10 Considerations When Investing in Self-Storage Facilities
Real estate investment is a more diverse field than many people realize. While investing in homes or office buildings can be profitable, it’s far from the only option. Some of the most enticing alternatives to look into are self-storage facilities.
When you think of real estate investment, storage lockers probably aren’t the first thing that comes to mind. While they may be more unconventional, these facilities can present a promising opportunity. Here’s a closer look.
Why Invest in Self-Storage?
The real estate market can be intimidating, as many factors can shift it in the blink of an eye. Self-storage can provide a hedge against that volatility, as it’s relatively recession-proof. During a housing boom, it helps people transition to larger spaces, and during a crash, it lets them downsize.
Self-storage facilities are particularly enticing right now as millennials make up a larger portion of the active market. The current millennial mindset prefers not to commit to a specific location. That behavior requires flexibility for moving, upscaling or downsizing, and storage units provide that.
Self-storage also typically includes lower ownership costs than other types of real estate. Less utility infrastructure makes them easier to manage, they have low staffing needs and building them is comparatively cheap. That, tied with the constant demand for stage space, can make them remarkably profitable.
While investing in self-storage can be an excellent idea, it requires forethought, like any investment. Here are 10 considerations for investing in these facilities.
Like any type of real estate, self-storage’s long-term value relies heavily on its location. Where a storage facility is can determine whether it will thrive or flounder as a business. Before investing in one of these facilities, look at the surrounding area for a few factors.
One of the most important considerations here is the state of homeownership in the area. Do people mostly own their homes or rent? Are the houses and apartments large or small? Generally speaking, renters and homeowners in smaller spaces will have a higher demand for extra storage.
Site visibility and access is another critical location consideration. Ideally, people should be able to see and drive into the property from multiple directions. You should also look for a property by high-traffic roads, as more individuals will see it that way.
Consider a storage facility's condition if you’re buying an existing one or building a new one. The most obvious part of this is the storage units' shape. Are they clean and intact? If they need work, how much will that cost?
Consider the age of the building, as some factors may not be immediately apparent. For example, if the roofs are old, they may need replacement or maintenance before long. The most crucial aspect of all these considerations is the usability and safety of the storage spaces. Leaky roofs or loose doors can damage stored items.
Check the state of any extra amenities, too. Security systems should be functional for both security and ease of use. Climate control systems should be working and efficient.
Keep the property’s end-use in mind when investing in any kind of real estate. For self-storage facilities, that means ensuring you can provide an affordable space that keeps people’s valuables safe. As a result, one of the most critical considerations is security.
Facilities that already have sufficient security systems are ideal, but you can add your own if you need. With some companies offering continuous monitoring for around $35 a month, security doesn’t have to break the bank. However, if the facility’s security is outdated or minimal, upgrading it could come at a high cost.
High security costs money, but tenants may pay more for reliable safety measures. Keep that in mind as you look at properties and consider any necessary upgrades. If the local market is likely to have higher-value items to store, security will go a long way.
4. Occupancy Rates
One of the best parts of investing in self-storage is that people will always need a place for their belongings. That said, demand can fluctuate between areas, especially as more people get into this market. Checking the occupancy rates of nearby storage facilities can help you gauge that demand.
Look up other self-storage facilities in the area as if you were a potential customer. You should be able to see how many units of various sizes are available. High availability may be good for a customer, but as an owner, that means there’s not much demand.
By contrast, if occupancy rates are high, you’ll be more likely to gain customers. That means you’ll make a positive return on your investment sooner. Remember that with self-storage, you’re owning a business, not just investing in an area.
5. Nearby Competition
Along those same lines, you should check out the local competition. The presence of other storage facilities isn’t necessarily a negative sign on its own. Competition could signal demand as long as the occupancy rates are high and no business has a relative monopoly.
On the flip side, too many other facilities may make it difficult to stand out. You can counter that by looking at what your competitors offer and what they don’t. Competition isn’t as threatening if you can provide customers with something they don’t, like higher security or lower rates.
Look at competitors’ locations, unit sizes, amenities and prices. These factors will help you determine if there’s unmet demand and what your offerings should be. Without understanding the competition, you can’t fully grasp the market, which will hinder your investment.
6. Local Tax Codes
Another thing you’ll want to consider when investing in self-storage facilities is the tax landscape. As with many types of real estate, self-storage taxation can be complex, and every area carries unique considerations. For example, you may have to pay capital gains tax on these facilities in some states but not in others.
An area’s property and business tax factors may complicate self-storage facility pricing. Consequently, you should always look into local tax codes after determining the upfront costs of one of these properties. A facility may be cheap but carry high ongoing expenses from taxes, and the opposite could also be true.
Look for loopholes and ways to mitigate these costs, too. Some tax codes may seem harsh upfront, but there may be ways to reduce their burden.
While you’re considering the costs of a storage facility, remember to include insurance. Most self-storage operations don’t offer coverage for customers’ stored goods, but they still carry some liability. Seeking the right kind of insurance can help protect your investment.
Liability coverage can help protect you if someone gets injured on the property. Considering injuries may be fairly likely when people are moving heavy objects on their own, that’s hard to ignore. Some self-storage facilities may also need dwelling coverage to protect them from theft, vandalism or weather damage.
What coverage a facility needs depends on the area, facility size and clientele. Before investing in these properties, consider the options and compare them to relevant risks. Without proper coverage, your investment may end up incurring unnecessarily high expenses.
8. Facility Amenities
Another important consideration is the facility’s current amenities and any you may want to add. Some features, like security cameras and crash-proof gates, are essential. Others, like air conditioning and other climate control systems, are optional but could prove valuable.
For example, climate-controlled storage units are essential if people in the area have to store delicate goods. This option can bring extra revenue, but remember that energy is one of the biggest costs for any property. You’ll have to balance the potential gains with these higher ongoing expenses.
The amenities you provide depends on what local clientele need and what competitors offer. You want to provide at least a comparable level of options and comfort as the competition, and possibly more. At the same time, you must consider what this would cost.
9. Tenant Quality
One easy-to-overlook factor is tenant quality. If you’re investing in an existing self-storage facility, check the books to learn how the business’s tenants behave. Look for records of property damage, payment timeliness and similar factors.
It could be a red flag if many tenants are behind on rent. The same goes for frequent instances of property misuse and damage. These records indicate if a business’s clientele or current operations make it a riskier investment than it should be.
You can look for reports of similar statistics from competitors but may not be able to find as much. If you can, though, these will give you a more cohesive picture of what the local market is like. Gauging these factors is critical in making an informed investment decision.
10. REIT Options
You may want to see if there are any real estate investment trust (REIT) options available. REITs let you invest in various real estate asset classes as a group, similar to stocks. This may be a more attractive option for investors with less capital or no business management experience.
If you invest in self-storage through a REIT, you won't have to worry about management. Factors like business and ongoing expenses will still impact your investment, but they won’t be your responsibility. As a result, they’re often easier and more affordable.
REITs may produce a more modest return on investment, but they’re less involved. This may be the best option if you don't have the time or capital to start a business.
Invest in Self-Storage Confidently and Safely
Self-storage facilities can be a profitable, safe real estate asset class if you perform due diligence. Consider these 10 factors before you invest to make the most informed decision. You can then take full advantage of these lucrative options.