Self Storage Investment | Investments That Pay Monthly Income
Investing in self storage facilities is growing in popularity amongst investors seeking low maintenance monthly income
David Garner
Asset Focus: Self Storage Investment
With annual revenues of almost $40 billion, 92% occupancy rates, and almost 1 in 10 households renting a facility in the USA today, it is little wonder that self storage investment has garnered the attention of investors. Especially those seeking relatively low-maintenance, high yield monthly income investments.
If you’re considering an investment in self-storage, this quick, one-stop guide will give you a good base of knowledge, as well as some useful tips and resources to get you started on your self storage investment journey.
Why Self Storage Investment?
Self storage is a profitable business! Almost 10% of US household rent a storage unit, putting occupancy rates at an all-time high of 92%. Profit margins run around 41%, with the average price to rent a unit just shy of $90/month, and the average lease lasting 14 months.
As demand for space continue to increase, the market for self storage facilities is growing fast to keep up. Over 60 million square feet of new space was added in 2020 alone, and the total market now comprises almost 1.8 billion square feet across 23.5 million individual units. Believe it or not, there are now more self storage facilities in the US than fast food restaurants.
With such high occupancy rates, growing demand, and relatively low operating costs, it’s no wonder that over $3 billion was invested in self storage in the US in 2020. Not bad considering the wider global pandemic at the time.
All said and done, the main reasons investors choose self storage is for the cashflow, low maintenance, and potential for price appreciation. Due to the regular monthly rents, self storage is especially with investors seeking a investments with monthly returns.
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How to Invest in Self Storage
There are plenty of ways to get involved in self storage investing. From buying (or even building) your own facility, through to specialist REITs that own and operate their own large portfolios of self storage facilities. Exactly how you choose to invest in self storage comes down to how active or passive you want to be, and of course how much money you have, or have access to.
Buying Your own Self Storage Facility
If you want to get hands on with your investing, then buying your own facility might be the route for you. Of course, it requires a huge amount of knowledge and expertise to purchase, improve and manage a self storage investment. That said there are a few things to bear in mind.
Like any real estate investment, the key to success in the self storage space is to buy the right asset, in the right location, for the right price. That means understanding what the local market wants and needs from a self storage facility. You’ll probably need to run a feasibility study to figure all that out. You can find self storage facilities for sale on websites like; LoopNet, Crexi, Argus Self Storage, or List Self Storage
Self storage facilities are commercial real estate assets, and as such they are valued based on capitalization rates. In order to come up with a bid price, you’ll have to analyze the cashflow to ascertain the net operating income. Remember that self storage facilities are operating businesses, so there are different costs to take into account than say, a multifamily apartment block.
Like most real estate investors, self storage specialists tend to look for existing assets with a significant value-add opportunity. Remember, most self storage facilities are owned by small private operators, so many have been left to degrade over time. These properties may be available to purchase cheap, with opportunities to add value through improvements and/or expansion.
If you do manage to get a property under contract, the subsequent due diligence process can be onerous. There’s plenty for you to check out and verify, including physical inspections, surveys, and of course running through the financials with a fine tooth comb.
Once you’ve secured your financing and closed the purchase, you then have to consider the asset improvements you intend to make. While they might seem like simple boxes built on concrete, there’s way more to it than that, and it’s easy to make simple mistakes that can cost you big time later on.
Finally, you’ll need to manage your new self storage investment. This includes things like leasing units, marketing, collecting rents, and ongoing maintenance. You might even have to hire staff to handle some of the basic day to day tasks.
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Building Your own Self Storage Facility
If buying an existing self storage facility doesn’t scare you, then maybe you could go one step further and build your own facility. As should be the case, building a property from scratch is perhaps the most difficult and risky way to invest in real estate, but it can certainly be the most rewarding, too.
Most existing self storage facilities are considered C or D class assets, whereas new facilities built to modern standards in good locations are considered A Class. These properties carry a significant price premium, and are highly sought after by institutional investors. They are also easier to finance, which can be very important.
First things first, you’ll need to find a good piece of land that is well-located. Ideally, you want to be close to a market with strong demand for storage units. You’ll also need to be aware of any local zoning restrictions, required permits, and local development procedures.
If you do manage to purchase a good site, you will want to build a facility that is suitable for the local market. You’ll have to take into account things like unit size and mix, and on-site amenities. If your intention is to sell the property to an institutional investor it’s a good idea to look at the types of properties they already own.
As with any real estate development, finding good quality, experienced contractors is essential to the ultimate success or failure of a project. Unless you are an experienced general contractor, you might want to hire an experienced project manager to oversee the day to day construction.
Once you’ve built your facility, you’ll need to start marketing to lease the units. When the site reaches capacity, you can then either refinance and cash out your equity, or sell the property to another investor.
Self Storage Syndicates and Private Equity
If you don’t want to get your hands quite that dirty, then perhaps partnering with other, more experienced investors might be more appropriate. You can do this by buying into a syndicate or private placement with an experienced Sponsor or General Partner.
There are lots of self storage investors that raise money from private investors through syndications and/or private placements. Some of these sponsors build facilities from scratch, while others buy and improve existing assets.
Like any syndication investment, you are relying on the capability of the sponsor for the majority of the dirty work. They will be choosing which property to buy, and planning and executing the asset improvement and management plans. So make sure you do your due diligence on the Sponsor as well as the underlying investment.
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Self Storage REITs
If you prefer to be really hands off and invest in self storage passively, then self storage REITs are going to be much more up your alley. Here is a list of the 5 biggest self storage REITs listed in the US today (all on the New York Stock Exchange):
- Public Storage – PSA
- National Storage Affiliates – NSA
- Cube Smart – CUBE
- Extra Space Storage – EXR
- Life Storage – LSI
REITs are highly accessible and investable with a relatively tiny amount of money. But as with all publicly traded investments, the stock price and performance of self storage REITs can be influenced by factors outside of the performance of the underlying real estate assets.
For example, rising interest rates tend to have a negative affect on REIT values, and with rates as low as they have ever been right now, the only way is up. It’s just a matter of when. This might be bad news for REIT stockholders.
REIT values are also not immune to general market movements. Negative news about the economy can cause the stock price of otherwise sound companies to fall rapidly. The same can be said for the self storage industry itself, where a negative news piece can cause investors to sell off their holdings causing stock prices to fall.
However you choose to invest in self storage, there are option for every appetite. But what are the risks specific to a self storage investment? let’s take a look and find out.
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Is Investing in Self Storage Risky?
No investment is without risk, and self storage investment is no different. That said, the risks of building your own facility are different to buying an existing property, and both are way different to investing in self storage REITs.
Operational Risks
Self storage is not just a real estate investment, it’s a commercial business. As such, owning and operating your own facility, or building one from scratch, carries all of the risks associated with owning and operating a business in todays economy, in the the self storage industry, and in your specific local market.
One thing to be aware of that you might not have thought about is site security and safety. For example, it’s great to have video surveillance because it can lower your insurance cost and protect your tenants property, but it can also cause you liability if you are not crystal clear in your lease agreements about the type and level of surveillance you install.
Other security considerations include installing adequate lighting around your site, erecting secure fencing and gate access to the property, and installing proper fire control systems such as alarms and sprinkler systems.
As with any leased real estate, your tenants can also cause you problems. Anything from late or non-payment of rents, through to serious damage or illegal misuse of the property can and does occur.
At the end of the day the golden rule is to have adequate insurance, and to make sure that your safety and security infrastructure is of the highest quality and approved by your insurer.
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Economic Risk
Self-storage investments are not immune to the ups and downs of the economy at large. Self storage units are usually a non-essential cost that can be one of the first things to be cut from the household budget when times are hard. As most contracts are month to month, tenants can vacate easily with minimal notice
Interest Rate Risk
As I mentioned earlier, self storage REITs in particular are sensitive to changes in interest rates. But property owners are not immune either. It’s most likely that you will have some form of financing – usually a mortgage – and so steep changes in borrowing rates can impact your net operating income and therefore your profit margins and the property value.
So there you have it, my quick-one stop introduction to self storage investment. I hope you found this article useful, and remember to subscribe to the Priority Investor Email to see details of monthly income-producing investment opportunities in your inbox every Thursday.
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Links and Resources
Informed investors make better decisions. If you want to learn more about self storage investment and other investments that generate monthly income, you can further your research using the following resources:
