Investment Considerations for Self Storage Facilities
To help potential self storage investors, we’ve put together some important factors to consider before investing in a self storage facility.
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In a nutshell, self-storage facilities offer rentable space for customers to a secure place in which to either store belongings that they won’t need in the immediate future but refuse to throw away, or simply the things they can’t store within their homes due to a lack of space. The self-storage business has seen impressive growth throughout the decade. At current, it is estimated that nearly one in three American households utilize self-storage facilities. The sector, with its 50,000 facilities and more than 1.6 billion square feet, has generated more than $39 billion in revenues annually in the U.S.
The self storage industry doesn’t typically follow common commercial real estate business models. Unlike with multifamily or office properties, self-storage facilities can thrive in less desirable locations. Additionally, self-storage tenants aren’t usually required to pay a deposit and have the ability to cancel services and leave whenever they choose. Even so, more and more investors are expressing interest in the sector for its impressive performance in recent years — even during a global pandemic.
Incomparable Demand
The growth and success of the self storage industry can be traced back to many contributing factors. However, the industry’s performance boils down to two simple truths, at its most basic level.
For starters, people will almost always continue purchasing nonconsumable items. Such purchases include furniture, sporting equipment, toys, leisure vehicles — items that, for one reason or another, some people are hesitant or flat-out unwilling to throw away or sell. Recent times have even caused many households to downgrade in terms of living space, which has sparked even more interest in rentable storage space in order to hold on to items such as those mentioned above.
And then there is the “staying power” storage facilities seem to have. Even though most storage facilities utilize short-term rental contracts, most tenants rarely return to the items they’ve placed in storage to throw out or sell what is no longer of use to them — it is estimated that up to a third of the total storage space in America holds personal belongings that have sat, unmoved, for at least three years. It's as if these tenants pack storage units and promptly forget they even exist. That said, self storage owners rarely ever have to worry about the vacancy issues that exist in other commercial real estate sectors due to its expanding tenant base.
Cash Flow Consistency
Self-storage facilities come in handy for a plethora of reasons, including — but nowhere near limited to — downsizing a household, renovations, relocations, military transfers, and even for holding business records or other important documents. What's more impressive is that unlike most other sectors, some of the driving factors for utilizing self-storage facilities actually become more ubiquitous during economic downturns — as the pandemic highlighted. This countercyclical feature makes investments in the sector highly desirable to investors looking to add a little extra security to portfolios. The tendency for many tenants to hesitate to remove stored belongings adds further defense against turnover concerns.
Low Maintenance Ownership
Unlike an apartment complex or office property, self-storage facilities are relatively low maintenance. Often, the majority of maintenance entails a quick cleanup of a recently vacated rental unit to prepare the space for the next renter. These facilities rarely have a need for tenant improvements or leasing commissions either.
Marketing may play a larger role for new facilities and the smaller mom-and-pop operations, but in most cases, once a facility can be found on the web, it will rarely have issues sourcing tenants — the industry practically sells itself. As for staffing, most facilities can operate with a skeleton crew. A manager should be on-site during business hours for new leases and to provide service to existing tenants as the need arises, and a security guard (or guards) is highly recommended — along with a decent security system that has cameras and alarms — to be employed during evening hours.
Final Thoughts
The self storage industry has become more and more popular in investment circles as of late thanks to the impressive performance the sector has displayed throughout the recent years of an otherwise unstable economy. The sector’s success can be traced back to inherent dynamics of the industry itself. Moreso, while investors must still be mindful of the asset class a facility falls in, typically sourcing tenants is no hard task, and vacancy issues are relatively rare.
Self-storage facilities are a great entry point into commercial real estate investment — low maintenance and almost bulletproof cash flow certainly help in this regard. Owners sincerely don’t have to worry about the multitude of costly issues or stressful occurrences that plague typical income properties, and can generally count on a decent portion of their available inventory to remain occupied for a number of years. Savvy owners need only keep their facility as modernized as possible, and should have little trouble remaining profitable regardless of outward economic stresses.
Related Questions
What are the key factors to consider when investing in a self-storage facility?
When investing in a self-storage facility, it's important to consider the following key factors:
- Choose the market carefully - look at the surrounding market conditions, population and job growth, and the number of homeowners and renters in the area.
- Analyze the competition within the market radius - consider the level of competition in the area, as well as the saturation level of the market.
For more information, please refer to A Beginner’s Guide to Self-Storage Investing.
What are the advantages and disadvantages of investing in a self-storage facility?
The advantages of investing in a self-storage facility include the potential for strong cash flow and ROI, easy management, and recession-resistance. Self-storage facilities are relatively easy to manage compared to other types of investment properties, as they are often fully automated and renters typically stay for a few months at a time. Furthermore, self-storage is a recession-resistant investment, meaning that it will not be dramatically impacted by economic downturns or market fluctuations.
When investing in self-storage, it is important to consider the surrounding market conditions. Factors such as population and job growth, the ratio of homeowners to renters, and the proximity to university campuses, residential areas, and businesses should all be taken into account. Self storage is a highly micro-location-focused business, so it is best to look at these metrics within a 3- to 5-mile radius of a facility.
The main disadvantage of investing in a self-storage facility is that it can be difficult to predict demand. Self-storage facilities are often dependent on the local economy, so if the area experiences a downturn, it could lead to a decrease in demand for storage units. Additionally, self-storage facilities require a significant amount of capital to purchase and maintain, so investors should be prepared to make a large upfront investment.
What are the most important financial metrics to consider when evaluating a self-storage facility?
When evaluating a self-storage facility, the most important financial metrics to consider are economic occupancy and cash flow. Economic occupancy measures the total possible income if a facility is fully occupied and tenants are paying the full market value in rent. Cash flow is determined by the occupancy rate and average rental price of units in the area.
For more information, see Physical vs. Economic Vacancy in Commercial Real Estate.
What are the most common mistakes investors make when investing in a self-storage facility?
Investors often make the mistake of not doing enough research on the local market conditions before investing in a self-storage facility. It's important to look at the population and job growth, the number of homeowners and renters in the area, and the proximity to university campuses, residential areas, and businesses. Additionally, investors should analyze the competition within the market radius and consider the saturation level of the market. The saturation level of an area is measured by the gross square feet of storage space available per person, with the average self-storage inventory per capita across the country being around 7 to 8 net square feet. A market with a per-capita inventory above the U.S. average is usually considered oversupplied, whereas anything below is undersupplied.
What are the best strategies for financing a self-storage facility?
The best strategies for financing a self-storage facility depend on the individual investor's needs and goals. Conventional loans from banks, credit unions, and other financial institutions tend to have the lowest interest rates and longest terms, making them a good option for investors who are looking for stability. However, they can be difficult to obtain if you don't have a strong credit history. Other options include SBA loans, which are government-backed loans that can provide more favorable terms than conventional loans, as well as private financing, which can provide more flexible terms and faster funding. For more information, check out this guide to self-storage investing.
What are the tax implications of investing in a self-storage facility?
Investing in a self-storage facility can have a number of tax implications. Depending on the type of investment, you may be eligible for deductions on your taxes. For example, if you purchase a self-storage facility as an investment property, you may be able to deduct the cost of repairs and maintenance, as well as any interest paid on the loan. Additionally, you may be able to deduct any depreciation of the property, as well as any expenses related to the operation of the facility.
It's important to consult with a tax professional to determine the exact tax implications of investing in a self-storage facility. Additionally, you should be aware of any local or state laws that may affect your investment. For more information, you can check out this article from the IRS.