There are many different types of real estate investments that you as an investor can choose from. While making a choice can be quite challenging, one option that may not have occurred to you before is self-storage, a niche of commercial real estate investing which has grown in popularity over the past few years.
Self-storage facilities are becoming increasingly popular because they offer customers a safe and secure place to store their belongings while living in a rented apartment or a house with limited space. Many facilities are being constructed in cities across the US – and each facility is divided into multiple units that customers can rent. With this upward trend, the self-storage industry has been an attractive option for investors looking to diversify their portfolios. While this investment can be profitable and rewarding, it also comes with some challenges and risks.
In this article, I’d like to share with you information and insights from industry expert Fernando Angelucci, Founder and President of Titan Wealth Group. In our most recent conversation, he shared his knowledge and experience on self-storage investing that I hope can guide you in assessing if this industry is right for you. If you’d like to listen to our full conversation, please click here.
The PROs of Self-Storage Investing
Self-storage is an attractive asset for several reasons. Listed below are a few.
- Strong ROI and Recession Tolerance
“When we first looked at self-storage as an asset class investment, we found a study that looked at the 2017 value of $100,000 invested in 1994. The study found that self-storage investments have registered a higher growth rate of 17.4% average annual return than stock market investments (S&P 500) with 7.5% growth or investment in apartments with 13.3% growth,” reveals Fernando. When compounding interest is factored in, return in real dollars is almost double over that period from 1994 to 2017, he adds.
Self-Storage investments have high recession tolerance, meaning they perform great during both good and bad economic times. Fernando shares that in the same study mentioned above, between 2007 and 2009, stock market investments lost about 22% in value. The apartment sector did much better, losing only about 7%. However, the self-storage industry lost only about 3.8% in valuations.
Fernando maintains that the reason that self-storage performed better is that there will always be a demand for extra space, and people are willing to pay for it. In an economic boom, people are buying up real estate and need a place to store items, while during downturns, people are downsizing their homes, so again, they need storage space.
“People have these sentimental possessions that they’re not just going to get rid of easily,” adds Fernando.
- Wide Market Base
Self-storage caters to the two largest population groups in the nation — the baby boomers and the millennials — says Fernando. Baby boomers are retiring from work and looking to downsize in property while the older end of that population is going into retirement homes. With confined spaces but with a lot of sentimental things that people don’t want to get rid of, self-storage spaces solve the dilemma. It makes more sense to cut 1200 square feet off of your housing size and simply pay a little extra for the storage space monthly.
The second group that self-storage facilities cater to is the millennials. This 18-to-34 age group is moving closer to the city centers where the action, great food scenes, and events spaces are. Opting for smaller, reasonably-priced housing in high rises, they pay an extra 80 or a hundred dollars a month for self-storage spaces as “exterior closets” for out-of-season clothing and belongings.
- Accessible Bank Financing
Bank financing for self-storage investments is superior to any other asset class because historically self-storage has a much lower default rate compared to others, says Fernando. When rare defaults did occur in self-storage, the amount of loss incurred by the bank was actually much lower than all other asset classes as well. Banks give great leverage to self-storage to offset the riskier loans they are giving, adds Fernando.
- Low Overhead and Ease of Maintenance
Self-storage facilities come with low overhead and less maintenance compared to other real estate assets. As Fernando puts it — with no residing tenants, toilets, or trash, there is less headache. With minimal utilities, self-storage operators manage facilities with small operating expenses. Some facilities can be self-sufficient, requiring only part-time management. Because there are fewer people involved, there are fewer moving parts, and less day-to-day management needed.
Fernando notes that self-storage facilities are guided by lien law or property law that makes it easy for operators to manage customers. Customers enter into a contract that allows operators to put a lien on the property for unpaid rents. After a prescribed period of non-payment, operators are allowed to sell the property to satisfy that lien.
- High Sticky Factor
Customers of storage units are more willing to absorb rent increases than tenants in other asset classes. Fernando explains the sticking factor as the customers’ tendency to tolerate a $10-a-month rent hike for another year or two rather than pack all their belongings, rent a truck, and move to a new facility which would cost more.
- Multiple Profit Centers
Storage facilities allow investors multiple streams of income. Some of the most common include car storage, boat storage, RV storage, selling moving supplies, packaging supplies, printing services, billboard space rental, etc. However, investors must study the laws and regulations before proceeding to add another business venture.
The CONs of Self-Storage Investing
As with every pro list, there’s a list of caveats in self-storage investing.
- Location Matters
Ideally, self-storage facilities need to be located in high-traffic areas but away from competitors to drive profitability. The best storage units should have high visibility at their location and fill a need in the community. Your customer base would be within the one- to five-mile radius of your storage facility so a background check of the area you’re considering is critical for potential profitability. Some factors to look into include other storage units in the area, traffic level generated, housing types within the vicinity.
- Growing Market Competition
A majority of all storage facilities in the US are owned by “mom and pop” or small operators with only one or two facilities. With little competition from big operators, it is easier for small investors to find off-market properties that can be negotiated at very favorable cap rates. However, with the changing landscape, larger competitors are moving into the self-storage spaces, immediately raising rents for the entire market. Fernando takes this as an opportunity to ride on the big players’ marketing efforts and create an edge by adjusting his prices for price-sensitive customers.
- Meeting Customer Needs
Operators must offer the right mix of units and amenities (tech-based security, 24/7 access, etc.) to meet the needs of the customers. A thorough market research should tell operators what they should offer based on the needs of the surrounding community.
- Fluctuating occupancy rate
For storage facilities to be profitable, operators are encouraged to achieve a 90% occupancy rate as a way to measure their annual income. It is crucial to perform a due diligence study on a business plan to find out if this percentage will be achievable. Working closely with a property inspector in pre-surveying the area would help.
- Securing Items in Storage
Although customers are required to take insurance for their items in storage, operators must invest in security features to protect customer belongings. Securing storage units 100% of the time could be difficult. Facilities will not only need locks on the doors and security cameras but costly upgrades and technologically advanced security systems might be needed to sway customers to use the facility and help your business grow.
Self-storage is a great investment for many people, and I’ve given you some ideas to keep in mind as you explore investment opportunities. Remember, it is best to look into investing firms or industries with a potential for future growth. Be careful of promises of quick returns as real estate investments are generally not meant for short-term massive profit-making. A good investment instead holds sizable earnings over a period of time.
If you are looking for good investment opportunities for your portfolio, we encourage you to talk with one of our experts today. Please email us at email@example.com or call to see if LifeBridge Capital’s investments are a fit for you.