Why Self-Storage Investing Is Red Hot

by | BiggerPockets.com

Why are single family, multifamily, and lots of other real estate investors turning to self-storage to maximize their income and increase their wealth?

My commercial real estate investment fund loves self-storage, so let me tell you why it’s such a great investment opportunity.

Related: How to Diversify Your Real Estate Portfolio With Self-Storage

Why Is Self-Storage Investing so Lucrative?

  1. It performs great during good or bad economic times. During good times, people are buying lots of stuff and need a place to store it. And during downturns, people are downsizing their homes, so again, they need storage.
  2. Self-storage garners sticky tenants. People in this asset class are willing to put up with more rent increases than tenants in other classes. Let’s say an owner increases rent by 6 percent. Self-storage customers paying $100/month aren’t going to take a Saturday to rent a moving truck, get friends together to help them lift things, and relocate all their belongings elsewhere to save $6. But apartment dwellers paying $1,000/month might be motivated to move to save 6 percent.
  3. It’s a huge industry. The size of the self-storage industry is on par with Starbucks, McDonald’s, and Subway combined. But the way in which things are optimally run within the industry is shifting. The strategy now is to buy mom and pop-owned facilities, upgrade them, increase the income, increase the value, then refinance or resell it to an institutional investor.
  4. There are a lot of simple, inexpensive value adds. For example, adding truck rental can increase income a few thousand dollars on a self-storage facility. Late fees, admin fees, raising rent, and putting in a showroom are other options.
  5. You make money when you buy, operate, AND sell. In other areas of real estate, it’s said that you make money when you buy. But the self-storage value formula is buy from a mom and pop, upgrade to an institutional standard, then refinance or sell to a REIT—and money’s being made the whole time.
  6. Value isn’t limited by comps. For residential owners and investors, value is limited by comparable properties in the area. This isn’t the case in commercial real estate. The value is calculated by dividing the net operating income by the rate of return (or cap rate). So, if you can increase the numerator and compress the denominator, you can dramatically increase the value of your asset.

Watch my video above where I go into far more detail and provide an example of the impressive appreciation potential of self-storage facilities.

 

Questions for me? Would you ever invest in self-storage? Why or why not? 

Comment below. 

About Author

Paul Moore

After graduating with an engineering degree and then an MBA from Ohio State, Paul started on the management development track at Ford Motor Company in Detroit. After five years, he departed to start a staffing company with a partner. They sold it to a publicly traded firm for $2.9 million five years later. Along the way, Paul was Finalist for Ernst & Young's Michigan Entrepreneur of the Year two years straight. Paul later entered the real estate sector, where he completed 85 real estate investments and exits, appeared on an HGTV Special, rehabbed and managed dozens of rental properties, developed a waterfront subdivision, and started two successful online real estate marketing firms. Three successful developments, including assisting with development of a Hyatt hotel and a multifamily housing project, led him into the multifamily investment arena. Paul co-hosts a wealth-building podcast called How to Lose Money and is a frequent contributor to BiggerPockets, producing live video and blog content on a weekly basis. Paul is the author of The Perfect Investment—Create Enduring Wealth from the Historic Shift to Multifamily Housing (2016) and is the Managing Director of two commercial real estate funds at Wellings Capital.

21 Comments

  1. Curt Todd

    You can also cut operation costs using technology automation, card key access (or no entrance for non-payers. Have a credit card box handy for them). Surveillance. Solar lighting. And best, few or no employees and no tenants, Toilets and trouble.

  2. cliff lachman

    i own seven acres zoned commercial in northern Oregon (Warrenton) that i am looking to do a self storage facility on. I’m seeing an experienced partner that knows the business well and has hopefully built and operated previously.
    Looking to get this project moving very soon.

    • Paul Moore

      Rob,

      It is really tough right now. Cap rates are compressed and many chasing deals. We are finding most of our success in partnering with operators who have done it for years and have a big pipeline and lots of broker/owner relationships. It may come down to some old fashioned walking into offices and direct marketing. And you may want to ask Wendy below. 🙂

  3. Wendy Carpenter

    We purchased 3 storage facilities in the last year! You’re absolutely right about everything, Paul! You might remember me commenting on one of your live webinars about the facility we bought that was being “managed” by meth dealers! Diamond in the rough!

  4. Paul Moore

    Nicholas,

    Thanks for your insightful comments. Great stuff. These are two of the three major risks I see to self-storage syndication/investing. The other is a competitor building nearby, which is largely predictable.

    I see these as long-term risks that can be mitigated by steep value-adds and other measures. I think these are trends that we, as investors, should be watching over long periods of time. And there may come a day when we want to invest with those companies (#2 point) as well. Just a little more risky than I’m comfortable with yet.

    Thanks.

    • Paul Moore

      Edana, I have heard of operators who operate relatively small facilities (under 25,000 sqare feet) remotely. I don’t believe this is an optimal way to maximize income, but with new systems that allow you to pay and unlock gates and units using your smartphone, I think this is workable. You could set up arrangements to give clients discounts on boxes etc at nearby stores and other co-marketing arrangements.

      Honestly, I think your best bet in your situation might be to find a great operator to invest with passively. You’d be trading control and hassles for passive investing, less risk, and potentially higher profits.

  5. Venkata Giri

    Hi Paul,

    Great Article. I have been observing self storage places around Aurora, Co for the last 2 years. There are 2 or 3 new SS under construction within 3 to 5 mile radius. How is this new competition / over supply going to affect the industry? How to find demand and supply for given market? what is the best way for newbies like me to get involved in these types of investments.

    Thanks

    • Paul Moore

      Venkata. I’d be glad to talk with you about this. Please reach out to me via private message and we’ll chat next week.

      There are tools you can use (like Union Realtime Radius) that allow you to analyze the square feet of storage per population in a given 3 or 5 mile radius. The national average is about 7 square feet of storage per person in any given radius like this. The demand is likely much higher in places like TX, FL and CA where there is limited basement and attic storage. Less in some areas in places like the Midwest.

      So as a rule of thumb, start with these numbers. And look for highly visible locations on highly traveled roads (say 10k vehicles per day or more for example).

      I hope that helps as a starting point.

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