Warehouses are one of the market’s most in-demand commercial real estate investment properties. With the rapid growth of online shopping and drop shipping, warehouse spaces are the go-to choice for businesses and entrepreneurs looking for storage for their products and a place to manage their operations.

So, if you’re an investor looking for excellent passive income, investing in this growing niche may be the ticket. However, before you purchase the first property you find, you need to consider five essential factors, which we’ll discuss in this post.

5 Key Factors to Consider Before Investing in a Warehouse Space

1. Location

The first thing you need to consider before investing in a warehouse is the location. Since most tenants use these spaces for eCommerce and drop shipping businesses, you need to ensure your space is accessible. In other words, you should consider options near urban areas, major highways, air/seaports, and even railways.

You can also consider warehouses in industrial zones to provide competition to other owners. Your warehouse’s geographical location shouldn’t be so remote that it’s difficult to attract good tenants and workers to fill management and other roles.

2. Purpose

The next important factor to consider is the warehouse purpose, which will help you find the best fit for your financial needs and interests. For instance, you can invest in small distribution centers that are typically used by carriers to temporarily store, package, and ship goods to customers nearby.

Alternatively, you can opt for a manufacturing warehouse in which tenants can store materials, products, components, and parts in stock to foster a smooth supply chain. Depending on your budget, you can go one step further and purchase a climate-controlled warehouse to attract higher-paying tenants looking to store perishable items like medicine, food, cosmetics, etc.

3. Cost & Ownership Type

Warehouses are generally more expensive than residential properties. Hence, you need to do your due diligence and perform a thorough cost analysis. You can work with a local commercial real estate company and find options in your budget. Secondly, you don’t have to be the sole owner of a warehouse. You can opt for fractional ownership and take a percentage of the passive income.

This alternative is suited for investors looking to reduce their risk when investing in new areas or property types or those with a modest budget (often not even enough for a down payment).

4. Return On Investment (ROI)

One of the biggest advantages of investing in warehouse space is the long lease period, which is typically around seven to 10 years on average. As a result, the chances of frequent turnover are extremely slim, meaning investors can predict tenant income for years.

Ideally, any warehouse you invest in should provide an ROI of 8-10% every year. However, to yield the cash flow you desire, you need to set the right rental rate while considering the market average rent.

5. Tenant Profiles

Finally, you need to understand that a warehouse investment will only be successful if you find standout tenants. So, you need to do your homework and find the right people to take care of your space, pay their dues on time, and remain in business for many years. Only long-term tenants can provide the stability you need regarding income so you can focus on other investment opportunities.

Wrapping Up

As the eCommerce and commercial storage industry grows, investing in a warehouse is one of the best strategies for establishing and sustaining a consistent positive cash flow. However, before investing in a space near you, speak to a real estate expert who understands the area and local market. With their intervention, you can make a more informed decision.

For more interesting reads related to commercial real estate investing, visit the CHRE website.