The self-storage sector gives investors high profit potential, recession-resistant growth, stable and regular cash flow, and minimal management requirements in contrast to residential, retail, and commercial real estate. But do you know how to invest in self-storage units?
You can always find individuals with a lot of experience in the business, like those at passivestorageinvesting.com, but before starting, there are things that you need to know to make an informed decision.
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Why Is Self-Storage a Lucrative Investment to Make?
Self-storage facilities give people who want more space a secure place to store the things they don’t currently need but will use again in the future. Due to the convenience they offer, the industry has become so popular that, according to a report by The SpareFoot Storage Beat, 1 in 10 American families are now using around 50,000 self-storage businesses in the US.
The same report also shows that the industry is making $39 billion in annual revenue, and the available spaces have now reached 1.7 billion square feet, which is almost three times the total land area of Manhattan Island. Aside from that, reality shows like “Storage Wars” and “Auction Hunters” have increased the industry’s popularity exponentially. Even with the current pandemic, it has seen robust growth and performance.
As the demand for these facilities rises, they have turned into an attractive investment opportunity for people who are looking for a source of passive income.
Investing in Self-Storage Units: First Steps to Take
There are two ways you can start your foray into the self-storage market. First, you can invest in real estate investment trusts (REITs), which is a convenient option. However, if you want to make more profit, you should take the second option—become an independent owner-investor. Here are the steps you can take:
Decide which type of self-storage facility you want to invest in.
Self-storage facilities are classified based on their use (what items they accommodate), style of construction, features, and size. Some facilities act as a storage hub for household belongings and pieces of furniture, while others serve to be as a temporary garage for unused vehicles. Other units are also designed to target businesses that need a space to organize and manage their inventories.
Storage facilities also come as “climate-controlled” and “non-climate-controlled.” Climate-controlled storage units are enclosed spaces within a building with supervised temperature and humidity to preserve weather-sensitive items, like wine, electronics, and precision tools. Non-climate-controlled storage units, on the other hand, are open spaces where less-weather-sensitive items are stored, such as sporting equipment, heavy tools, and automobiles. Of course, the rent you can charge for the former is more expensive than that of the latter.
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Primary types of self-storage facilities
- Outdoor/drive-up storage – This type of facility is common in the US, and it is the one that often comes to mind when you speak of “self-storage.” Although it is usually the cheapest option, most drive-up storage facilities have coded gates, CCTV cameras, and security personnel.
- Climate-controlled storage – Climate-controlled storage facilities have risen in popularity in the past few years among people who want to store valuable items, such as vintage cars, expensive furniture, family heirlooms, important documents, works of art, etc. As we mentioned before, owning these facilities allows you to charge higher fees compared to owning outdoor self-storage facilities. After all, you’ll be providing more sophisticated services.
- Vehicle storage – As the name suggests, vehicle storage facilities cater to customers who want to store their boats, RVs, and other vehicles.
- Mixed-use storage: This kind of storage facility is gaining popularity because of the demand from retail and other commercial establishments.
Remember, each type of storage facility has its own set of management pros and cons. Before you decide which one to invest in, determine which type of market you want to cater to and what works best for your bottom line.
You can find great options for self-storage facilities by visiting websites, such as passivestorageinvesting.com.
Find a self-storage investment property.
You can use self-storage investment websites or work with a licensed real estate broker to find self-storage properties that fit your needs. But before you start searching for and investing in self-storage units, you should set your budget, determine the size of the property you want to have, and study locations. Most self-storage investors prefer to acquire properties near their place of residence.
You should also think about whether you want to become an active or passive investor. This way, you will be able to determine your market. Most active investors choose properties closer to them, while passive investors want to have a broader range of options.
Examine the cash flow.
Cash flow is the single most crucial factor in the self-storage industry. If you are financing your investment personally, as most investors do, your ability to get credit for expanding operations or acquiring new properties is based on cash flow. When you stumble upon a property that piques your interest, take a look at its cash flow from the past three years to the present.
You need to determine whether the cash flow is growing or declining. If it’s heading south, then finding out why can save you from a bad deal—the business might not be worth it. If you found the opposite and determined that the facility is profitable, you don’t need to have second thoughts, and you should act quickly as a bidding war might ensue.
Know the occupancy rate.
In the self-storage industry, occupancy is categorized into two types: economic and physical. If a facility has 90% physical occupancy, but only has 55% economic occupancy, then it might not be as profitable as you think.
The difference between economic occupancy and physical occupancy denotes the actual and potential income of the facility. High physical occupancy and low economic occupancy might mean that customers are paying way below the market rates. Getting this information is crucial in obtaining financing for self-storage facilities, so it is also a significant factor in market pricing.
Do a market analysis.
This step is essential for any kind of real estate investment. Before you take the plunge and invest in a self-storage business, you should research the local market. You need to focus on factors like population, employment, wage growth, and other things that will play a role in the broader property market.
One good tip is looking at the average home size in the area you are interested in. A city with smaller homes tends to have a greater self-storage demand compared to one with large homes. Also, areas with a high population of renters rather than homeowners would need more storage units, as these people move houses more often. Coastal areas and national parks are also some of the specific markets you should look into if you want to set up a vehicle storage facility for RVs and boats.
Know your competition.
Like with any business, you will have competitors when you invest in the self-storage market. To keep tabs on your competition, you need to know more about them, find out their expansion plans, and the broader state of the area’s self-storage market.
If you are a new investor, however, you might want to set up shop in an area with minimal competition for the foreseeable future. More often than not, you’ll find this opportunity in most small cities and towns where you would only find one or two storage facilities. The big players often overlook these places because they tend to focus on larger cities for higher ROIs.
Get financing
You can finance your investment through conventional lenders, government lenders (like the Small Business Administration [SBA]), new construction loans, and hard money lenders.
How to Maximize Self-Storage Investment Returns
You can use these easy tips to implement strategies to improve your investment’s cash flow, see better self-storage investment returns, and increase your chances of success.
- Use management software – Using applications that are specifically designed for managing self-storage facilities will let you track every detail about your self-storage business, like unit details, rentals, collections, rental rates, revenue sources, tenant information, and more. Also, this software lets you set dynamic pricing for your storage units, meaning your rates and promotions can change daily based on availability. Plus, it makes your operations and collections more efficient and generates useful reports to improve management.
- Build a nice, user-friendly website – All businesses must have a good website that customers can visit! Also, a website will make it more convenient for your customers to know about your units. It also allows you to cater to their inquiries and needs at the soonest possible time. With good service, you can attract more customers.
- Make ancillary income – You need to have products and services that support your primary business. These can range from merchandise, propane rentals, courier services, tenant insurance, moving supplies for purchase, truck rentals, etc. Be creative, but make sure that the services won’t interfere with your primary business.
Final Thoughts
The self-storage asset class offers property appreciation, good cash flow, and resilience against recession. On the broader, macroeconomic level, the market for self-storage facilities is growing very rapidly and is still in a state of consolidation, so there are many opportunities available that haven’t been acquired by the big players. These factors make investing in self-storage businesses a very attractive way to diversify your portfolio.
Aside from the attractiveness of investing in this sector, there is the draw of specialists who can help you achieve success, especially if it’s your first time investing in real estate. You can visit sites like passivestorageinvesting.com to get started with your journey to becoming a successful self-storage investor.
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