How to Diversify Your Real Estate Portfolio With Self-Storage

by | BiggerPockets.com

For those relying on real estate investments as a core part of their financial planning, the debate between different types of properties is an important one. Multifamily homes tend to yield profits quickly, but they also have a high rate of failure. The same goes for office and retail space—you may be able to negotiate a longer-term lease, but the business behind it may fail, leaving you with nothing. Comparatively, self-storage properties are a safe bet, with a failure rate of only 8 percent. That’s a great number for any type of investment.

What makes self-storage so successful within the greater real estate investment arena? It comes down to a few factors, especially flexibility and low overhead. Together, with increasingly mobile lifestyles, the market is perfectly calibrated for a growing self-storage sector.

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Focus On Flexibility

Though the phrase “self-storage” tends to conjure up a singular image of garage or closet-like spaces—and many do look like this—part of what makes this market so profitable is that it can shift to meet the needs of the local community. Flexibility is a virtue and easy to achieve in the self-storage world.

Many storage facilities offer boat or RV parking, for example, so that owners don’t have to keep these large vehicles on their home properties, but these types of offerings are contingent on location. You won’t find much water in Phoenix, Arizona, so it doesn’t make sense to offer boat storage in this area. Rather, you’ll find standard storage spaces in many sizes in this location, but near large bodies of water or along the coast, the company often includes boat parking in their offerings.

Related: BP Podcast 138: Self Storage, Systems, and SEO with Michael Rogers

One word of warning about storing cars, boats, and RVs: Be conscious of liability. Unlike most other items kept in self-storage units, these items need to be insured, and proof of ownership must be provided. It doesn’t matter if you typically don’t require insurance or other documentation—you’ll be glad you got it if something happens and you end up in court.

Advance Your Infrastructure

In general, overhead costs for self-storage units are much lower than those for residence or even for offices and commercial spaces. They just don’t need the same level of architectural finesse as spaces that people inhabit. There are no windows to buy or special siding to choose. Many storage facilities are even built from inexpensive, recycled shipping containers.

Of course, since your infrastructure costs are fairly low to begin with, there’s no reason not to advance your self-storage site to make it more appealing. For example, while almost every self-storage site uses a gate code to monitor who comes in and out of the site, that can’t prevent theft by unit owners. You might consider upgrading your units to install door alarms that are coded to individual users, rather than just using locks that someone else can cut.

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Related: Why Investing in Garages Is an Ideal Source of Passive Income

Move With the Market

Based on the community, some storage companies provide storage calibrated to wine collectors, while others emphasize climate controlled spaces that can be a boon to antique collectors who want to protect their finds. These varied offerings emphasize the importance of listening to your customers. When you get a call looking for a particular kind of storage, it’s worth noting the request and seeing where it might fit in your overall strategy.

Requests like those above typically come from more affluent neighborhoods where you’ll be able to charge higher rents, but where you may also need to improve the appeal of your property. In some areas, investors have changed the appearance of their storage units to better fit in with the area, making them look like modern, commercial buildings while maintaining a utilitarian manner inside.

Ultimately, these types of requests require infrastructural changes, so you’ll need to assess your budget to determine where they fit, what kind of profit they’ll yield, and how much of such an offering you would like to include at your self-storage property.

No matter what path you choose, it’s about knowing—and moving with—your market. The flexibility to do that is what makes self-storage such a profitable investment in the first place.

Would you consider investing in this niche? Why or why not?

Let’s discuss below!

About Author

Larry Alton

Larry Alton is a professional blogger, writer and researcher who contributes to online media outlets and news sources. A graduate of Des Moines University, he still lives in Iowa as a full-time freelance writer and avid news hound. In addition to journalism, technical writing and in-depth research, he’s also active in his community and spends weekends volunteering with a local non-profit literacy organization and rock climbing.

13 Comments

  1. Anthony Gayden

    Nice article. I am interested in buying a smaller self storage facility in my area and I was wondering how you go about judging if it is a good deal? Obviously cash flow is a factor, but I don’t know how much cash flow I should be seeking. Is it generally lower than with regular real estate?

    • Michael Wagner

      Hey Anthony,

      I thought you might be interested in a Storage based facebook group I started: You can check it out on facebook: @Storage Rebellion. I specialize in turning around small to medium self storage facilities and making them profitable. You can also check out my blog here on BP, its called “All Things Self Storage”. I wish you well!

  2. Sam White

    I acquired my first self storage business/property last year. I wouldn’t buy a storage without having a solid understanding of value investing and coupling that with understanding of the Internal Rate of Return (IRR) as Ben Lebobovich describes in link below. Even real estate investors are reactive. If you have vision and can look 2-3 years ahead of the developments, and buy a good cash flowing deal, you can capitalize on the value brought by others all around you.
    Still in the first year of owning a self storage and learning, but thus far it has been a very enjoyable investment vehicle.

    Glad to see someone getting featured on this topic, Larry.

    https://www.biggerpockets.com/renewsblog/2015/07/21/whataes-important-aecf-appreciation/

  3. Evan Hill

    Please understand that in 2018 self storage is strictly a business. It’s not an “investment vehicle”, “revenue stream” , or “passive investment.” There’s still a ton of room for growth because only 15% of the market is run at a professional level by REITs and publicly traded companies.

    One growth factor will be the generation of new demand streams. Only business-minded people who enter this market will profit during the coming downturn—> https://www.wsj.com/articles/a-slowdown-is-in-store-forthe-self-storage-business-1516128008. They will buy struggling facilities at a fraction of their worth, and quickly outcompete all the other “investment vehicle” owners around, and then buy them.

    As these business owners gain larger shares of the marketplace they will also create a product that’s more appealing to mainstream Americans. Currently only 10% of Americans use self storage at a time. This number will double as innovative operators take over and implement advanced marketing and customer services.

    While the “passive investment” myth may get you through another winter realize the sharks are circling. If you’re entering now you better know how to run a business in the internet commerce era. If you have the time to commit and can operate at a high level, or at least afford to pay someone to run your business intelligently it will be a Gold Rush.

    • Michael Wagner

      While I fully agree that SS is not passive, I have to disagree on the idea that Storage can’t be an investment. It all depends on how you structure the deal/management. With the proper management structure in place, self storage can be every bit (if not more) hands off than residential or other commercial rentals. My 3 property portfolio generates almost $500,000 in revenue a year on just 5-10 hours of my involvement per week (primarily book keeping and paying bills–occasional customer service)…Thats far less time than I ever spent managing my rental portfolio or buying/rehabbing properties.

      I think we should all be treating our investing as a business and therefore think singling self storage out as any different than other investment vehicles is incorrect. There’s no such thing as free lunch so some work is always required. I believe this to be true even for what others call “passive” investments like NNN, lending etc. These are “residual” not passive….unless your just saying yes to every loan request or buying every NNN offered. It all takes some degree of work up front as well as oversight and re-calibration as time goes by. Just my two cents.

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