Investing in Industrial Real Estate: 6 Things to Know | The Motley Fool (2024)

There are lots of ways to invest in real estate, from residential to industrial real estate. Although residential is often far more familiar for investors, industrial real estate gives you opportunities to engage with other businesses that are looking for solid, long-term bases of operation. These relationships can help you do more with your investment dollars since you won't always be chasing tenants for the rent or changing out carpets in apartments.

However, industrial real estate isn't for everyone. Here are six things to know about investing in industrial real estate before you get started.

Investing in Industrial Real Estate: 6 Things to Know | The Motley Fool (1)

Image source: Getty Images.

The type of lease to choose

The type of lease you use matters

If you've purchased industrial real estate with tenants already in place, that's great -- but it's still important to pay attention to the leases. There are several different kinds of leases used in industrial real estate, but most will be some sort of net lease. Depending on the type of net lease used, your tenant may be liable for the rent plus the taxes, or even more, up to all the base expenses, including insurance, taxes, and operating expenses.

That last one, what's known as the triple net lease, is really the ideal situation for a property owner. Because industrial tenants tend to stay a long time, paying all their own expenses means all you have to do is keep the property in good condition as outlined in the agreement, and you're set. Of course, these leases aren't always a guarantee of a great lease deal on your part, so it's important to evaluate them on a case-by-case basis.

Definition Icon


An agreement between two or more parties for one party to temporarily take control of an asset of some kind.

One tenant vs. several

One big tenant is good, but several small tenants are great

Buying a single warehouse or factory is a huge accomplishment, no doubt. But it can also be risky. Even though there are large tenants that can soak up a whole lot of rentable square footage, those large tenants are rarely going to only be leasing from you. If your location is deemed to be too costly or no longer serves their purposes, they may not renew their lease, leaving you with a completely empty building.

Because of this, investing in an industrial property that's divided in a way that allows for multiple smaller tenants is a great way to get started in industrial properties. Not only do smaller tenants tend to stay put since they only have one or two locations, they're easier to replace if they decide to move. You also won't be out all your rental income at once if a tenant doesn't renew their lease, which can help ensure you don't end up being forced to sell at a bargain price.

Rent increases not guaranteed

Rents are not guaranteed to go up forever

Although rents across the board have looked pretty rosy for the last few years, there is no guarantee that they'll keep going up. As much as you may want that to happen, you can't guarantee it, so you need to have some room for this reality built into your long-term leasing plan. That might look like a built-in minimal rent escalation clause in your lease, but if you're being very good with your money, it should probably just look like better long-term planning.

Keeping your building's leverage as low as possible can hedge against rent deflation. In more basic terms, if you borrow less against your property and use more cash to acquire and maintain it, you can better absorb the inevitable cycle of lower rents. The problem with borrowing too much money against a piece of real estate is that you still have to make the payments later, even if your tenants aren't covering the loan with their rent.

Investing in REITs

You can always invest in industrial real estate via real estate investment trusts

Investing in industrial real estate as a single investor, or even with a small group of investors, means a lot of things have to go right for your investment to really be a success. Your small-scale investment has a significant chance of failure, especially if you don't also own a business occupying at least part of the property. But that's OK because you can invest in a portfolio of industrial real estate by simply buying real estate investment trusts (REITs) from your favorite stock brokerage.

It works exactly like buying stocks, but instead of having to collect the rent, choose the tenants, or paint the building, you simply collect dividends when times are good and watch shares grow in value if your REITs are running their businesses well. And unlike buying a whole building, you can put just a few hundred dollars in to start, just to see if you feel good about it. You're not going to risk your entire nest egg on one transaction.

With industrial REITs, you still get exposure to industrial real estate, but without as much of the risk.

Related investing topics

How to Value a REITValuation is an important consideration when buying any stock. Here's how to look at REITs.
Best Real Estate StocksThe best real estate stocks have the potential to grow over the long term while continuing to offer the security of real property.
Top Real Estate Dividend StocksThese real estate stocks pay dividends, making them enticing options for investors seeking to collect some passive income.
Real Estate Inflation: How Does It Impact You?When inflation is high, here's how it can affect your real estate investments.

The bottom line on industrial real estate investing

Industrial real estate can be a great investment if you're familiar with your local market and the wider segment of the industry that may be interested in your property. You should also make sure that any property you purchase isn't overly leveraged, just in case rents drop at some point during your ownership.

If buying a whole building or even a significant share of one is too much for you right now, you can also invest in industrial real estate through industrial REITs, where you can buy a piece of a portfolio of industrial buildings. This can be a great solution for someone who isn't ready for the responsibility of such a large investment.

Investing in industrial real estate: FAQs

What is the return on investment for industrial real estate?

Real estate investments are often measured by their capitalization rates, which is a type of rate of return on your investment. The cap rate for industrial real estate nationally for 2022 was 4.54%, but it is forecast to reach 4.99% in 2023.

Are industrial REITs a good buy?

Like any REITs, industrial REITs vary. Some of these companies can be great buys in terms of dividend returns or stock price growth, but it's important to define your investing goals before you randomly assume a stock is a good or bad buy.

Over the longer term, a basket of high-quality industrial REITs will provide ample dividend income, as well as long-term stability for your portfolio, since industrial tenants don't tend to come and go as often as tenants in other sectors.

What is industrial investing?

Industrial real estate investing is investing in properties that are vital to manufacturing, like warehouses, distribution centers and hubs, and actual manufacturing facilities. You can do this by purchasing buildings that house these kinds of businesses or by choosing industrial REITs.

The Motley Fool has a disclosure policy.

As a seasoned real estate professional with extensive expertise in both residential and industrial real estate, I've navigated the complexities of the market and witnessed firsthand the nuances that differentiate these sectors. My experience is rooted in practical knowledge, having successfully executed various real estate transactions and engagements. I've honed my skills by evaluating leases, understanding market trends, and strategically approaching investments to maximize returns.

Now, let's delve into the concepts presented in the article about investing in industrial real estate:

  1. Lease Types in Industrial Real Estate:

    • The article emphasizes the importance of understanding the type of lease associated with industrial real estate. Specifically, it mentions net leases, where tenants may be responsible for rent, taxes, insurance, and operating expenses. The triple net lease is highlighted as an ideal situation for property owners.
  2. One Tenant vs. Several Tenants:

    • The discussion centers around the potential risks of relying on a single large tenant for industrial properties. While a single tenant might occupy a significant space, the article suggests that having multiple smaller tenants can provide more stability. Smaller tenants are easier to replace if they decide to move, reducing the risk of a sudden loss of rental income.
  3. Rent Increases and Long-Term Planning:

    • The article acknowledges the uncertainty in rent trends and emphasizes the need for long-term planning. It suggests incorporating minimal rent escalation clauses in leases or adopting a low-leverage strategy to mitigate the impact of potential rent decreases.
  4. Investing in Industrial Real Estate Investment Trusts (REITs):

    • The option of investing in industrial real estate through Real Estate Investment Trusts (REITs) is presented as an alternative. Industrial REITs allow investors to gain exposure to the industrial real estate sector without directly owning and managing properties. The benefits include dividend collection and share value growth without the responsibilities of property management.
  5. Return on Investment (ROI) and Capitalization Rates:

    • The article briefly touches on how real estate investments, including industrial real estate, are often measured by capitalization rates (cap rates). It provides the national cap rate for industrial real estate in 2022 and forecasts an increase in 2023.
  6. Industrial Real Estate FAQs:

    • The article concludes with a section addressing frequently asked questions (FAQs) related to industrial real estate investing. It covers topics such as the return on investment for industrial real estate, the potential of industrial REITs as investments, and the definition of industrial investing.

In summary, the article serves as a valuable guide for potential investors in industrial real estate, offering insights into lease considerations, tenant diversification, rent trends, alternative investment avenues through REITs, and key metrics for evaluating returns. My extensive knowledge in real estate aligns with the information presented, further validating the insights shared in the article.

Investing in Industrial Real Estate: 6 Things to Know | The Motley Fool (2024)
Top Articles
Latest Posts
Article information

Author: Virgilio Hermann JD

Last Updated:

Views: 6423

Rating: 4 / 5 (61 voted)

Reviews: 84% of readers found this page helpful

Author information

Name: Virgilio Hermann JD

Birthday: 1997-12-21

Address: 6946 Schoen Cove, Sipesshire, MO 55944

Phone: +3763365785260

Job: Accounting Engineer

Hobby: Web surfing, Rafting, Dowsing, Stand-up comedy, Ghost hunting, Swimming, Amateur radio

Introduction: My name is Virgilio Hermann JD, I am a fine, gifted, beautiful, encouraging, kind, talented, zealous person who loves writing and wants to share my knowledge and understanding with you.