need for your intended use. Here are just a few examples of questions you should ask:
- Does the building have overhead cranes or lifts? Can it support them if you want to add them later?
- Are there loading docks? This is a plus and probably cannot be added later without considerable expense.
- Is there sufficient parking and turnaround space for vehicles bringing and picking up the products being stored there?
- Can you add value to the property? For example, is the building large enough to create office space? Or, is the lot large enough to expand the building?
Go to the website for the state’s transportation agency and look up any planned improvements for the area. There may be good things ahead such as widened roads or improved highway access. On the other hand, you could be in for long-term access interruption.
What is the rent and maintenance history of the property? Ask for the previous year’s utility bills. Property owners can get a year’s billing history from their water and electricity providers. Also look up or ask for the property tax bill.
What is located nearby? Industrial areas often have properties that create environmental hazards. If they are uphill from your property, you may have remediation issues in your future.
How Much Does It Cost to Buy a Warehouse in the USA?
Is buying a warehouse a good investment for you? An important factor is, of course, the cost. I made a detailed analysis of this factor in my article How Much Does It Cost to Buy a Warehouse?. But let’s make a short overview in this section.
The price of a warehouse property will be determined by the property’s;
- age/functional obsolescence
The following determinations were made after surveying warehouse markets across the country on multiple commercial real estate listing platforms.
Investors look for properties that can be bought in the lower ranges and possibly improved for a reasonable amount of capital.
In markets that are on the outskirts of cities, existing older warehouses and basic shell buildings will cost around $300,000 to $400,000 for a 5,000 sf (square feet) building, $600,000 to $800,000 for a 10,000 sf building. Properties with more advanced features can go for as much as $1 Million for a 10,000 sf warehouse.
Similar properties located inside most US cities will see a significant increase, even double the price. Plain properties that are in good shape can cost between $625,000 to $750,000 for a 5,000 sf building, $1.25 Million to $1.5 Million for 10,000 sf.
Renovated and upgraded warehouses will command higher prices, in the range of $875,000 to $1.125 Million for 5,000 sf, to $1.75 Million to $2.25 Million for a 10,000 sf warehouse property.
Lower priced properties can be found in metropolitan areas, but their condition will probably require a significant capital investment in repairs.
Interestingly, some of the largest cities have built up a large inventory of industrial properties over the years. This sometimes results in a supply that is larger than demand, and prices are lower. Many of these buildings are old, so you should perform inspections carefully.
How to Assess the Value of a Warehouse?
The 3 methods of evaluating the value of a property are:
- Cost Approach – how much would it cost to build that property today?
- Sales Comparison Approach – how much have similar properties in the area sold for recently?
- Income Approach – how valuable is the property as an income-generating investment?
In their initial assessment, investors use the Comparison and Income approaches to see if a property is reasonably priced. Properties that meet their criteria will be examined more closely, possibly leading to a purchase.
Successful warehouse investors need to know the properties in the area that have sold, market rental rates, and the average Cap Rates (Capitalization Rates) for warehouse properties. Cap Rates show the potential investment returns based on the property’s price and the rents you can charge in that market.
The Sales Comparison approach compares properties for sale with similar sold properties. After accounting for minor differences, the price of the property for sale should be close to the price that similar properties were sold for recently.
The Income approach takes your assessment a big step further. By multiplying the price by the average Cap Rate, you’ll see what the Net Operating Income (NOI) of the property should be. If the income is higher than market rental rates will support, the price is too high.
If the property under consideration meets your initial assessment, you can put the property under contract while you examine it more closely. During your inspection period, the seller will provide you with detailed financial statements showing the actual NOI.
By using the Income approach, you can more accurately assess the value of the property to make sure that you can achieve your investment goals.
If you are new to the market, or new to investing, a good use of your time would be to introduce yourself to several commercial appraisers in the area. Meet with them, maybe take them to lunch. They can be a good source of information about sold properties and Cap Rates.
Where to Buy a Warehouse for the Best Investment?
If you, like other savvy investors, are searching either for the best possible deal or something very specific, we suggest that you look for a warehouse at WarehouseCashin marketplace. At this platform, you can find off-market warehouses at affordable rates, including distressed properties whose owners need a fast sale.
Our marketplace’s interface was developed specially for warehouse investors’ needs. It enables you to easily find the desired type of warehouse and type of deal (FSBO, agent-assisted, foreclosure, short sale, and others). You can also view detailed important data that will help you estimate right away how lucrative the investment opportunity is.