What Are the Benefits of Investing in Self-Storage?
If you’re looking for mainly passive forms of investing, don’t overlook self-storage as an excellent option. While you will have some upkeep and need to at least hire an excellent management team, most of the income is based on automatic payments without any additional work on your part to keep the dollars rolling in.
According to Business Wire, the self-storage market's global value is $48.02 billion and should reach $64.71 billion by 2026. With a compound annual growth rate of 5.45% through 2026, there's still plenty of room for investors to get in on the ground floor of this industry.
Almost any town you visit has at least one or two self-storage facilities. Occasionally, the units are full and a second self-storage facility would be beneficial to the community.
Primary Benefits of Investing in Self-Storage
Self-storage is an excellent investment choice. Short-term leases make it efficient. People who don't pay their rent aren't living in the unit, so you don't have the lengthy or expensive process of evicting tenants. Benefits include:
- Easy clean up after the tenant vacates the property
- Partially full building still equals profits
- Easy to automate (security cameras, coded gates, and online paperwork)
- Low management costs
- Lower construction costs
Although climate-controlled and green buildings are on the rise, there are still a number of smaller, individually owned buildings without the bells and whistles. You can still command a decent monthly rate without spending as much upfront to get into commercial real estate.
Tips for Investing in Self-Storage
As with any new business or investment venture, there are some things you can do to increase the odds of success.
1. Find a Mentor
You may have to go a few hours away from the location where you plan to build or buy your own self-storage facility, but your best source of information is someone who has successfully run one before.
Find an experienced owner and talk to them about the pitfalls you should avoid, how to find new customers and any other information they care to share.
Rather than jump in blind and make mistakes, learn from the errors of those who’ve gone before you. You’ll save time and mitigate losses by not repeating the past mistakes of others.
2. Specialize in a Niche
Find a specialty area and cater to those clients. For example, you might have a storage facility where commercial business owners store the equipment they aren’t using or keep things there while moving to a new facility they’ve built for office space.
Another idea is offering climate-controlled units for those who collect classic cars, store boats or have other precious items they don’t want to experience fluctuations in temperature.
Classic cars must be kept at a steady temperature to avoid damage to the collectible. Moisture control may also be a concern, as dry or wet conditions cause cracked leather or rust.
Additional resource: What you know about renting self-storage
3. Know the Market
The self-storage rental market space reaches a big segment of the population. Approximately 9.4% of homes utilize off-premises storage space. Most experts expect the demand to grow as older generations leave collectibles behind and younger generations make space for newer items.
Survey people in your area to get an idea of their need for self-storage. Keep in mind that some people need a short-term solution to their lack of space while others keep a storage unit for years.
4. Consider Economic Occupancy
You may have a full facility, but if most of the rent is discounted, you might not make as much as you think. If you’re buying an existing building, get all the details on the rates tenants pay every month. Be sure to look for rising rents and not a static or declining model.
Additional resource: Important considerations before investing in self-storage
If you’re building a new facility, you’ll need to gather as much information as possible on the competition. Pay attention to their advertising. Send a friend to scout out their business and get information on rates, terms, and conditions.
5. Automate It and Forget It
According to Realty Mogul, around 33% of people fill storage units and leave the items for over three years. Once you lease space to someone, set their payments to come out automatically. Give them access so you don’t have to deal with letting them in unless there is a problem. You can even automate reminders about specials and changes.
The low maintenance and fast cash flow of self-storage investments make this business a much safer investment than some commercial ventures. Make sure you have the ability to grow in the area you’ve chosen. You need to rent units regularly and remain competitive with other facilities in your area.
6. Understand Net Operating Income (NOI)
If you buy a company already built and operating, you’ll want to understand the value based on net operating income. How much workable cash flow does the facility take in after covering all expenses? How much does it vary? Ideally, the NOI will be about the same from one quarter to the next.
Pay attention to how much units lease for compared to other self-storage companies in the area. If rates are too high or too low, it can signal a problem. Self-storage is often attractive to investors because rent is monthly and it’s easy to raise rates, in theory.
Check overhead costs. Energy is one of the biggest costs for most small businesses.
The more amenities offered, the higher utilities run. A temperature-controlled building costs more to operate than one that is not.
7. Seek Advantages
One of the top rules of real estate investing is location. How can you choose a place for your self-storage facility that gives you the upper edge? Some areas are friendlier to investors than others.
For example, Florida offers many tax advantages other states don't. Zillow ranked the state's real estate market as very hot and points to steady growth and low taxes.
8. Have Cash Reserves
Even if you plan to finance the purchase of a self-storage facility, the bank will want to see you have enough funds to keep things running smoothly until you turn a profit. You’ll want money to pay the salaries of your office staff and security team, for example.
You’ll also have some overhead you may need to cover until you get the first rent payments, such as maintenance, electricity, insurance, and alarm system fees.
9. Consider REITs
If you don’t have enough money to buy or build a facility, consider investing in real estate investment trusts (REITs) instead. There are several focusing on commercial real estate with a focus on storage facilities. A self-storage REIT lets you take advantage of the unique benefits of the sector without the market risk of direct involvement. You’ll buy shares in whatever self-storage REIT catches your interest.
Disadvantages of Self-Storage Investments
As with any type of investment, there are pros and cons to self-storage facilities. Here are some of the cons:
- The high upfront cost to buy-in
- Liabilities and insurance costs
- Potential to deal with unhappy customers
- Risk of theft
If you’re aware of the potential issues, you can usually find a solution. The drawbacks are fewer than with many other investment options.
Types of Self-Storage
You have a number of options to invest in self-storage. There are several types of facilities.
1. Drive-Up Self-Storage
Drive-up/outdoor storage is probably the most common type of self-storage facility. These consist of a row of units with metal doors. Sometimes several buildings make up a facility. Security can be a concern with drive-up facilities.
Mitigate the security risk by adding fencing and self-coded gates on the outside, plus cameras and security guards.
Climate-controlled buildings work well for those wanting some outside office or warehouse space. Imagine someone selling candy bars or electronics. They need a unit that doesn’t have huge temperature fluctuations.
Climate-controlled self-storage facilities may be fully indoors and have maximum security. Moisture and temperature controls are top-notch, meaning these places can charge a premium price.
3. Vehicle Storage
Some places specialize in storing vehicles, RVs, boats, or motorcycles. Classic cars require special climate controls, so vehicle storage and climate-controlled facilities often mesh in the same area.
If you’re investing in this type of business, you’ll want to make sure security is ramped up. People park their recreational and specialty vehicles in your facility to protect them from damage. This type of business is sometimes seasonal in nature, with maximum capacity in the winter months.
A growing trend in the self-storage industry is facilities catering to the different needs of nearby clients. If you’re building or adding on, you can easily make sure you have a variety of services and levels for customers.
For example, you might offer an outdoor option for people who come and go frequently, such as a local vendor who accesses their supplies daily but doesn’t need temperature control. You might also have some inside units with moisture and heat controls for people to store collectibles or valuable documents.
You might even offer shared office space for those who need access to an office only part of the time.
How Much Money Do You Need to Invest?
You can start with as little as one share of a REIT or invest hundreds of thousands of dollars. Banks often loan building costs to entrepreneurs, knowing this industry has a higher success rate than some others. You could even pool your money with an investment group and build a new facility with multiple partners.
If you truly want to invest in self-storage, there are many paths to your destination. You can start with a little or a lot. The end goal is the same. Investors want to see a good return on investment and low participation models.
Only you can decide if self-storage is right for your needs. You can spend your time and resources on other investments if the self-storage option doesn’t present a viable benefit at this time.