I just noticed that I could drag & drop files (doc, docx, xls, pdf, png, etc...) directly into Outlook folders. Basically this would allow me to use Outlook as a single storage location for as long as I have space in my mailbox, instead of saving these files separately in Explorer.
Are there any downsides to this method and is this actually even supported by Microsoft?
This is a supported feature but the reason for usage might be questionable. Keep in mind; Outlook isn't a file system and keeping the files directly "on disk" is more efficient in terms of storage.
However, if you “live” in Outlook, it is a great feature to take advantage of to keep specific files easily available, especially when you use an Exchange or IMAP account and access your mailbox on multiple systems; the files are synced as well.
Still, it would be wise to consider alternatives first and be aware of the downsides if you intend to use it.
Aside from the obvious downside that your mailbox size would increase, there are a couple of other downsides you should be aware of. Depending on your situation, these could be only minor inconveniences to you.
Inbox folder is not supported
You cannot directly drag & drop files into your Inbox folder. Doing so will create a new message with that file attached. Creating a new root folder called “File Repository” might be convenient.
File and message size limit
Any message/attachment size limit that has been set by your system administrator also applies to files placed directly in your mailbox. Placing a file in your mailbox which goes beyond this limit will not be uploaded or synched and will cause send/receive errors.
First file is opened directly
Upon selecting a folder, the first item will be automatically selected. If this is a file, it will be opened or even previewed when an appropriate previewer is installed.
Non-cached folders and large files could cause Outlook to hang
As the first file is automatically opened, large files could cause Outlook to hang. If the file is being stored in a folder that is not being cached (for instance a Public Folder which is not a favorite), then even small files can cause Outlook to hang as it first need to be downloaded completely before Outlook will return to a responsive state again. There is no such thing as header support for file, so if the first file is 100MB and you are on a slow remote connection instead of on a fast local LAN… you may need to wait a long time. Also, if the folder isn’t being cached, files will get downloaded completely again the next time that you select it. You might want to avoid this when you are on an expensive wireless connection.
Some files types are being blocked
The same file types that are being blocked as attachments are also blocked when they are stored directly in your mailbox, Public Folder or pst-file. While you can get them in the folder, you’ll first need to unblock them before you can access them again.
Original support for this feature goes back to the time that Public Folders were being used as Document Repositories (in some organizations, this is still the case). Now the focus for it has changed to support connecting to SharePoint Libraries, Site Mailboxes, Microsoft 365 Groups and Microsoft Teams.
This will probably be your first choice alternative if your corporation has deployed SharePoint, OneDrive for Business and/or Microsoft Teams, and you require remote access to the files on multiple locations/devices or easy sharing capabilities.
If sharing/synching is not directly a priority but easy access is, creating a link to the file or folder location can be done in the Shortcuts Navigation.
Another alternative would be to use Cloud Storage to save, sync or share your files with other people or devices. OneDrive for instance is such a service and is also free. It basically is Microsoft’s free home-user alternative for SharePoint and OneDrive for Business. You can then store your files within the OneDrive folder on your computer which will automatically sync to the OneDrive server.
An alternative to OneDrive would be Dropbox which offers similar features and functionality.