Why Self-storage Investment Offers Lucrative Opportunities
For anyone with an interest in high-yield investments generating monthly income and requiring basic low-cost maintenance, self-storage investing is ideal. Yearly revenues for this type of real estate investing are rapidly approaching $40 billion in the U.S. today. Nearly one in every ten households across the country rents space in a storage facility. In addition, these self-storage units generally maintain steady high rates of occupancy.
Although self-storage units are available for much higher rental rates, the average monthly rental fee nationwide equals approximately $85 to $90 per month. An average lease is for 12 to 14 months, and profit margins are generally about 41 percent. With the current steady growth in demand for these storage units, the total number of self-storage facilities in the U.S. surpasses the number of fast-food restaurants food-court services.
Due to the high demand for these convenient and cost-efficient storage options, more than 60 million square feet of new self-storage space was constructed during 2020. With the current count at nearly 24 million separate units countrywide, the total amount of square footage for U.S. self-storage space equals nearly 1.8 billion.
Clearly, the major reasons that investors decide to invest in self-storage are the regular cash flow, the low-end maintenance costs and the possibility of price appreciation.
Ways to Invest in Self-storage
There are multiple valid ways of getting started as a self-storage investor. You can invest through real estate syndication or invest in REITs that own and manage extensive portfolios consisting of self-storage facilities. If you can raise sufficient funding, you can also buy, or possibly construct, your own facility of storage units.
Self-storage Syndication Investing
When you invest in self-storage through a real estate syndicate, you join with other investors, pooling your capital to fund a property deal. You and the other passive investors are also known as limited partners for this syndication investment project. The sponsor for this property deal, the general partner, locates, plans and transacts the investment deal.
The sponsor also manages the daily operations of this investment project. The sponsor assumes the lead in executing the property deal. The investors then acquire an owner’s stake in the self-storage syndication property without the need to perform any additional duties after funding the project.
As an example, if a self-storage facility is valued on the market at $1,500,000, you need a 20 percent down payment to purchase it, or $300,000. Yet if a real estate syndication deal sponsor supplies a portion of the down payment, they can then form a syndication.
By advertising and networking, the sponsor can attract passive investors to fund this property deal. If one limited partner invests $100,000 in this deal, they will gain an ownership stake of 25 percent in the syndication investment project.
Pros and Cons of Self-storage Syndication Investing
Pros and cons of self-storage facility investing through syndication include the following facts and features:
Pros
- Tax Advantages. At first glance, self-storage syndication investments do not appear to offer more attractive tax treatment than REITs. Yet since as a syndication passive investor, you own a “piece” of the investment property, pro rata shares of all income and costs are issued to you. Since depreciation passes through to each investor, this often results in a loss that is taxable, although positive cash flow is also distributed to each investor.
- High Returns. Real estate investing (REI) syndications make investments in single- property deals. For this reason, results and returns on each deal can vary significantly. Yet a self-storage syndication investment generally offers higher financial returns than putting the same amount of funds into a self-storage REIT. This is especially true when you consider the tax treatment of the investment.
Cons
- Lack of Liquidity. Self-storage syndication property investments are totally illiquid assets. This is due to the fact that every passive investor in a deal owns a stake in the property. For this reason, it is impossible to convert a passive investor’s stake in a self-storage syndication property deal into cash quickly. The majority of these deals have definite time limits, for instance five or ten-year investment limits.
During the lifetime of the investment, the limited partners receive cash flow distributions plus a final payment when the property is sold. Any investor who cannot risk committing a certain amount of funding for the duration of the investment project should consider another type of property investing.
- Lack of Due Diligence. Before you join in a self-storage syndication deal, take time to perform thorough due diligence concerning the track record of the REI syndicate and the investment project itself. By doing this, you can help avoid the pitfalls of getting involved in potentially risky or fraudulent investments.
Since REI syndications typically undergo very little regulatory scrutiny, unlike publicly-traded REITs, you need to research each syndicate deal carefully before investing your money. You should also gain a good understanding of commercial property underwriting relative to self-storage.
Buying a Self-storage Facility
Experts in self-storage investing usually focus on existing facilities that offer impressive value-add potential. Since the majority of these facilities have private small-business owners and operators, they may have experienced some deterioration over time. These storage assets may be low-cost investments with good possibilities of increasing their value with facility updates or expansion.
As commercial property assets, these self-storage investments are valued according to capitalization rates. You need to review the property cash flow record to determine the net operating income. Since self-storage investments are also operating businesses, they have costs that are different from those of a multifamily apartment complex.
Pros and Cons of Buying a Self-Storage Facility
Basic pros and cons of buying your own self-storage facility can include the following points:
Pros
- Hands-on Investing. Buying a self-storage facility gives you a direct hands-on investment opportunity. You are in control of all aspects of your property investment, including the purchase of the facility, its management and any necessary repairs or upgrades.
- Control of Management and Staffing. As the owner of a self-storage facility, you have overall control of its management and staffing. You can hire the staff members of your choice to handle daily ongoing tasks. You will have the final say in marketing and leasing units, charging and collecting rental fees and the necessary maintenance of your facility.
Cons
- Misunderstanding of Asset Improvement Needs. Before you obtain financing and purchase a self-storage building or complex, be sure that you understand all of the necessary improvements. Many people view storage units as simple concrete boxes that need little, if any, maintenance.
Yet all storage facilities receive ongoing wear-and-tear from daily use. Even if your storage building is not in need of major renovations, regular repairs and maintenance costs may be higher than you think.
Of course, if extensive renovations are essential, you need a reliable cost estimate before buying the facility. Some investors join together in a partnership to buy land and build a self-storage facility so that they have more control of all cost allotments “from the ground up.”
- Lack of Knowledge for Wise Spending and Saving. It is also essential to gain full knowledge about wise spending and saving when you purchase a self-storage facility.
Although it may be in vogue to add a cafe and lounge area for your renters’ enjoyment and convenience, spending for updating your ventilation system and fire safety measures is a much wiser idea. If all goes well and your facility proves lucrative, you can add the attractive amenities later on.
Self-storage REITs
If your goal is to invest in self-storage as a completely passive investor, self-storage REITs may be your best investment asset. You can invest in these REITs with relatively small amounts of capital.
However, these are publicly traded investments that are always open to influence by factors other than their performance. These outside factors can have significant effects on the stock price of an REIT as well as on its performance.
Pros and Cons of Investing in Self-storage REITs
Major pros and cons of choosing to invest in self-storage REITs include the following:
Pros
- Passive Investing. When you invest in a self-storage REIT, this allows you the freedom of being a truly hands-off, passive investor. All aspects of the investment are managed for you, and any profits will be issued to you without any work on your part.
- Small Capital Investment. No large amount of capital is required to get started with your first investment in a self-storage REIT.
Cons
- Risk Factors. Since self-storage REITS are publicly traded investments, they are constantly vulnerable to outside factors. These factors may affect both the stock price and the performance of an REIT strongly.
- Lack of Control. As a passive, hands-off investor in a self-storage REIT, you have no influence or control over the management of the investment.
Is a Self-storage Facility a Risky Investment Asset?
There are risks associated with self-storage investments, just as there are with any type of investing today. Different types of self-storage investing also have different risks, such as the following:
Operation Risks
Self-storage investing is both a type of real estate investing and a commercial enterprise. If you own and operate your own self-storage facility, you will encounter all of the risks that business owners confront in the current economy. For this reason, you may need more extensive insurance coverage than you planned for.
Also, any outside factors that may affect your industry or your specific locale will most likely affect your business as well. For instance, if your facility is in an area that requires extra security equipment to ensure safety, you must cover the costs of these necessary installations and their operation.
Economic Risks
Many consumers view self-storage rentals as basic conveniences that are non-essential during difficult or uncertain economic times. These units may be one of the first expenses that they eliminate from their monthly bills. The majority of these storage rentals have month-to-month contract agreements, so renters can vacate their units on short notice.
Interest Rate-Related Risks
Self-storage REITs are especially affected by fluctuations in interest rates. As a result, owning a self-storage facility can also leave you open to the perils of changes in these rates. If you have a mortgage or another form of financing, significant changes in borrowing rates can strongly affect your net operating income, your business profit margins and the value of your property.
Concluding Thoughts
Although there are varied risks involved with different types of self-storage investments, investing in these facilities offers a lucrative opportunity today. They can be ideal investing choices for investors seeking high-yield investments that generate monthly revenues.
Approximately one in every ten U.S. households today rents a self-storage unit. Annual nationwide profits from this type of real estate investing will soon reach $40 billion. The currently booming industry of self-storage may be a highly profitable investment to consider for your property portfolio today.