While we have both leased and owned warehouses in the past, we have a pretty strong bias toward leasing today, and in fact, currently own no warehouses. By the time you finish this post, you will know why, but before we get to that, I do want to acknowledge the two major benefits of owning:
- Full control over the space and the ability to customize to your business. No landlord permission is needed if you want to make changes.
- Potential for property value appreciation. Many business owners see warehouse ownership as a way to double-dip: they get use from the building as well as investment gains.
I get it. I have been swayed by those factors too. But, before you pull the trigger on warehouse ownership, I want you to ask yourself three questions:
Is the equity you will have to invest in the building the best use of your capital?
You will likely have to put down between 20-100% of the purchase price of the building. If you have capital to spare, that may not be a big deal to you. However, DTC/Ecom businesses are cash-intensive, and very few are sitting on mountains of cash that could not be better utilized somewhere else.
Very likely, you will need a lot of money for inventory, and if you grow fast, your inventory cash needs will explode. So, think carefully before putting your cash into a building.
Can you predict your warehouse size needs going forward?
One of the biggest reasons businesses lease is because they simply do not know the future. They don’t know how much inventory they will be carrying in 3-5 years. If you buy/build a warehouse, how do you know you won’t need a bigger warehouse in a few years? If you do, then what?
Leasing is very attractive because you can easily adjust up or down in size as your business changes.
What business are you in?
It is easy to justify an expensive warehouse purchase by saying it is a “good investment.” In fact, it may be a great investment. But, is real estate investing your core competency? Is it your core business?
Typically, your core business is the best place to invest your cash. While you might see some modest single-digit appreciation in your warehouse value year over year, that appreciation is quite possibly insignificant when compared to the ROI you would get on investing that money in inventory.
No, if you purchase a warehouse, it will not really be part of your business. In fact, if you buy a warehouse, your lawyer and accountant are going to advise you to form a new corporate entity to own it!
We are not against commercial real estate. If you want to invest in commercial real estate, go for it. But, you might consider whether you need to mix your commercial real estate investments with your core business. You can own buildings anywhere, regardless of whether your business is involved or not.
While those are points of consideration, do what is best for you. We don’t pretend to know your situation and needs. For example, you may have a great purchase deal pop up on the market a few minutes from your house. If you want to buy, buy. But, all things being equal, at least consider leasing.