The self storage market offers investors high-profit potential, recession-resistant growth, regular income, and minimal management when compared to residential, retail, and hotel properties- but how exactly do you get started investing in the self storage market? Let's find out.
Basics of the Self Storage Market
Self storage businesses exist to offer their customers a safe place to store household goods, business materials, vehicles, and anything else that the customer needs to stow away. Consumer and business-facing self storage facilities are seeing tremendous growth- almost 10% of American households use a storage facility each year. Currently, the sector is generating over 20 billion dollars in revenue, with roughly 50,000 storage facilities in the US and total rental space of more than 1.7 billion square feet. This growth in storage facilities has not gone unnoticed by the media. Numerous storage-based reality shows like Storage Wars dominate television networks, and the self storage facility has profoundly entered the American cultural lexicon.
All of this growth has attracted investors, big and small, with the majority of facilities still being in the hands of individual owner-investors- all though there is a move towards consolidation in some larger markets like SF, NYC, and other high cost of living regions. The property class is not what you think of when you think of commercial real estate. Most people think of gleaming skyscrapers or McDonald's locations- not storage facilities that sit in industrial areas on the periphery of town.
Rather than the long-term and single and triple net leases that come standard in the commercial RE world, self storage tenants can usually end their tenancy on a short term basis, and tenant turnover is higher than traditional leasing- although turnaround costs are significantly less than most commercial buildings. Although the sector is not exactly glamorous, it has seen substantial growth recently, even thriving during the last recession.
How to Invest in the Self Storage Market
You can invest in the self storage market through REITs (real estate investment trusts), shares in public self storage companies, or as an independent owner-investor. In this guide, we will show you how to acquire and analyze a self storage facility as an owner-investor. Your level of direct management in the property is up to you, some investors like to take an active hand in day to day business, and others prefer to outsource the duty to an outside management firm. The steps for getting started are as follows:
Find a Self Storage Investment Property
You can use online resources like Loopnet.com, ReMax.com, or a licensed commercial real estate broker to find properties that fit your criteria. When you begin your search, you can designate your ideal price range, physical location, age and size of the property, and more. Many investors like to limit themselves to properties near their geographic location. Whether you want to be an active or passive investor in your self storage facility should be the most significant determining factor for your market choice- with active investors tending to stay local, and passive investors having an extensive range to work with.
Types of Self Storage Facilities
Self storage facilities are categorized by their condition, size, and style of construction. Some facilities are purpose-built to act as a storage center, and others have undergone a conversion process that shifted the facility from other uses, like warehouse storage, small-scale manufacturing, or other commercial purposes. self storage properties range from one-story buildings with drive-up auto access, to multiple stories, with climate control which are accessed through secure entrances.
When you think of self storage centers, this type of building is probably what comes to mind. They feature rows of storage buildings, with doors that roll upward into the top of the structure. You can drive right up to the doors to make storage and removal easy. Security measures at these locations vary, but most facilities have a coded gate as well as video cameras, and for larger facilities a security guard or team. Outdoor drive-up properties tend to be the cheapest due to minimal costs, maintenance, and staffing.
Climate Controlled Storage
This property type has grown in popularity over the past few decades. Climate and humidity controlled storage spaces are used to store items that need to be protected from extreme heat, cold, or moisture, like classic cars, family heirlooms, furniture, documents, and any other object that requires a safe, climate controlled space. These facilities can charge a premium due to the fact that they fulfill a very specific niche in the market, and they provide services above and beyond your standard drive-up storage facility.
These facilities cater to people who have an extra boat, car, RV, or other vehicles they need to store. They are often (but not always) outfitted with the same climate and temperature controls that are offered at other storage facilities. Vehicle storage facilities are often located in proximity to harbors, racetracks, airports, and other places where consumers use these vehicles.
A growing trend in the industry is combining self storage with other retail or commercial businesses. For example, a self storage facility may be built into an office park which allows clients to access business materials quickly. Alternatively, a moving supplies retailer that doubles as a storage spot for convenience. There are many different ways to combine a self storage business with another operation to maximize profits and widen your customer base.
Examine Cash Flow
Cash flow is king in the self storage industry. If you are financing your facility, as most owners do, your ability to obtain credit to expand operations or acquire new properties is driven by cash flow. When you find a property you like, take a look at the past three years of cash flow as well as the current year to date. After looking at the current storage unit rent roll, determine whether or not cash flow is increasing or decreasing. If it is going down, find out why before you make an offer- this could be a sign of trouble. Conversely, if cash flow is increasing significantly, it may be a sign that you may need to jump on the opportunity quickly, and that you may be in for a bidding war.
Find Out Economic Occupancy Information
In the self storage sector, occupancy is denoted by two categories: economic and physical occupancy. For example, a given facility may have 90% physical occupancy, but that same property may only have 55% economic occupancy. The discrepancy between the two represents the difference between actual and potential income and profits from each unit. So if a facility has a high physical and low economic occupancy, some tenants are likely paying below-market rates through existing contracts or tenancies. Economic occupancy is critical when obtaining self storage financing, and thus is a major driver of market pricing.
Be aware that rental rate risk is often decreased in self storage facilities, due to the fact that they rely on lower occupancy levels compared to other commercial RE asset classes. For a typical storage facility, the breakeven occupancy rate to service standard debt is roughly 45%. That percentage for retail, office, and commercial spaces can be 65% or more. After a self storage facility is acquired and stabilized, they tend to weather recessions much better by holding value and recovering quickly during economic distress.
This step is critical for any commercial real estate investment. Before taking the plunge with a self storage facility, you should do a deep-dive on the local market. Pay close attention to factors like job and population growth and other factors that will affect the greater property market. An insider tip is to also take a look at the average size of a home.
Typically the smaller the homes in the area, the more demand there is for self storage units. Also, areas with a higher percentage of renters tend to require more units, as renters change their housing situation more often than homeowners. Specific markets may also have high demand for things like vehicle and RV storage, for example, a coastal area may require more boat storage than the average city.
When you invest in a self storage business, in most cases you will be competing with other operators in the region. It is imperative that you understand who you will potentially be competing against. Going up against a behemoth financial services and REIT investor is different from a single owner-investor. Research the current competition, any other new facilities that are coming online, and the general state of play in the local self storage market.
Ideally, you want to find a market with minimal current competition that is set to remain in that state for the foreseeable future. Smaller cities and rural areas often have one or two storage facilities for a substantial geographic region and are overlooked by many of the major players, who tend to focus on high-COL cities.
Financing for self storage units is available through conventional lenders, government agencies like the SBA (Small Business Administration), new construction loans, hard money loans, and others. Let's take a look at some of the more common ways to finance a self storage facility acquisition.
You can work with standard lenders and banks to obtain a conventional loan. Potential benefits offered by conventional loans include low-interest rates, substantial loan amounts, and multi-year terms. These loans are excellent- if you qualify. To obtain a conventional loan, you will need a high credit score and assets you can provide as collateral for the loan.
Small Business Administration loans are offered by the federal government to help develop small businesses, including self storage facilities. You can use a small business loan to purchase, refinance, or expand a self storage facility. For self storage purposes, SBA loan terms are up to 25 years in addition to the construction time. SBA loans have lower equity and down payment requirements than conventional loans.
These loans are financed through a rural development program overseen by the USDA, or United States Department of Agriculture. If you are planning to build or purchase a self storage site in a rural area, you may be eligible to receive a USDA self storage loan. Rates for these loans are set between prime plus .5% and 2.75%, with a 30-year term.
If you want to build your facility from the ground up, you may be eligible for a construction loan. For the most part, self storage construction loans require up to a 25% cash down payment. After this initial payment, you will be responsible for monthly payments at a reasonable interest rate. The term of the loan is dependent on how long the construction process takes, typically between one and three years. Construction loans almost always have a large balloon payment due at the end of the term, which is often a large percentage of the total balance due.
Hard Money Loans
You might turn to hard money loans if you are unable to obtain credit from the SBA, USDA, or a conventional lender. These loans are typically repaid within a 12-month term and hold higher interest rates than conventional and government lenders. Many self storage owners use hard money loans as a stopgap measure, or to fund expansions or repairs.
As in the rest of the commercial real estate sector, the self storage industry has a wide range of borrowed capital options for investors. Remember to evaluate all of your options- pay close attention to loan terms, interest rates, and prepayment penalties. self storage loans can be significantly more complex than a standard residential purchase loan, so it is best to have a professional review of any loan agreement before you sign.
Self storage is an asset class that offers property appreciation, stable cash flow, and is also a uniquely recession resistant asset. On the macro level, the self storage market is growing rapidly and still in the process of consolidation- which means there are still opportunities that haven't been scooped up by large players. All of these factors make a self storage investment a compelling addition to your diversified portfolio.
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