For those who rely on real estate investment as a core part of their financial planning, the debate between different property types is an important one. Each asset class uses resources differently and some have greater cash flow than others. Multi-family homes often make a quick profit for buyers, but they also have a high failure rate. The same goes for office and retail space: landowners can negotiate a long-term lease, but the business behind it can fail. Investing in storage space is relatively safer, with a failure rate of only 8%. That’s a great number for any type of investment.
Self-storage facilities can be found in most cities and are often buildings divided into multiple units that customers can rent to store their belongings. Sometimes customers only need to rent the storage space for a month, while others need it for the long term, which can take years. Hidden within these self-storage facilities is a potential goldmine for investors looking to diversify their portfolio.
What makes self-storage so successful in the larger real estate investment arena? It comes down to a number of factors, most notably flexibility and low overhead costs. Along with an increasingly mobile lifestyle, the market is perfectly calibrated for a growing self-storage sector.
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Flexibility: the key to investing in self storage
Although the sentence self storage tends to conjure up a unique image of a garage or closet-like spaces – and many look that way – part of what makes this market so profitable is that it can shift to suit the needs of the local community comply. Flexibility is a virtue and easy to achieve in the world of self-storage.
For example, many shelters provide parking spaces for boats or RVs, so owners don’t have to keep these large vehicles at home. However, these types of offers depend on the location. There isn’t much water in Phoenix, Arizona, so there’s no point in offering boat storage in this area. Rather, there are standard storage areas of many sizes in those locations, but facilities near large bodies of water or along the shore often include boat storage.
A warning about storing cars, boats and RVs: Investors should be aware of liability. Unlike most other items kept in storage areas, these items must be insured and proof of title provided.
Increase revenues by upgrading the infrastructure
In general, the overhead costs for storage areas are much lower than those for residential or even 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 from. Many storage facilities are even constructed from inexpensive, recycled shipping containers.
Since the infrastructure costs are quite low to begin with, there is no reason not to upgrade a self-storage site to make it more attractive. For example, while almost every self-storage site uses a gate code to control who enters and leaves the site, this cannot prevent theft by unit owners. Consider upgrading the units to install door alarms coded for individual users, rather than just using locks that someone else can cut.
Go with the market
On a community basis, some storage companies offer storage calibrated for wine collectors. Others emphasize air-conditioned spaces that can be a boon to antique collectors looking to protect their finds. This varied offer underscores the importance of listening to customers. When a customer is looking for a particular type of storage, it’s worth paying attention to the request and seeing where it fits into a company’s overall strategy.
Such requests tend to come more from affluent neighborhoods where it is possible to charge higher rents, but it may also be necessary to improve the attractiveness of the property. In some areas, investors have changed the look of their storage spaces to better fit them, making them look like modern, commercial buildings while retaining a utilitarian interior design.
These types of requests ultimately require infrastructural adjustments. Therefore, it will be necessary to assess the facility to determine if the improvement is feasible, how much it will cost and what kind of profit it will yield.
The benefits of investing in self-storage
Let’s take a look at the ways self-storage can be a great addition to your investment portfolio.
Excellent performance in good or bad economic times
In good times, people buy a lot of stuff and need a place to store it. And during recessions, people shrink their homes, so again, they need storage space.
Garners sticky tenants
People in this asset class are willing to put up with more rent increases than renters in other asset classes. Suppose an owner increases the rent by 6%. Self-storage customers paying $ 100 / month are not going to take Saturday to rent a moving van, get friends together to help them haul heavy things and move all their belongings elsewhere to save $ 6 / month . But apartment dwellers paying $ 1,000 / month may be motivated to move to save 6%.
A huge industry
The size of the self-storage industry is comparable to that of Starbucks, McDonald’s and Subway combined. But the way things are running optimally within the industry is shifting. The strategy now is to buy facilities owned by mother and father, upgrade them, increase income, increase value and then refinance or resell it to an institutional investor or a real estate investment fund (REIT).
Simple, inexpensive added value
For example, adding a truck rental can increase the income of a self-storage facility by a few thousand dollars. Late fees, administration costs, rent increases, selling moving supplies and placing a showroom are other options.
Earns money buying, operating, and sale
In other areas of real estate it is said that one can only make money by buying. But the self-storage value formula is to buy from a mom and pop, upgrade to an institutional standard, then refinance or sell to a REIT – and money is made all the time.
Business value is not limited by comparisons
For home owners and investors, the value is limited by comparable properties in the area. This is not the case with commercial real estate. The value is calculated by dividing the net operating income by the yield (or maximum rate). So increasing the numerator and compressing the denominator can dramatically increase the value of an investor’s assets.
The disadvantages of investing in self-storage
But remember: with every pro list, there is a drawback list.
Must be in a high traffic area but away from competitors
Ultimately, this is what will drive profitability. The best storage units operate at 90% capacity for most months, have high visibility at their site (at least 20,000-30,000 cars drive daily) and provide something of value to the community.
Must meet the requirements of the surrounding community
It is also important to provide the right mix of units (drive-up vs. interior) and amenities (air-conditioned, high security, 24/7 access, etc.) to meet the needs of the local community. Market research will give owners an idea of what they should provide based on the needs of the surrounding community.
Finding good help
It can be difficult to find good help in this industry, and most storage facilities are managed by one trustworthy person. Many owners tend to personally manage their storage business as poor management can quickly fuel a business.
Different demographics of customers
Your customer base can have very different needs, and people using storage facilities can find themselves in stressful circumstances (death of a loved one, relocation of a job, etc.). Dramatic interactions with tenants are to be expected and managers must be able to keep a cool head while still providing excellent customer service.
Fluctuation of the annual occupancy rate
Most storage companies are encouraged to aim for a 90% occupancy rate as a way to measure their annual income. But that number is not always easy to find in this industry.
It is difficult to protect the items in each storage unit 100% of the time. A facility needs several security features to protect personal or commercial property: locks on the doors, security cameras, and other protections. Costly upgrades may be required to encourage customers to use the facility and help your business grow.
Financing investments in self-storage
Self-storage financing usually comes in the form of a commercial real estate loan that finances the purchase, renovation or construction of self-storage units and commercial real estate buildings. These loans typically have a repayment period of 10 to 25 years.
Lenders generally assess the financial performance of a business, the value of the property, the surrounding market, and the credit profile of the business owner. Most lenders consider a storage loan to be a low-risk business loan.
Typical qualification requirements for self-storage financing include:
- Working time: at least two years
- Minimum Credit Score: 680
- Minimum down payment: 10%
- Debt Service Coverage Ratio (DSCR): 1.25x or higher
- Credit History: No recent foreclosures, bankruptcies, or tax law
Those interested in purchasing an established storage company often seek a loan to cover the acquisition costs. Acquisition loans are required when purchasing an existing self-storage facility. Many merger and acquisition activities in the self-storage industry are carried out by large investment companies and (REITs). It is less common for independent storage facilities to buy others, but there are plenty of financing options to buy an existing facility. The best option for prime borrowers is almost always a conventional bank loan or a Small Business Administration (SBA) loan.
When it comes to investing in self-storage, it’s about knowing the market and going with it. The flexibility to do that is what makes self-storage such a profitable investment in the first place.
Commercial real estate
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Commercial real estate