All Forum Posts by: AJ Osborne

@George Fitz The reason storage should not trade at the same cap rate and can be riskier then multi-family is the contractual nature with the tenant. There are no long term contracts in storage and yes you can fill it up same day but only if there is demand. So in overbuilt markets occupancy can drop quickly. We have facilities in some of our markets that are at 50% occupancy, that 6 months ago were at 90% occupancy. If you are buying a 5 cap storage facility you can be in trouble in the next slow season.

As for taxes, you do not get as much depreciation out of storage facilities. There are less items that the government allows to depreciate, so the tax benefits are not as good.

Let's be clear, in no way shape or form am I saying don't invest in storage. I own over 100 million dollars of it and have the largest self-storage podcast in the world. So I am a huge believer that storage is the best asset class to be in. But... all things being equal, self-storage is not as secure and predictable as multi-family. If it was, I wouldn't be in it and I couldn't get the returns that I do!

@Derek Hutson You've done a great job outlining some of the pros and cons of storage investing. @Michael Wagner great points as well.  

Some things to keep in mind: 

Storage acts more like retail, not real estate, and is more competitive by nature. It is a business and it's not hands off or passive. 

You have tenants that come in and out every single day, and if you're doing it right, you SHOULD have turnover, which obviously creates the need for active management. 

The pro to apartment buildings or multi-family is that you can change the underlying revenue much quicker with less capital expenditure. 

The downside to storage is risk, because people can move in and out month to month and this means that it is more susceptible to be affected more by overbuilt markets. 

There's still a lot of opportunity in self storage, and more opportunity in storage than multi-family in my opinion. Reason being - there are a lot of under performing facilities that are family owned (or Ma and Pa's). 

So in the future, there's a lot more opportunities to buy under performing facilities and turn them around. The industry will consolidate massively over the next 10 years and there's opportunity to be a part of that consolidation. But that is something that people have caught on to and there are a lot of misconceptions about how storage works. Such as how people think that if you build it... they will come.

And this will drastically affect supply and demand over the next five years.

With a little effort you can get amazing returns out of self storage, you just need to be careful that you are not caught in the windfall of over supplied markets. 

@Jason Turgeon In self storage good operators can really take advantage of different opportunities but honestly fighting high vacancy isn't a strategy I think anyone should try!  Sounds like you made a good call. There are plenty of good second and third tier markets out there!

@Jason Turgeon market analysis in self storage has always been a boots on the ground job. There is a lot of good data but you need to do a comprehensive analysis of the competition through secret shopping and asking the reits them selves. Net working is important too. Look at facilities in the area for sell. One just came up for sell in Dallas at 80% occupied.Why would you sell at such a low occupancy in one of the biggest markets in the united states? Digging into these situations and networking with large operators in the are are all must. The large operators ( those with more then one facility) are usually  very helpful and open. You need to really dive in deep with some old fashion door knocking! 

@Scott Meyers The REITS are starting to do strange things due to pressure for share holders as their returns continue to diminish. With so mush new supply, new competitors like clutter, and the lack of acquisitions they are trying to create a new narrative for growth. Self storage is changing and this creates massive opportunity for us! But we need to be careful. We have seen the REITS destroy markets and be OK with it as long as they get more market share. I couldn't agree more with you. 

@Michael Wagner preach! I couldn't agree more man. The smaller the market the more up side you need for two reasons: 1. Margin of safety. One facility can ruin small markets and if your deal doesn't have cushion, you can get crushed! 2.  If you don't get the upside on the turn around you can wait a long long time to ever get any appreciation. 

I thought I would put this up because what I have to write can save you, however few are talking about this point. When buying or developing self-storage facilities in new markets it is so important that you understand and underwrite for new supply and zombie (as i call it) supply. What is zombie supply? When reporting occupancy, the REIT's have a secret. Whats the secret? Zombie supply. This is vacancy that is not reported. Like the living dead it will kill you. They are able to not report their vacancy because the facility is not "stabilized". While many major markets are showing 90% occupancy, this is an illusion! And like a mirage, you will end up in trouble when, after the fact, you realize it was not reality.

Let me give you a example. There are markets in Texas right now that 3 major REIT's show 1 million square feet as 90% occupied. The reality? They have 500,000 square feet that have come on to the market, but are still in their stabilization period ( most 3 years ). Most of these new facilities are under 50% occupancy, but for the sake of this example I will just give them 50% occupied.

Now, this market that you thought had less than 100,000 square feet of occupancy on the market actually has 350,000 (100,000 as reported plus 250,000 as not reported). That's 350,000 square feet of the top self-storage competitors in the market. Let's say you were planning on building a 50,000 square feet facility in this market, you now have 7 competitors that are your size and they are REIT's that have essentially unlimited funds, cutting edge technology, low debt and 350,000 square feet to fill.

What does that do to your fill up time? Rates you can charge?

Make sure you know the real vacancy in the markets before you jump in! Find good markets make good money!

If you are looking at self storage development what really matters is your competition. How much, where, and at what occupancy. That would determine where or not i would look at the market. Then what can they charge per sq ft per month. That determines at what cost the project will be successful or at all. In storage you are competing with other small businesses so you need to make sure there is enough demand to compete. Hope that helps you getting started!

Great suggestions here @Zach Quick 

@John Woodrich As with anything, there's pros and cons to all of them. I use SSM for my facilities. 

SSM allows us to make active changes to the software for our portfolio as we need them. There are new software products coming out on the market next year that will out perform all the software products on the market right now. 

Here we go @Dante Belmonte, Self Storage Income is on Spotify now 

https://open.spotify.com/show/4cq4CfjFYknagGeca24g7f?si=_iGeHEFFQIa_nrYlaMf-uQ