A Quick Guide To Self Storage Investing
Most new real estate investors don’t think of self storage facilities as investments. These are just places to store extra stuff during college or while moving homes, right? Wrong!
Self storage represents an outstanding commercial investment opportunity, and I’ll use this article to explain why.
Self Storage Investing Overview
As the name suggests, self storage facilities include the commercial properties where you can rent a storage space. These can range from rural facilities with a handful of storage units to high-rise, urban properties with hundreds of units.
When investing in self storage properties, investors should understand that certain common characteristics define high-quality self storage facilities. Each market will differ, but the following represent universally desired traits in a self storage property:
● Located in a major metropolitan area
● Solid access to major roads and/or highways
● Well-made construction with paved lots surrounding the structure
● Occupancy of 90% or higher
● On-site management
● Industry-leading amenities like alarms, electronic gates, exterior lighting, and surveillance systems
Benefits of Investing in Self Storage
Commercial real estate investors have turned to self storage to maximize income and increase wealth. Specifically, this property type appeals to investors for the following primary reasons:
● Solid performance in good economies: When the economy does well, people tend to buy more stuff. And, resistant to throwing things away due to emotional attachment, many Americans instead choose to store their old stuff in storage units.
● Solid counter-cyclical performance: Self storage also performs extremely well in bad economies, making it a solid hedge to your portfolio. When the economy enters a downturn, people tend to A) downsize, and B) go back to school. Both of these options entail moves that require people to store their excess stuff somewhere.
● Tenant inertia: If you raised an apartment’s rent 20%, you’d drive many tenants to find another place to live. If you raise rent on a storage unit from $50/mo to $60/mo (also 20%), most tenants won’t take time out of their schedule to move all their old stuff into another storage unit - the “out-of-sight, out-of-mind” phenomenon.
Feel free to drop us a note if you need help analyzing self storage investment opportunities in your market. This analysis can seem challenging, and we’re happy to help!
Adding Value to Self Storage Facilities
Many commercial investors also view tremendous added-value opportunity in self storage properties. According to the commercial real estate value formula:
○ Property value = NOI / cap rate
As such, investors can significantly increase the value of a self storage property by A) increasing its NOI, or B) compressing its cap rate. For example:
○ Increase NOI: Adding a showroom to sell boxes and other moving supplies, leasing trucks via U-Haul or Penske on-site, raising rents, and cutting operating expenses all can increase a self storage property’s NOI.
○ Compress cap rates: Selling to a large institutional investor or a REIT can provide the asset a level of stability justifying a cap rate reduction.
Commercial real estate professionals can help you identify value-add opportunities in your commercial properties. Need help connecting with reliable ones? Drop us a note!
Institutional Investment Opportunities
In the United States, there are currently over 50,000 self storage facilities, and approximately 40,000 of those are independently owned. Most of these “mom and pop” investors own these single properties as passive investments, not willing to add significant value.
This status quo provides tremendous investment opportunities for institutional investors. Specifically, I recommend the following “value path” for institutional investors pursuing self storage properties:
● Step 1: Buy multiple self storage properties from independent, “mom and pop” investors.
● Step 2: Add value to these properties via the above NOI techniques plus improvements in marketing, active management, physical appearance, automation, and pricing demand software to optimize rents.
● Step 3: Profit via a refinance with the improved value or by selling your portfolio to a larger institutional investor or REIT.
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We recognize that, even after outlining the above information, tackling the challenges of entering the self storage real estate world can seem daunting.
That’s why we’re here to help. The Pocket Broker team lives and breathes commercial real estate, so drop us a note to see how we can help you achieve your unique objectives!