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If you're looking to purchase a warehouse as an investment or for your own business's use, you'll need finance. Here's what you need to know.
Warehouses have a lot in common, but there can be some major differences that differentiate one warehouse from another. While all warehouses tend to be constructed from steel or industrial concrete in a no-frills box shape, typically without windows, it is the facilities inside the warehouse and its intended use that can set one warehouse apart from another.
Some warehouses double as retail stores (like large Supré outlets) while others are an inventive mix of warehouse, retail and showroom (such as IKEA). Some warehouses are mostly automated and can move large amounts of stock with minimal staff, while other warehouses are purpose-built and refrigerated or climate controlled to handle perishable or sensitive stock such as computer products, flowers, fresh produce or frozen items.
Warehouses have long been popular commercial real estate choices for investors, attracting long leases and stable rental income. However, not all warehouses are alike, and savvy investors know what to look for when purchasing a warehouse. Read on to find out how warehouse loans work and how to increase your chances of having your warehouse loan application approved.
Compare loans suitable for purchasing a warehouse
Why are you buying a warehouse?
A warehouse as a freehold investment
A warehouse can be an excellent addition to a commercial real estate investment portfolio, providing a low-risk source of regular, stable rental income. Built with industrial strength and a no-frills design, warehouses are largely immune to the risk of damage and wear and tear. In fact, the biggest risk an investor takes when purchasing a warehouse is experiencing periods of low demand that could see the warehouse empty and not producing an income.
This risk is somewhat mitigated by the fact that warehouse leases tend to be stable and long term. Even if a warehouse is empty while you look for a new tenant, once a lease agreement is in place, it is likely to persist for some time – at least five years, but often as long as 10 years per lease term with options to renew.
Tenants and lease agreements
As with the majority of commercial real estate purchased for investment purposes only, the strength of your application will depend to a large extent on the tenant. If the warehouse is currently tenanted, the lender will need to see evidence that the tenant is in a good financial position, has signed a long-term lease and has provided an indication that they intend to stay on in the warehouse in the future.
Be prepared to provide a copy of the lease agreement to the lender since they will want to know that the tenant has complied with their obligations under the lease agreement, and that automatic rent increases in line with inflation are included in the agreement. Lenders will usually require financial documentation for the tenant's business as well as a copy of the business plan. Be wary of a tenant who is unwilling to provide this information as it could suggest business mismanagement or financial difficulties.
Running your own business from a warehouse
For many people, the decision to purchase a warehouse is a viable alternative to continuing to lease a warehouse for business purposes. When making this decision, a lot will come down to running the numbers and determining the financial viability of making business loan repayments rather than rent payments. It is always a good idea to obtain independent financial advice when making this kind of assessment to ensure that every financial element is included.
Other considerations will include potential tax benefits including deductions made on interest payments on the business loan, along with any plans you may have to renovate a warehouse to suit your business's individual needs. It can often make more financial sense to spend money renovating real estate that you own – thereby increasing its market value – than improving a rental property owned by someone else.
Choosing the best warehouse for your needs
Location and zoning
While location is not as vital when purchasing a warehouse as it is for a retail store that relies on foot traffic, it is still an important consideration to make when choosing a warehouse to purchase. This is particularly true if the warehouse does have a retail aspect to it, rather than solely picking and packing orders and moving stock.
If you are purchasing a warehouse as an investment, warehouse occupancy rates in the area will give you a good indication as to how long it may take to find a new tenant should the need arise.
Zoning is another important consideration since zoning restrictions can limit or even prohibit you from running specific types of businesses from the warehouse. Obtain legal advice or make your own enquiries with the local council to find out the zoning of the local area, and determine whether this may restrict a particular type of business, such as one that relies on the use or storage of potentially hazardous or environmentally unfriendly materials or chemicals.
Finding finance to buy a warehouse
Standard loan terms
Loan terms offered for a warehouse loan will depend on a number of factors and can vary from lender to lender. With any type of commercial loan, it is always important to compare your options and choose a vendor that best suits your individual circumstances before submitting an application.
As a guide, the following loan terms could apply to a warehouse loan:
- Loan amount. You can get a loan amount of up to 50% of the value of the warehouse for a specialised or purpose-built warehouse, up to 70% for a standard warehouse or up to 100% if you offer residential property as additional security for the business loan.
- Loan Term. You can typically get a loan term of 20 years or a loan term up to 30 years if you use residential property as security.
- Interest rates. These will vary between lenders and will depend on the strength of your application and the value of the warehouse itself. You may get an interest rate discount if you use residential property to secure the loan.
Getting approved for a warehouse loan
The key to getting approval for a warehouse loan is to put together a comprehensive application that highlights your strength as a borrower and your ability to meet the loan repayments.
After that, the business loan application process will vary depending on your proposed use of the warehouse.
- If purchasing the warehouse as an investment, the lender's primary consideration will be the stability of the current leasing situation and the financial strength of the tenants.
- If purchasing the warehouse to run your own business, the lender's focus will shift to your business plan and your skills, expertise and experience in the industry.
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