If you’ve been around here for a while at The Executive Real Estate Investing Show, you know that we love the diversity of real estate investing. You can choose to go in so many different directions, which is what makes it exciting! We really think there’s something for everyone in the real estate industry.
That said, some asset classes and investments are more popular than others. Most people are familiar with single or multi-family homes because they understand it and have, of course, lived there themselves!
But industrial real estate is a bit different. It’s not as well-known and has a few more question marks surrounding it. That’s why it was so exciting to have Chad Griffiths join us on Episode 40 of The Executive Real Estate Investing Show. He’s an expert on industrial real estate and is committed to demystifying it for potential investors so that you can take advantage of some great opportunities.
What is Industrial Real Estate?
One reason industrial real estate is not as popular as some of the other asset classes is because it’s not as visible. We all live in homes and shop in stores each day, but most people don’t see or visit factories, warehouses, or manufacturing facilities.
Industrial real estate is not as visible in our daily lives because cities are zoned into residential and commercial areas. It’s set up this way so we don’t go out for dinner to a restaurant with the sound of a factory next door!
The first step in understanding how to invest in industrial real estate is to define it. There are three types of properties that fall into this category:
- Warehouses: Think of Costco or Amazon fulfilment centers. These are the big distribution centers where products come in, get sorted, and are sent back out to customers.
- Manufacturing Facilities: This is anywhere where things are made and assembled. It can range from small items in a few-thousand square foot building, to large items like an airplane manufacturing facility.
- Flex Properties: This is a catch-all category that anything else zoned for industrial might fall into. Some examples include showroom space, offices, churches, or art galleries.
Once investors start understanding the different types of properties under industrial real estate, they can see just how much opportunity there is.
Making Money with Industrial Real Estate
Another potential area of uncertainty surrounding industrial real estate is, how do you make money as an investor? Like multi-family units, you own a space and rent it out to a tenant. In the case of an industrial real estate property, the tenant is a commercial business.
Each lease agreement is set up slightly differently, but the intention is generally the same. For industrial real estate, there are two types of income flows:
- Base or net rent: This is the amount that is agreed upon, payable by the tenant each month for a certain number of years.
- Operating costs or additional rent: This amount includes building insurance, maintenance, or property fees, and is calculated at an amount per square foot of the building. It is variable and flexible, with all additional costs being the responsibility of the tenant.
The two-tiered system provides investors with a good opportunity to earn money. Since there is a portion of income that is variable, you don’t have to worry about losing out on your income if property taxes jump up—the tenant will be responsible for covering that increase, unlike in residential leases.
Residential Versus Industrial Real Estate
The two-tiered rents are one major benefit of industrial real estate. But there are a few more benefits, too. In comparison to residential real estate, there is significantly less competition in the industrial space. This comes down to investors not understanding it as much or mistakenly thinking it doesn’t offer the same number of returns.
That said, industrial real estate is a more niche investment area and is harder to understand then residential real estate. So, there is a tradeoff: industrial real estate is harder to understand, but it has less competition.
A final point of comparison is regarding management. Residential real estate is much more management investment than industrial. Just consider owning one factory with one client versus an apartment building with 100 units—of course, there’s going to be more issues with the latter! So, industrial real estate can be more “hands-off” and has a lower management responsibility.
The Future of Industrial Real Estate
While no one has a crystal ball of the future, Chad is an expert in industrial real estate and has some predictions about where it will go in the future. There is likely to be a lot of growth in the future in industrial real estate. This is for a few reasons:
- Industrial real estate has always been a stable asset class. We always need warehouses and manufacturing, so it’ll always be around.
- The rise in e-commerce is what made industrial real estate blow up, and it’s not going to slow down anytime soon. From small mom and pop shops to large corporations, online businesses need manufacturing and warehouse facilities to create and store their products.
- Supply chain issues may shift manufacturing back to North America. This relies on several factors, but it’s likely that more manufacturing will return to the US as international supply chains are stressed and impacted.
Real estate investing is an exciting field because there are so many opportunities. If you are considering diversifying your portfolio, make sure to investigate industrial real estate. There are huge opportunities for growth and a lot of potential in the area. Just make sure to do your homework and really learn what you can about it before diving in.
To help you do that, Chad has a YouTube channel dedicated to educating investors on Industrial Real Estate. Check it out here! Also make sure to head over to www.executivereishow.com to catch episodes of the podcast, ask questions, and get free resources!