This is one of the most underrated concepts in real estate investing. And it is one of the many reasons we love Industrial Outdoor Storage (IOS).
Here is the idea: you buy a property that generates cash flow today and the improvements cover your costs and pay investors. But the real long-term value is the land underneath.
The "cover" is the existing cash flow. The "play" is the optionality.
In IOS, this works like this. We buy a secured yard with a canopy, some service bays, maybe a small office. Tenants pay rent. The asset cash flows. That is the cover.
But that same parcel (near a port, a freeway, a logistics hub) could support a multi-story industrial building, additional density, or a completely different use if the market evolves. That optionality is built into what we own. We are not paying for it. We are getting it for free alongside the cash flow.
This is why zoning matters so much in IOS. M-2 heavy industrial zoning, like our Gilroy asset carries, is hard to replicate. You cannot just rezone a parcel. That scarcity protects the land value. In California, it is difficult to get land rezoned to uses like heavy industrial and this provides natural barriers to entry for IOS and value to build extra density in the future.
Another example of a covered land play is some of the older class C office buildings in the core Bay Area. For several years, we generated cash flow from one of my family's assets - a class C office building in Santa Clara - while we got entitlements for a 328-unit multifamily project. We are currently building out that project now and that property was a great covered land play.
The best real estate assets generate returns today and preserve optionality for tomorrow.
That combination is what we are always looking for.
Have you ever owned or invested in an asset where the land value was the real thesis?
Wednesday Real Estate 101: The covered land play
