Want to buy a commercial real estate investment property? Commercial real estate is quite different from residential real estate. The four major types of commercial real estate include Office, Retail, Industrial, and Multi-Family. If you want to know more about the types of commercial real state, leases, and more, then read my post Investing in a Commercial Property.
This post will focus on the Industrial side. If you already started browsing for a property on LoopNet.com, the first thing you will notice are the property classes and zoning ordinances. Property classes can be seen as grades or ratings. It is important to get the property class that meets your needs and fits the area you are looking at. The class also matters if you are looking for capital appreciation or preservation.
A Zoning Ordinance is like an allowance that explains what you can and can’t do on the property. Each city has zoning laws and a zoning map that shows where you can have industrial properties and what they can do in those areas. For example, a loud mechanic shop may not be allowed in all industrial buildings. You would have to buy a building in a zone that allows for mechanic shops. Zoning laws were created to protect neighboring residents and businesses from disruption. Think about what a warehouse would do to the row of townhomes down the street. It would cause more traffic, more pollution, and more noise from loud semi-trucks. Buying an Industrial Property for the purpose of warehousing, then finding out it is zoned for light manufacturing is like buying a condo to rent out only to find out that the HOA does not allow renters. You could be making a huge financial mistake if you don’t understand what the property is zoned for before going into your investment.
Re-Zoning and Class Upgrades
As you read on, keep in mind that you can re-zone the property into a multi-family property or a mixed used property. It is not stuck as an industrial property. Changing the zoning of a property is very expensive and could cost upwards of $10,000 so make sure you are committed before submitting an application. For example, many investors like to buy old factories to convert them to apartment buildings. With enough renovations and upgrades, you can also change the class of a building.
Industrial Class A
An “A” Class building is a newer high quality building built with sustainability in mind. They are high earning, low vacancy properties that are typically made with the top of the line mechanical and utility systems which may include Trane HVAC systems, solar panels and LED lighting. Because of the high prices that they demand, location is a very big factor in getting tenants. The CAP rate is calculated as the ratio between the annual rental income to its current market value. Something to consider is that CAP rates for Class A buildings are usually low because of the high prices of these buildings. At the same time, the risk is much lower with these properties. Minimal investment would be needed to maintain these buildings. Class A buildings are great for those looking for a passive income with minimal work.
Industrial Class B
Class B buildings can be new or old. A new building made with normal or affordable materials can be considered a Class B building. A well maintained older building with many updates could be considered a Class B building. Investors like Class B buildings because of the capital appreciation opportunities in renovations. These buildings can be upgraded to Class A buildings with enough work. Class B properties are more affordable but the risk of vacancy is higher. That is unless you find a Class B building in a great location.
Industrial Class C
I personally work in a Class C Industrial building. More specifically, I work in manufacturing and the building was erected in the 1920’s. Class C buildings are over 20 years old and require some maintenance and repairs. They are also located in less desirable areas and command low rents. This is Not the property for you if you are looking for passive income. However this property may be a good fit if you have experience renovating and upgrading facilities. The opportunity to make a ton of cash is there if you know what you are doing.
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