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Posted over 6 years ago

Why Choose Self Storage

There are hundreds of ways to make money in real estate, which makes it harder to choose just one strategy. Furthermore, you should focus on one thing and be great at that one thing. Diversifying is good in theory, but it leaves you open to just being mediocre at a few different topics, rather than an expert at one. You can create different profit centers off of one strategy without having to diversify across asset classes. An example would be starting off by using an asset manager to handle day-to-day management, then transitioning into building a management team in house. You are still specializing in one niche, but you also create more income in doing so.

There are millionaires in every category within real estate, therefore find what fits your goals by working your numbers. Consider the time frame in which you want to achieve your goals, but keep in mind your strengths, weaknesses, past experiences, exit strategies, etc. Many factors can contribute to how you decide which strategy to focus on.

Over the last few years I have tried many things including flipping, wholesaling, buy and holds, non-performing notes, bird dogging, lending, and creative financing of all sorts. It’s okay to try a few different strategies before one sticks. All of these ventures started off great, but after a few months of experience in each strategy, I got the true inside knowledge of what success really meant. They would never allow me to reach my true potential.

I found storage early on in my investing career and wanted this to be my end goal. I decided at the beginning of 2017 that I needed to jump into storage 100% or else it will always be a pipe dream.

Here are a few reasons I chose storage.

Industry Numbers

-Lowest loan default rate, at right under 1%. Compared to 4.7% for residential

-Minimal spikes through downturns. People need storage in good and bad economies which makes this asset class very stable. Some call this asset class, “recession proof”

-Forced appreciation: There are over 20+ ancillary profit centers you can implement

-Total of 58,000 facilities online in the US

-Cost to build is low: $25-$40 per sq ft.

-Average annual revenue of $36 billion dollars in the US

-Average occupancy of 90% nationwide

-One in ten families currently have a storage unit

-On average 80% of customers are residential and 20% commercial. Residential tenants stay on average 3-5 months, whereas commercial tenants stay closer to 18 months

-Number one reason for needing storage is moving, with the second reason being basement/garage consolidation

-Top 3 reasons tenants choose a facility: (1) location (2) security (3) price

Consolidation

-Close to ¾ of all the facilities owned are “mom-and-pop” investors. This means they only operate one facility. Times have changed in self storage over the last 10 years and these owners have, on average, not kept up with the industry. This means they have rarely increased marketing efforts online (if at all), increased rents in years, or even added any ancillary income. This leaves plenty of opportunity for repositions/value add opportunities.

-Larger corporations and REITS are focused on consolidating the industry

Economies of Scale: Regarding Purchases

Reaching your goals requires fewer purchases than single family investing. I used to look at 50-75 houses just to put one flip/rental under contract. Then consider the amount of work needed in order to obtain a loan, complete construction, and sell/refinance. My rentals brought in $250-$350 in rent. I would need an incredible amount of these properties to achieve true wealth. Imagine how many houses you would need to look at to find the right ones. Time is better spent purchasing a 500 unit facility with one loan, one property, and one rehab process.

Sure, SFR investing has its place for tax breaks and preserving wealth on high-income individuals. However, achieving larger goals (and you should always think big) are more realistic when you are dealing with larger assets. I would much rather buy a few storage facilities a year and hold for cash flow than to run around like a chicken with its head cut off to just barely pay my bills in the single family rat race.

Economies of Scale: Regarding Number of Units

Scaling up has benefits in regards to how many units you have at one facility. If you run a 500 unit facility you can have 50+ tenants (10%) leave in one month and still be able to cover expenses, pay down debt/investors, and put a little in your pocket. Imagine if you had all single family rentals and 10% of your houses went vacant. Now you are taking profits from other properties to cover costs of those properties. For a short-time, they become a drain on your portfolio.

Low Maintenance

-Without drywall, carpets, kitchens, and bathrooms, maintenance is simple

-No tenants or toilets. No one lives in the unit so you don’t have the same issues as residential assets. Even troublesome tenants rarely cause damage due to the construction material being steel and cinder blocks.

-Turnovers consist of sweeping away dust/debris

-Keeping it clean: managers walk the property every morning and clean trash/debris. Mop hallways when necessary, wipe windows, clean bathrooms, replace light bulbs, etc.

-3rd party- Anything above the basic managers duties on maintenance can be delegated to a third-party company or you can hire in-house maintenance.

Month-to-Month Leases

-Tenants do not typically stay long which means self storage has a high turnover rate. Leases are typically month-to-month. Some argue that is a bad thing, but there is definitely a positive in higher turnovers. This allows you to charge an administrative fee and make substantial returns since there will be a high rate of move-ins/outs. This also means problematic tenants do not stay long.

-Efficiency: move-ins can take as little as 5-10 minutes. Due to the high frequency, this process is streamlined which can be automated.

Rental Rate Increases

Rental rates can be systematically increased. Competition and local market are the significant drivers behind the rental rate. There’s a big myth that rental increases could cause significant move-outs. The truth is, people rarely move out because of an increase. If they look like they are legitimately going to move out then you can adjust their rate.

-On new purchases you can aggressively increase rates to match market rates. In the same year, 2-3 rental rate increases could occur.

-Once the property is stabilized, most operators increase rates once every 9-12 months. This also depends a lot on your local competition.

-If your occupancy is down, you can quickly drop price on vacant units to fill them up without touching current tenants’ rates.

-Rental rate increases/decreases on vacant units can be based off of how many units are available in that size. Supply and demand!

-Discounts: you can run different discounts to help fill the air. Popular discounts include military discount, $1 first month, half off for three months, student discount (they typically store their stuff over summer so you can run a 3 month summer special with any valid ID), or beat/match competitor’s rates.

-Once you hit a certain occupancy, 90%-95%, you can/should increase your rates.

Automation

The two biggest expenses in self storage are property taxes and payroll. Cutting costs is not easy but with automation it opens the doors to that. Automation can come in many forms. Some companies run all of their facilities completely unmanned. Correctly implemented, you can run facilities/portfolios with significantly less personnel which drastically increases revenue/value.

Automation can be as simple as adding payments and move-in capability to your website, or as complex as running the site completely unmanned via kiosks and call centers from another state.

There are third party companies that can implement automation at any level to fits your needs. These same services can be completely in-house with the correct management and systems in place.

Loans Available

Being that self storage is part business and part real estate, there are more options for loans available compared to most real estate. Most of these loans are available to other commercial assets.

-Conventional banks and credit unions

-SBA offers two types of loans for storage operators. The 504 and 7a are the two loan products that the SBA offers. The differences vary from loan limits/maximums, to the specific project itself. Talk with a loan broker to get more details.

-Syndication. Raise money from private investors for the down payment money. Use this in conjunction with a bank loan or cash if the numbers make sense.

-CMBS- Commercial Mortgage Backed Security. These loans are typically packaged and sold to the bond market. These loans have less contingencies and are based off of the performance of the property. These are typically non-recourse.

-Insurance loans- Life insurance companies offer loans on commercial assets that are typically non-recourse, but require much more equity. These companies are very conservative in their underwriting.

-Cash. If you need to preserve some wealth and lower your taxes, real estate is great. If you were wondering if you should pay cash for a facility or leverage debt…call me.

-Expansion and renovations loans are also available.

Miscellaneous Benefits

-Predictable capital expenditures

-Predictable NOI

-Few capital improvements needed: brick building, metal roof, and paved driveways shouldn’t require replacement anytime soon.

-Breakevens have been reported as low as 45% occupancy!

Overall

Self storage offers many benefits that can help you achieve many different financial goals. They are great for short-term value add repositions and also, as long-term cash flowing assets. Economies of scale, matched with the durability of construction materials used, makes the decision to invest in self storage an easy one.

The benefits can also be materialized as a limited partner. If you do not have the experience, or are not comfortable with managing an entire project, you can always invest passively alongside a seasoned investor. Example: you put up money for the down payment on a facility and the experienced partner manages and maintains the entire project from start to finish. This is a true win-win for both parties.

Thanks for reading!

Feel free to connect with me.



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