I bought a warehouse!

This site details the purchase of my warehouse in Michigan.

The Start

It was September 2021 and the COVID pandemic had been with us for 6 months now. Gyms were closed, most things were closed, and the winter was soon approaching.

With a little research, I found that large spaces with good ventilation were generally safe for a gym. In fact, a CO2 monitor could test the level of risk exposure in the air. We found that a large warehouse could operate at about 600 ppm of CO2. This is almost the same as the outdoors.

With this in mind, I began my warehouse search. Initially, the plan was to rent and use it as a rec facility, and we soon found the perfect space. However, the landlord didn't want to rent to a short term tenant but he agreed to sell the building while leasing it to us before the closing.

The Offer

Since the timeframe was tight, I made an all cash offer of $1.4M for the 18,000 square foot space. A little research showed that this space was in good condition and was selling below the replacement cost. Total rents for the space were $12,700/month. Expenses included an increased property tax amount, insurance, and maintenance. I also offered a rent discount of $250/month for a tenant to manage the property. My insurance agent recommended an increase in liability insurance to do this.

One issue. This warehouse was not approved for recreational use, aka, a gym. Therefore I made my offer contingent on getting approved for this. An experienced real estate agent can often help with this approval.

Financing

While I made an all cash offer, that doesn't mean that I had $1.4M sitting in a bank account ready to spend. However, I knew that I could produce $1.4 before the closing. For me, this was achieved by using a mixture of cash savings and a margin loan at my brokerage. The margin loan is a floating rate that is currently at 1.2% with an indefinite term. The main risk is a market crash that results in a margin call, so I needed to make sure that my margin loan used was low enough to avoid this risk.

I also investigated a commercial loan for the warehouse, however the best rate I could find was 4% amortized for 20 years with a balloon payment after 5 years. I also considered a home refinance at roughly 3% fixed for 30 years, but there was a lot of documentation that was needed. It's amazing how easy a margin loan can be. I withdrew the cash from my brokerage and it showed up in my bank account the next day!

Update: I later refinanced to a fixed rate of 4.1% for 5 years. I saw inflation increasing so I thought it was a matter of time until margin rates increased.

Closing

The biggest hassle so far has been the closing. I needed to arrange insurance, the cash, and review all the documents with my lawyer. Fortunately, everything went smoothly and I bought the warehouse without problem.

Returns

I might have overpaid for the warehouse but the return depends on whether tenants stay in place and future rent levels. In my area it is very difficult to find warehouse space with large doors for trucks. Additionally, it is located at the intersection of a major highway that makes it easy to get anywhere. The warehouse also cost less than the replacement cost to build new.

My cheap financing allows me the opportunity to receive a high return on this property. If I put down $1M in cash and financed the rest I'd expect an IRR of 9% and a cash on cash of 6.5%. If I put 30% down I would receive a return of almost 20%. The smaller the down payment, the higher the return. I expect to own this property indefinitely.

Discussion

This should be a decent investment for me, largely due to the cheap financing. If inflation rises, it will do particularly well. It has been difficult to estimate warehouse rents. They seem to be all over the place, with prices as low at $6.50/year per square foot up to $14. Rents should go up over the long term, but this is not guaranteed. While this purchase was mainly to have a private gym during the COVID winter, I expect it to do well financially too.

Feel free to contact me with comments or questions.

Details
Square Footage: 18,000
Purchase Price: $1,400,000
Expected Cap Rate: 6-7%
Cap Rate Updated: It actually performed better than expected. The current cap rate based on the original purchase price is about 9%.
Interest Rate: Floating 1.2% brokerage margin loan
Interest Rate Updated: I later refinanced to a fixed rate of 4.1% for 5 years
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