What You Need To Know About Self Storage
Over the last 40 years, self-storage facilities have been proven to be a reliable and low-risk investment option. Like multi-family real estate, self-storage investments provide the option for low maintenance properties, multiple streams of income, the ability to be your own boss, and important tax benefits. To be successful with this type of investment strategy, there are a few things you need to know about how to get started, including what to look for in a profitable self-storage investment and some common misconceptions about self-storage facilities.
We’ve put together this comprehensive guide so you can develop a basic understanding of investing in self storage facilities and how to add it to your growing portfolio.
Just like any other investment, the more research you do beforehand, the better you’ll feel about moving forward on a project. If you have experience investing in other types of property, you know that it is important to consider cash flow, overhead, expenses, vacancy rates, and market conditions before committing. Spreadsheets and software are available to help you analyze the profitability of specific projects. Here are a few other things to know about investing in self-storage facilities:
Storage facilities are fairly resilient through both economic booms and downturns. This tends to reduce risk on the investment, particularly for stabilized assets and owners with long-term investment horizons.
Self-storage facilities are not overly complex investments and have relatively low capital demands. They’re usually less expensive to build, and the typical self-storage investment benefits from a relatively low capital reserve requirement.
Whether looking at a development project or an existing facility with value-add potential, self-storage investors can frequently see significant internal rates of return on their invested capital. Owner-management is entirely possible, even for the first-time owner, although there are plenty of extremely well qualified third-party management companies at both the regional and national levels. Capex should be manageable and relatively predictable, so as long as property taxes remain in check you should be able to control expenses and maximize ROI.
Most self-storage facilities offer month to month pricing, which makes it easy for investors to manage accounts instead of dealing with long term contracts and expensive vacancies. Sophisticated self-storage management software will also permit owners to optimize their rate structure in response to market conditions, allowing them to maximize the profitability of each unit.
Types of Self Storage
A Real Estate Investment Trust, or REIT, is a company that makes commercial and residential real estate investments. Investors can buy shares of a REIT and share the ownership of the property. This levels the playing field for all investors to participate in income-generating investments, like self-storage facilities, that they traditionally would not have access too. REITs represent some of the largest owners of self storage, including Public Storage, Extra Space, and CubeSmart, although each of these companies also manage facilities on behalf of independent owners.
Climate-Controlled Self Storage
Climate-Controlled Self Storage facilities offer indoor storage spaces designed to reduce humidity. Because of this feature, the expectation is that tenants will generally pay premium prices to store their valuables in these units. This can potentially increase the profitability of a facility.
Non-Climate Controlled Self Storage
Non-climate controlled self-storage facilities can still be a smart investment, they just usually bring in lower rental rates because they don't offer the climate control features that many renters find important when choosing a place to store their valuables. The importance of this feature can vary significantly in different regions of the country.
Portable Container Storage
Portable container storage units can be dropped off in a driveway or parking lot, for temporary or long-term storage space. These units can then be transferred to a warehouse depending on the needs of the renter. These are popular for homeowners doing a renovation or in the middle of a relocation. Increasingly, portable container storage is also being used as an add-on to existing self-storage businesses, providing quick expansion options that can potentially avoid some permitting complications while providing attractive tax advantages.
Information Management Service
Boxes, furniture, and family heirlooms aren't the only things that need to be stored. Information management services specialize in keeping data and digital information safe and secure. This involves everything from developing information software and business practices to the physical storage of data and documentation.
The most basic RV/Boat storage facilities are made up of a large piece of land and a basic security system. Instead of storage units, these self-storage facilities offer parking spots for recreational vehicles. Some of these facilities offer indoor spaces so boats and RVs can stay out of the sun and in a more secure space, or even added services specific to the owners of these units.
Understanding Self Storage Classes
Just like traditional real estate, self-storage facilities fall into three distinct classes or categories.
Class A self-storage units are premium properties, usually climate-controlled, that are in desirable locations and generate higher rental yields. These are typically new builds (built in the early 2000s or after)
Class B self-storage units are older, usually built in the ’80s or ’90s, and run as a mom and pop operation. These generate stable rental yields.
Class C self-storage units are in less desirable areas, require more maintenance and upgrades, and present more of a risk. These are often located in low-income areas and generate lower and unpredictable rental yields.
Things To Consider When Investing In Self Storage Facilities
As you begin your search for a self-storage unit, it’s important to keep three things in mind to ensure you’re making a smart and profitable investment.
Location is one of the most important things to consider when choosing a self-storage investment. Self-storage follows many of the same trends as commercial real estate, meaning profits are higher when the economy is thriving. When more people are moving to the area, the need for storage is higher. Most major metropolitan cities have storage facilities, many of which have few vacancies. Investigate areas outside of the city center where there is a need for self-storage and that may not have seen an abundance of new construction.
Supply and Demand
It is important to understand who will be renting your space, particularly the percentage of residential and commercial customers. What factors will dirve the residential customers in your area and how long do they stay? For commercial, tIt is important to understand who will be renting your space, particularly the percentage of residential and commercial customers. What factors will dirve the residential customers in your area and how long do they stay? For commercial, think about what industries are prevalent in your area? What businesses in your area need more storage space to house their products? Many pharmaceutical companies, for example, rent out storage units to house their products, and self-storage units are also popular with people who work from home, as well as with small businesses that need extra space to store their products.
Before you invest in a self-storage facility, do some market research to see how many similar companies are currently serving in the area. The data is significantly better than it was just a few years ago, and now it is possible to see the market conditions all over the country almost instantly. Prime real estate is in an area where the demand for self-storage is high and the supply is low. Although the rule of thumb is 7 sf/capita or less, numerous factors can affect this, such as percentage of houses with basements, population growth, demographics and more.
Some self-storage facilities will need some upgrades and maintenance before they are ready to be rented. Others are in top shape, already have tenants, and are ready to start making money. Think about how much time and money you’re willing to spend on repairs and upgrades. The condition of the facility will determine how much you spend on improvements before you can start making money.
Self Storage Facilities: Your Next Steps
There’s a lot to learn when it comes to successfully investing in self-storage, but you don’t have to figure it out all on your own. When you join our mailing list, you are instantly connected with the tools and resources you need to diversify your portfolio. Stay up to date with current market analyses, information on recent sales and current listings, and advice about how to dive into self-storage facilities investing with confidence.