Self storage in small towns?

22 Replies

@Johnny Horner I currently own three of them right now and I'm killing it with them. I buy them on land contacts from the current owners, put websites and call centers and install fence and gate systems and run them remotely. All are now 90%+ and cashflow like crazy. Finding sellers down the road will be harder but not impossible as I have people being me to sell to them. Small properties are great to learn the business and setup your processes.

Originally posted by @Johnny Horner :

Self storage popping up everywhere, what is the BP community thoughts on self storage in small towns? The town with less then 2000 people. Currently 62% occupied.

As a self storage investor, Small towns don't scare me at all! In fact, I seek them out. The merits of a self storage facility are dependent on a lot of things but size of town is not one of them. A better measure is supply and demand...square foot of storage per person. VERY generally speaking, the national average is 7 sq. Ft. Per person so if your small town has less than that, you might be into something. How large is the property? Rather than look at the population of the town though, you will want to look at the population within a radius...probably 5-7 miles for a rural small town like this one Can you ascertain why it is 62% occupied? If the "problem" causing the low occupancy can be fixed and the property offers an acceptable ROI, it very well could be a deal. I bought a property in one of the smallest towns in the least populated county in Florida in April of 2018 for $465k....it's now worth over $1 Million!

 

 As several people have mentioned small towns can be a really good opportunity. Very few developers will bring a project out of the ground in a smaller community  so you are less likely to face competition from new product. That being said you need to research the development pipeline and find out if there are any new facilities coming online and take that into account. Real estate is hyper local for every type in class so you need to really know your market all the metrics etc. 

@Johnny Horner Just like anything else in real estate is all about the terms of the deal. I own a 88 unit facility in a MN town of 4,700 people with flat population growth and have had no issues with filling units as they turn. Main difference from the Sioux Falls market I live in (250,000 MSA population) is that I got a 9.5% cap in MN compared to a 7.5% in Sioux Falls. If you are going to be buying in a small town you definitely have to get a higher cap rate than the larger markets to be rewarded for your risk.  You should also plan on owning it for longer because the buyer pool is much smaller in the small towns.

Aren't you all concerned about the long term prospects of self storage? I know plenty of baby boomers who were borderline hoarders and even some Gen Xrs who have lots of belongings. On the flip side, younger generations are trending towards minimalism and value experience over possessions. Will the need for storage continue as we move towards the "subscription" live style?

Have any of you considered this as you enter this business?

@Joe Splitrock valid concern that can only be answered by look at what is happening with millennials and how they are now getting married and buying in suburbs again (granted at older age than earlier generations).  Then again if you are  moving then don’t you have things to store?

@Joe Splitrock Storage serves more than just the long term belongings hoard. It also plays an important part in temporary storage when people move from place to place. I do agree there is decreasing demand risk, but in larger metro cost of construction is driving people to smaller living quarters so demand should maintain. The "subscription" life style also plays into the storage model because its essential a subscription instead of owning/renting a larger living quarters. In Sioux Falls specifically, I would absolutely not want to own a facility down at the Tea exit for the reasons you mentioned, but I think facilities close to residential areas will maintain good occupancy numbers. 

Originally posted by @Joe Splitrock :

Aren't you all concerned about the long term prospects of self storage? I know plenty of baby boomers who were borderline hoarders and even some Gen Xrs who have lots of belongings. On the flip side, younger generations are trending towards minimalism and value experience over possessions. Will the need for storage continue as we move towards the "subscription" live style?

Have any of you considered this as you enter this business?

Valid concern but not one that gives me too much pause....my kids might need to worry about it if they follow me into this business but not one that I see affecting the industry in an appreciable way for at least 20-30  years....Growth may be stunted as compared to this past decade but existing properties in the right  markets won't be affected much at all in my opinion....plus, we need to keep in mind that Millenials haven't YET shown the propensity to consume the way Baby Boomers do....they also haven't reached many of the "life milestones' that contribute to the need for storage...ie-growing families, marriage, divorce, etc...jsut my two cents.

 

Originally posted by @Ronak Shah :

@Joe Splitrock valid concern that can only be answered by look at what is happening with millennials and how they are now getting married and buying in suburbs again (granted at older age than earlier generations).  Then again if you are  moving then don’t you have things to store?

My parents have more belongings than me, even though they are senior citizens. Junk they have not touched for 20 years piled up. My mother explains it as being poor and never having much as a child, so she has trouble letting go of things. I didn't grow up that way. I have no trouble hauling a load to Goodwill or selling things on Facebook as soon as I stop using them regularly. I just look at friends and younger people and don't see the same habits as my parents generation. But you are right that storage during moving is needed. I see PODS all over the place for that though.

@Stone G. this is maybe a 1 in 100 chance, but if I'm available I will meet them. Otherwise I can give a one time use code to allow them into the property. I take their drivers license and info, and also have cameras on site to be able to monitor activity and let them know as much also.

@Johnny Horner be careful with the advice you are getting from those that 1.) do not own self-storage at all and 2.) that do not own storage in small towns. Self-storage is much different than any other type of real estate.

We currently own storage in small towns and love it. The owners are willing to sell at much higher cap rates (we have been getting 9.4% - 14.1%) day 1 and doing value-add into the 16-18% ranges.

The storage facilities we have in major MSA's are the worst performing out of all of them due to high competition from investors and REITs dropping entrance cap rates into the 4.5% - 7% ranges with little to no value add opportunity on those facilities. In addition, more investors are building ground up or expanding their facilities in those large MSA's further increasing the supply index into unsustainable ranges.

Make sure the supply index is suitable (we like 3-5 NRSF/capita in the trade area) and that there is value add that can be performed. The non-sophisticated owners in these small towns are very likely to have well below market rents, management and expense inefficiency, no website, no advertising, no additional profit centers. These facilities are amazing opportunities.

We have purchased 3 in the last year and have another 4 under contract currently. Still have another 22 facilities to underwrite from our most recent mailing campaign to 9,000 owners across 24 states.

@Liza B. I've got a 60 unit in a town of about 200 but also pull from surrounding areas. Also have a 134 unit in a town of 2500. And others similar to these. I'm currently at our 96 unit in a town of 865. It also does well with outside storage as it's close to vacation destinations in northern Michigan.

Hi @Johnny Horner - Here is a detailed article on verifying if there is enough demand for a self storage unit in general area. There should be between 6 and 8 sq. ft. of storage space demand/per person. Based on that, you'll be able to see if the market you are going to can support more self-storage. 

https://www.insideselfstorage.com/site-selection/how-perform-mini-demand-study-potential-self-storage-site

Ameet Mehta
Syndication Pro

SyndicationPro
Originally posted by @Ameet Mehta :

Hi @Johnny Horner - Here is a detailed article on verifying if there is enough demand for a self storage unit in general area. There should be between 6 and 8 sq. ft. of storage space demand/per person. Based on that, you'll be able to see if the market you are going to can support more self-storage. 

https://www.insideselfstorage.com/site-selection/how-perform-mini-demand-study-potential-self-storage-site

Ameet Mehta
Syndication Pro

SyndicationPro

 This is great advice but do keep in mind that the National Average of 6-8 sq. ft. per person is JUST a starting point.  There are markets where all the properties are doing really well at 20 square feet or more per person.  Now that's not to say I would be running to those markets to farm deals, but don't kill a deal just because it is higher than the national average.  Regional and local circumstances come into play (like no basements in the south, high density housing, etc)...If a market is higher than the average (and even if its not!), part of your due diligence will be to call all competitors and find out what their occupancy is.

@Johnny Horner Depends on how small town and the demographic. If you are in a very affluent area there is always a higher per capita storage demand because of storing boats and sports cars. I automated my facility with a call center and website. In small areas you won't have competition from REITs but because land is so cheap I find that mom and pops will

build everywhere like 4-6k square feet only because they free storage so figure may as well build a few more. They never raise prices and are 100 percent full and never pickup phone. I charge at least 20 percent more than all my competition and have strong occupancy still. All my competitors are businesses that also happen to have storage like car dealerships, waste management and a host of others. If you are buying in a rural area just make sure you are getting better cap rates. We are on our third deal this year either personally or for clients and all will cashflow above a 10 CAP.