The cannabis industry is flourishing despite the conflicting legal status between states and the federal government.1 As the market is forecasted for even more growth—up to $91.5 billion—in the coming years, many savvy investors want to jump on the train.2 However, the legal conundrum has some people worried about the potential consequences of investing in cannabis businesses.
Cannabis is an incredibly attractive market for would-be investors. An important question to ask is, “How can I ensure the safety of my investment?” Direct investment in a cannabis company could result in devastating losses down the line if local laws change and the business becomes a different game. This is why we recommend a more indirect approach that can yield very attractive profits while still protecting your investment.
Investing in Cannabis Real Estate
Purchasing industrial warehouses and leasing the real estate to marijuana industry professionals is a safer way to invest in cannabis. Dispensing, cultivating, and distributing cannabis on a commercial scale requires a great deal of space, with some companies operating warehouses measuring over 1 million square feet. Of course, these are just the largest growers. With an average space requirement of around 34,000 square feet, investors have a viable opportunity to offer these types of spaces.
Cannabis requires space. Many grows are outdoors, but some growers opt to grow indoors in order to control the environment, which makes warehouses in light industrial areas very attractive as grow sites. However, because it is still federally illegal to grow and sell marijuana, companies involved in the marijuana trade are unable to take out bank loans in order to purchase property. Thus, the vast majority of them have to lease their spaces instead.
The Opportunity for Real Estate Investors
Cannabis growers are extremely attractive tenants because they typically pay rents above market rate due to the risky nature of the industry. This provides investors with a great opportunity to take advantage of the growing marijuana industry while keeping risk to a minimum. Because most marijuana growers have to rent their growing spaces at above market rate, property owners can quickly recoup their initial investments and generate a profit. Most importantly, property is a secure investment. If the marijuana industry runs into difficulties, commercial properties can be leased to more traditional business tenants and still generate a return.
Purchasing property for cannabis use is difficult. Most investors don’t have the funds necessary to pay all cash for property, and obtaining a loan from a bank is not possible for this use. This is where Socotra comes in. We can lend up to 60 percent of the total purchase price on an arm's length purchase of a commercial property, and we help make our clients’ purchase offers look extremely attractive thanks to our ability to close quickly in 15 days or less with a 10-day look and five-day close. We also have options available to close in five days or less with our Turbo Close. We have helped many investors purchase commercial warehouses and quickly begin to generate a return on their investment.
The Potential Risk for Real Estate Investors
Investing in the marijuana industry requires serious due diligence. Before you rush out and buy a property, take some time to do your due diligence. Your research should include:
- The marijuana industry and the governmental regulations that impact it
- Local ordinances—every county and city has its own specific rules, separate from those set at the state level
- Local zoning and what zones cannabis businesses are allowed to operate in
Keep in mind that laws and zoning regulations are always changing. In order to protect your investment and maximize your return, you should ensure that your knowledge is always up to date.
In addition, we strongly recommend that our clients get advice from an attorney who specializes in cannabis law with the knowledge necessary to accurately appraise the operations of your tenant and to identify any potential legal issues that could jeopardize the business or property. Some cannabis purveyors are incredibly savvy and detail-oriented businesspeople, but there are many who, in their eagerness to cash in on the craze, fail to adhere to the regulations and laws governing their industry.
Lastly, before you purchase a property, ask yourself the question, “If the marijuana industry died tomorrow, what would happen to my investment?” Buying a property that would only be attractive for marijuana use means that if the industry fails or falls victim to federal enforcement, your investment can become worthless. Only get a hard money loan for a property that would be attractive to a variety of tenants, not just for green use.
Get Started with Socotra Capital
As long as you show proper care and caution, the marijuana industry has massive potential for real estate investors. If you would like to learn more about how Socotra Capital can help you grow a profit in this dynamic industry with vast potential, give us a call today at 916-277-9311, or start the application process online.
For more ideas on real estate investing, read How to Grow a Passive Income Portfolio in Today's Market.