Industrial Real Estate is the new “it” thing in the world of real estate. What contributed to the popularity of this particular asset class? Before we discuss the reasons behind the popularity of this particular asset class. Let’s discuss what Industrial real estate means.
What Is Industrial Real Estate?
As the name implies, Industrial real estate refers to real estate or property that is used for industrial or commercial purposes. It is an umbrella term that includes land for any industry and any business function, including storage, distribution, production, etc. This real estate class was mostly overshadowed by the other sectors, such as residential and e-commerce real estate. However, what investors failed to see in the past is that industrial real estate is a prominent asset class and plays an important role in income generation and keeps the global supply chain running smoothly.
What Factors Have Led To The Popularity Of Industrial Real Estate?
Investing in real estate is probably the best choice today for investors in most parts of the world, and here is why:
1. A Predictable Cash Flow.
Investors yearn for one thing, and that is predictability. Industrial real estate guarantees investors with predictable cash flow. The term cash flow means the net income that is acquired once all the expenses have been paid. On average, a good real estate investment should be able to provide you with at least 6% in fixed earnings. Whether you lease your land to a Digital Marketing Services or an Accountancy firm, you can expect that you will get a fixed amount of money on each financial cycle, reducing the risks of investments.
2. Building Equity
Real estate helps to build equity for investors as well. Let’s suppose you borrow money to buy a property that you are renting out. By doing this, your tenant will be the one who will be paying off your debt every month, and over time, you will become the owner of the property as the equity gets bigger over time. It is like a savings account in the form of property. You can eventually sell off the property at an even higher price to make a profit out of it. Most investors flip industrial real estate, meaning that they buy land at a discounted price and then upsell it to businesses for a sizeable profit.
Other than building equity, in most markets, real estate appreciates over time as well. This plays a crucial role in long-term real estate strategies. If you have made a worthy investment, over time, the value will increase, and you will be able to generate profits as well. According to Zillow’s research, the real estate in the US is expected to increase by 4.8% in the coming year.
4. Real Estate Can Be Leveraged
An important aspect of real estate is that it can be leveraged. Leverage is using borrowed capital to increase the ROI. An example of the borrowed capital is debt. Suppose a 30% mortgage down payment will be able to get you the house you wish to buy. This is known as leverage. It is easier to leverage real estate as financing for tangible assets is easily available. Industrial real estate comes in handy when businesses need to borrow money to meet their business’s financial requirements. Investors consider industrial real estate as a worthy asset and are willing to give a business loan against it.
5. Tax Benefits
Real Estate has a lower tax rate too. Suppose you have a property that you have to sell after just one year of purchase. The gain will be dependent on the individual tax bracket rather than the personal tax bracket. The individual tax bracket lies between 15% – 20%, which is significantly lower than the personal tax bracket.
6. Risk-Adjusted Returns
The return on real-estate transaction often varies and depends on factors such as locality, age, maintenance, and asset class. However, some investors have managed to overcome the “average” return on their investment.
7. Real-Estate can be Improved
If you have ever bought a property, you must be aware that real-estate can be improved. Since it is a tangible asset, it can be renovated and made better to increase its worth and eventually be sold at a higher price in the market. The value can be increased by either maintaining the current state of the house or by adding more details to make it more appealing. You can do it yourself, or you can hire someone to do it for you. Once renovated, you can sell or rent it for a higher amount.
8. Real-Estate Aligns with Retirement Goals
When you purchase a piece of property, you will get a fixed cash flow every cycle. Therefore, buying property (even if you don’t put it on rent) is eventually a forced savings account. It is a tangible asset that you can later liquidity when you need money the most. If you lease out industrial real estate, you can live comfortably on the rent, and if you sell industrial real estate, you can use the money to buy a nice house or take a long-awaited vacation to Europe with ease.
9. Inflation Hedging
Real estate tends to hedge inflation due to the relationship between GDP growth and real-estate demand. When the economy of a particular country becomes bigger, due to the increase in demand for real estate, the rents become higher too. This leads to better capital values, and eventually, real estate can maintain their buying power. The inflation is passed down to the tenants who end up paying higher rents while the owner does not have to deal with the consequences of inflation.
Industrial real-estate is becoming noticeably important for investors with every passing year. The key advantages that we have listed above have contributed to the popularity of industrial real estate among investors, and there are many more advantages as well. However, there is another side of the coin too. There are some significant drawbacks to this kind of investment as well. One of the major disadvantages is that industrial real-estate properties are difficult to liquify. Liquidifying refers to converting the tangible asset into cash. The real-estate transaction takes heaps of time to close – sometimes even months. Nonetheless, investors are willing to put their money in hopes of increasing profitability and building equity over time, and it works too!
Arslan Hassan is an electrical engineer with a passion for writing, designing, and anything tech-related. His educational background in the technical field has given him the edge to write on many topics. He occasionally writes blog articles for Dynamologic Solutions, A software development company.