EXPELLING THE MYTH
When I first heard the term ‘industrial real estate’, I immediately envisaged a large, red brick building full of macho men in hard hats, belching air-polluting smoke (the building, not the men!) into the atmosphere. In my imagination all of the agents were men, as were all the people tenanting the buildings. Indeed, this seemed a very intimidating place for a woman.
Commercial real estate, is something I could understand–I’ve been shopping, so I can relate and imagine. But factories? I had no idea. In fact, that was pretty much the way it used to be. When I purchased my first industrial property in Sydney 15 years ago, even the agent’s office was intimidating for me. It was an all male domain–small, crowded and cluttered, and it had no receptionist to greet me on arrival. One brave woman worked from a central island within the office. Her role was to type all the correspondence for the male-only sales staff.
Today, however, things are changing. The modern industrial park has slowly been taking shape over the past 70 years or so. Things only really started to change, though, when developers began building unit factories. Some of these small unit factories are really cute; you could live in them! Often there are half a dozen or so unit factories, in a row or grouped together, painted in nice pastel colours, with neat gardens in front. They have a mezzanine floor, a kitchen, and his and hers toilet facilities. They are run by strata managers who, if they are doing their job properly, ensure that the buildings are well maintained and that the courtyard truck turnaround areas are free from obstructions, such as empty pallets, piles of commercial material, or other unsightly and potentially dangerous matter.
THE DIFFERENCE BETWEEN COMMERCIAL AND INDUSTRIAL REAL ESTATE
When I tell people that I invest in industrial real estate, they usually respond by saying, ‘Oh, yes. offices and shops’. But there’s a difference: ‘Industrial’ refers to industry–that is, factories and warehouses; ‘commercial’ refers to commerce–shops and offices. So, if I were retailing a product or a service directly to the public, I would have a retail business. If I were a wholesaler, manufacturer or supplier of a product to a retailer, then my business would be industrial. Think of it like this: If the public are able to freely access the buildings, then it is probably retail or commercial real estate. Of course these days the lines can get blurred, but generally the public is not wandering around industrial manufacturing sites.
Today, industrial real estate is frequently grouped with commercial real estate by sales agents and media alike. This can be confusing when the uninitiated begins searching for an investment property. My objective is to explain how to make passive income from factories and warehouses.
BENEFITS OF INVESTING IN INDUSTRIAL REAL ESTATE
Compared to residential real estate, I have found the following benefits to investing in industrial property to be true:
Longer Lease Periods
Generally speaking, leases are signed for three years or more. The majority of tenants tend to rollover (i.e., renew) for a further lease term, often repetitively.
The longer lease terms in industrial real estate mean a more stable form of revenue for the investor.
Industrial property returns–that is, income from the investment–in today’s market are 7%-10% net. Residential returns are typically 2%-5% net.
Outgoings Are Paid By The Tenant
If the lease is correctly structured, the tenant pays all the outgoings. With residential rentals, the owner pays the rates, taxes, insurance, and water and sewage bills on the rented property out of the rent he receives.
Fewer Tenant Problems
It has been my experience that business owners take better care of their income-producing enterprises, and respect their workplace environment more than residential tenants do their homes. Additionally, a correctly structured lease will include a clause whereby the tenant must ‘make good’ the property (i.e., leaves the property as he found it) upon departure.
Fewer Neighbourhood Problems
Town planners who establish industrial zones take into consideration who future adjacent neighbours will be. Complaints from neighbours are therefore highly unlikely.
TYPES OF INDUSTRIAL PROPERTY
Industrial Property Breakdown
Industrial property is broken down into four smaller groups:
- Standalone – single-use buildings
- Strata title – two or more units grouped together with common-use areas
- Industrial parks
- Distribution centres
There are two zoning categories:
- Industrial 1 – toxic material manufacturing and special use (the list can be obtained from councils).
- Industrial 2 – warehouses and light manufacturing.
I would like you to feel that you understand enough, and are comfortable enough, to seek the aid of the various resources I recommend, as you explore the possibility of earning passive income from an industrial unit factory zoned in the Industrial 2 category.
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