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When it comes to finding real estate investment opportunities, it’s wise to leave no stone unturned. Investors should explore all options and strive to build a diverse real estate portfolio with multiple types of investments.
One unique way to diversify a real estate portfolio is to invest in the growing self-storage industry.
Keep reading to learn more about how investing in self-storage works and its benefits for investors, along with some key points to keep in mind.
What Is Self-Storage Investing?
Self-storage investing is a type of commercial real estate investing that involves putting money into self-storage facilities and leasing units to renters.
Self-storage facilities are small, private units that people can rent out for short or long periods at a time. For example, sometimes families rent self-storage units when they accumulate too much stuff and don’t have any place to put it all. Other times, people may temporarily use self-storage units when moving from one place to another.
Self-storage is considered a strong asset class, and the market fared well during the coronavirus pandemic, even as other markets faltered.
What do self-storage units contain?
Self-storage units are typically only for household items like boxes, furniture, lawn care equipment, and old clothes, to name just a few examples. They may also contain cars, motorcycles, or other motorized vehicles if permitted.
Self-storage units aren’t meant to house people or pets, although this sometimes does occur with rogue renters. Living in a storage unit or housing people in them is against the law and grounds for eviction. Landlords are encouraged to use security cameras and monitor their facilities to prevent unauthorized dwelling or squatting activities.
Types of self-storage facilities
As with all commercial real estate, there are three classes of self-storage facilities: Class A, Class B, and Class C. Let’s take a closer look at each one.
Class A self-storage facilities were typically built after 2000 and can be found in nice neighborhoods. Class A facilities usually are the most valuable, offering amenities such as climate control and elevators. Therefore, owners often incur higher operating costs and can charge higher rents.
Class B self-storage facilities are often mom-and-pop-owned businesses that were built in the ’80s or ’90s. You won’t find any bells and whistles here, but these types of units are most often well-run and profitable.
Class C self-storage facilities are often found in undesirable neighborhoods and may have serious structural or maintenance issues. As a result, they’re riskier investments, but you may be able to find a bargain and enhance the property’s value — if you time the market right and really know what you’re doing.
Benefits of Self-Storage Investing
There are several enticing benefits to investing in self-storage facilities. Here are a few that stand out.
Demand for storage facilities is growing, especially in heavily populated areas. Strong demand for storage can lead to high occupancy rates, a steady residual cash flow, and solid long-term profits — all of which are important factors when investing in real estate.
Another benefit to investing in self-storage is that these facilities typically come with low overhead.
The amount of overhead usually depends on the quality of the storage unit. For example, some units are bare-bones and don’t come with electricity. These minimalist structures typically have concrete or brick walls, a roof, and a sliding metal door.
A growing number of self-storage landlords choose to upgrade their facilities by offering electricity and heating, air conditioning, and ventilation (HVAC) for climate control. This can be attractive to clientele looking to store climate-sensitive items like expensive furniture, artwork, and clothing, which can potentially degrade if exposed to high and low temperatures and humidity.
These types of amenities cost more, but landlords can charge more rent as a result.
Generally speaking, landlords can typically get away with minimal upkeep as long as buildings are operationally sound and renters can safely access units. For example, common residential and commercial retail maintenance issues like plumbing or appliances failing are not likely to occur.
The less upkeep, the better. That also makes self-storage investing a potential stream of passive income.
How to Invest in Self-Storage Facilities
As you can see, there are some great benefits to investing in real estate self-storage. Here’s how you can get started.
1. Real estate investment trusts (REITs)
The easiest way to invest in self-storage is to invest in REITs, which are bought and sold like stocks. REITs are companies that invest in publicly traded properties and offer shares to consumers.
The great part about investing in a self-storage REIT is that it offers hands-free investing. Investors don’t have to worry about being landlords or running a busy commercial enterprise. Instead, they can put money into REITs that invest in self-storage facilities and make money from capital gains and dividend distributions.
Of course, it’s important to read each REIT’s prospectus to understand the exact properties in each fund and outline any potential fees or restrictions. It’s also important to analyze the REIT’s growth over time and get a sense of where it could be headed in the long term. REITs are typically medium- to long-term investments.
One of the most popular self-storage chains, Public Storage, is run by a REIT.
2. Buy a self-storage facility
One of the most common ways to invest in self-storage is to buy an existing facility and start your own small business.
The upside to buying an existing facility is that you can avoid purchasing land, getting clearance from the town, and going through the lengthy and costly construction and marketing process. At the same time, you’ll inherit a customer base, so you won’t have to start from scratch. Most facilities are priced based on total square feet and facility quality.
The only potential downside to buying self-storage properties is that you can potentially buy a failing business or one with structural damage or lousy customer reviews — leading to a negative rate of return. So it’s critical to do your due diligence and determine the net operating income (NOI) and long-term growth potential.
If you’re considering buying an existing self-storage facility, start by talking to lenders and ensure that your finances are in order. Then find a savvy commercial real estate agent and start hunting for opportunities.
3. Build a self-storage facility
The most difficult approach is to buy a plot of land and build your own storage facility. Or you can convert some other business into a self-storage center.
This strategy is much more resource-intensive, as it involves finding the right parcel of land that you can transform into a commercial property. You’ll have to check ahead of time with your town or local government to ensure that you can develop the land and that the local community is on board with the decision.
Then, you’ll need to factor in demand and construction requirements and purchase a facility that resonates with local buyers.
Make sure to do your research before embarking on this type of undertaking. You may even consider going in on a project with experts who know their way around construction and business development. If you don’t have any experience in these fields, you may fall in over your head.
Renting Storage Space at Home
You don’t have to get involved with self-storage facilities or even REITs to make money in storage. All you need is an attic, basement, or garage, and you can potentially offer storage to friends and community members.
This may require some minor construction in your basement, as you’ll want to provide a locked area to protect renters’ belongings. It will also require being available from time to time so that people can add or remove items from storage.
If you go this route, make sure to document the process and write a contract. You should probably also look into insurance to protect yourself from damage, theft, or unhappy customers.
The easiest way to get started renting out storage space is through Neighbor. This app is the “Airbnb of storage” and lets you list your spare space on a secured platform.
Tips for Self-Storage Investors
Here are some points to consider before investing in commercial self-storage.
Don’t worry about the location
Location is critical in most types of real estate. But when it comes to self-storage, it doesn’t matter quite as much.
Most people don’t visit their self-storage facility every day and don’t need immediate access to it. So don’t be dismayed if a facility you can afford is on the outskirts of town or in an industrial area. Customers will find you wherever you are if you offer solid service and reasonable pricing.
Keep costs low
You may be tempted to add amenities to increase the value of your facility. This could be a trap that increases your debt on the property. Most customers just need bare-bones storage.
If you’re going to put money into anything, spend more on security by investing in cameras and potentially even a security service to periodically check for suspicious activity. Unprotected self-storage units make easy targets for criminals because they often contain valuable items.
Assess your risk tolerance
Make sure you’re in a position to buy real estate before jumping into this market. Run through your portfolio and financial situation ahead of time. It’s also a good idea to talk with a financial advisor before making such a serious purchase.
Frequently Asked Questions
Can I make money with self-storage?
Most of the time, yes. But it all depends on the deal. If you buy an existing business with a steady customer base, you could quickly turn a profit. At the same time, it could turn into a money pit if serious repairs are needed or if you fail to maintain a high occupancy rate.
An easier route is investing in REITs, which requires no prior real estate experience or serious upfront capital.
Are self-storage investments secure?
Usually, yes. However, no investment is ever 100% secure. When you invest in something, you have to account for the fact that the investment could go wrong, and you could lose money. There’s no guarantee that it will pan out in your favor. That’s just the nature of investing.
That said, self-storage is more secure than most other alternative investment classes.
Is self-storage commercial real estate?
Any type of real estate that you buy with the intention of driving a profit is commercial real estate. As such, self-storage is an example of commercial real estate.
The Bottom Line
Self-storage real estate is an exciting asset class to explore. It’s recession-resistant, offers passive income opportunities, and comes with low overhead.
Finding a suitable facility or even building your own can potentially lead to a significant source of revenue. It also has flipping potential, meaning you could buy a facility and then sell it for a profit.
Of course, real estate investors still need to be careful and do research before jumping in. The key to success in the self-storage industry — and real estate in general — is to do your due diligence.
Here’s to finding the next best real estate investment on your journey to financial independence.