Knowing the basic differences in investing in industrial properties such as office service, multi-tenant and/or large manufacturing properties in the basis for making sound investment choices.
Office Service Properties
Investing in office service properties is generally a profitable enterprise. A typical office service would be a plumbing company. The standard office service building is probably about 50,000 square feet with 15,000 of that space used for the showroom to display commodes, bathtubs, and faucets. However, they also have a huge inventory in the back, which is where most of their business is conducted.
Freestanding, Multi-Tenant, and Large Manufacturing Properties
When investing in industrial properties such as freestanding, multi-tenant, and/or large manufacturing properties, remember that freestanding buildings are usually larger and mostly single-tenant. In fact, the single tenant is often the owner in this kind of property. You can group freestanding, large manufacturing, and even multi-tenant buildings all in the same category in the initial stages. However, experienced commercial property investors and realtors would advise beginner investors to stay away from this type of property. It's more of a specialty-type property, meaning that you must really understand the industry and the business.
To examine the issues of investing in this market, consider the following example. Let's say you have the opportunity to buy a multi-tenant building of 100,000 square feet both for an investment AND for the headquarters of your own business. It suits your business purposes and has space for two other tenants.
Tip: The vast majority of the time in this market, even with just three tenants, one of the tenants is the owner of the building. This is a substantial building that's in the multi-million dollar range, but with three tenants, basically it means that you have about 33,000 square feet per tenant.
That may sound like enough room for everybody, but if one tenant moved out, you just lost one-third of your revenue. It takes quite a while to rent 33,000 square feet, particularly in a building that usually has some kind of specialized function. You could be empty for as much as a year or two- or more.
Now, you have to decide if you can withstand that kind of deficit. If you are lucky, two-thirds of the building will carry the mortgage and the other one-third is your profit. So, it might be okay, but you will still barely break even for a significant length of time, and no investor wants to do that. These specialty areas are not good places for beginning investors, even if they have another business that could use that space of 1/3 of the building for themselves. In our opinion, it's risky. We advise you invest in the areas where you won't get hurt and you know that you can manage the risks.
NOTE: Ask yourself if what risk is involved every time you invest in a particular piece of real estate. Whether investing in industrial properties such as office service, multi-tenant, and/or large manufacturing properties or any other commercial property, weigh all factors first.
