Nearly 10% of American households use a storage facility every year, according to Radius+. In fact, they wrote, “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.” A storage facility, explained Uri Perl, Financing Expert at Lev, “is a steel box that you can rent out to place your stuff that you might not have room for at home, or you might be moving. There might have been a death in the family, and you have all this stuff. What do you do with it? You go to your nearest storage facility.”
In an age where Americans are both obsessed with decluttering and reluctant to part with their belongings entirely, self-storage as an asset is gaining ground. For self-storage investors, it’s a profitable, recession-proof option, with lower overhead and less hands-on management than many other commercial real estate investment opportunities. Here’s what you need to know before you get started with your self-storage business.
For investors used to dealing with the challenges of multifamily or other forms of commercial real estate, self-storage is more straightforward. As Perl said, “I’ve spoken to a lot of storage owners…and they say it’s so great not having to work with toilets and pipes and sewage and lights and all that stuff. It’s really just four walls, a door.” There’s less liability to worry about.
Below are some other advantages.
As Perl explained, self-storage facilities “[have] performed very well in all economic cycles, such as in 2008 in the financial crisis. It performed very well in COVID. It’s almost counter-cyclical in that it does even better when there’s economic downturns.” U.S. News and World Report agreed: “During a boom cycle, you might see customers using self-storage facilities in more novel ways, such as short-term product warehousing for small businesses or incubator space, whereas in a downturn people will be downsizing into smaller homes and moving sentimental items and excess furniture into self-storage facilities.” Once a facility is stabilized, they tend to hold value more easily than other asset classes.
Storage, Perl said, is “inherently diversified. Typical storage facilities will have anywhere from 50 to as many as 500 units, 700 units for the big ones. You don’t have to worry about one tenant leaving, or a couple tenants leaving.” The cash flow is coming from many different sources, so if one person leaves, you’ve got plenty of other self storage units producing cash, and it’s going to be easier to find new tenants.
Self-storage facilities don’t tend to have long leases, with most tenants on a month-to-month schedule. That cadence can make it easier to raise rents more frequently without tenant pushback, and to keep a consistent cash flow even with frequent turnover. Still, even with the short leases and sometimes quick turnover, there is still more wiggle room when it comes to occupancy rates compared to, say, a multifamily building. As Radius+ wrote, “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.”
“The eviction laws for storage are much more owner and landlord-friendly than they are compared to multifamily,” Perl noted. For instance, if a self-storage tenant doesn’t pay rent, you can both evict the tenant, and obtain the contents of the unit, which you may be able to sell. By contrast, in multifamily buildings, it can take months to evict someone, and they can still live in the unit while the eviction process makes its way through the courts.
Storage is popular for a reason, but that doesn’t mean it’s foolproof. Depending on what kind of facility or facilities you own or invest in, here are some drawbacks to look out for.
Self-storage facilities can be the victim of their own success. New investors, seizing on the advantages discussed above, can oversaturate a market, driving down occupancy rates and rents. As the New York Times wrote, that was a problem in 2016. As Stephen Clark II of the Clark Investment Group in Wichita, Kansas explained to the Times, “I think we have peaked in terms of the bumps we got from Covid; a lot of that will stick because people like having the space. But if this prompts overbuilding, it could be ruinous.”
Unlike when investing with a REIT, which we’ll cover below, owning or especially building your own self-storage facility requires more hands-on work. You don’t have the benefit of an experienced company like Cubesmart or Public Storage there to sort out collecting rents, handling move in and move out, and other administrative tasks. If you’re building a new facility from scratch, you’ll also have to worry about lease-up and getting tenants so you can achieve the right level of occupancy in order to make a profit.
If you’re building the unit yourself, you might run into supply chain issues that have plagued other construction projects during the pandemic. Or you might have to deal with zoning codes that don’t allow storage facilities in certain areas. The New York Times reported that cities are slowing the approval process for facilities, a sign that some municipalities fear oversaturation. The Times also noted that it can take up to five years from the planning stages until an individual facility is fully leased-up.
Here are the three most common ways to invest in self-storage.
A Real Estate Investment Trust (REIT) is a company that invests at least three quarters of their assets from real estate, derives at least 90% of its income from real estate, and distributes dividends from that income to shareholders. A self-storage REIT does just that specifically with self-storage, and leases space in those facilities to customers.
Going through a self-storage REIT and investing with an established brand like Cube Smart, Public Storage, An Extra Space, or Life Storage is the most passive and straightforward way to get involved in self-storage real estate investing. This approach also offers a good return on assets. The REIT takes care of the overhead and administration. As Ryan Smith, principal at Elevation Capital Group in Orlando, Florida told U.S. News and World Report, “Many of the well-performing storage units are professionally run. They have very sophisticated technology systems that allow them to do dynamic pricing of units to offer incentives and to raise rents when it’s appropriate.”
These REITs have excellent brands, Perl said, and “they are dividend payers, so you can collect some income from those and [it’s] a good way to kind of learn the space, study the companies, and see which one you like best.”
If you want to take on a little more responsibility, Perl advised, you can consider becoming the general partner or investing with one who pulls money together to buy existing storage facilities. In this scenario, Perl explained, “You can place your money with them and read their offering memorandums, see what the returns are going to be like.” If you’re looking to buy a facility on your own, use an online platform like Loopnet.com, ReMax.com, or find a commercial real estate broker with knowledge of the space. A debt fund broker will be able to connect you to lenders that fit your project. Alternatively, you can do a cash buy, but you’ll still want the help and knowledge of an investment sales broker.
You should be looking for spaces with a high occupancy rate, a square foot per capita that’s in line with the average for your area, and a facility that’s in decent condition so you don’t have to invest additional capital in renovations. This option is going to be much more active and hands-on than going through a REIT. You’ll have to do the research and due diligence to determine metrics like the cap rate, the net operating income, and expenses like the current real estate taxes and other expenses, like property insurance, management expenses, advertising and more.
This is the most expensive and labor-intensive option and not a good fit for an investor seeking passive income. As Perl said, this option “requires more experience. A lot more time and effort. A lot more risk. It’s not going to be diversified like a pool of facilities or like a real estate investment trust.” You’ll have to start with finding the land for the facility, preferably in an area with high demand and low vacancy rates for existing storage units. Then you have to confirm that the land is suitable for building at least a one story — if not a multi-story — facility. Then there’s permitting, zoning and going through all of the steps of the real estate development timeline.
The advantage here is that new storage facilities are considered class A investments, and you can potentially charge higher rents or in the future sell the facility for a higher price. However, that scenario assumes you’re able to stabilize the asset, go through all the construction costs and headaches, and get the occupancy rate up high enough for future buyers to be interested. You’ll also need to decide whether you want to do a cash buy or finance using a debt fund, hard money lender or alternative lending options.
Perl recommended the following factors to look for when seeking out a self-storage investment:
If the occupancy rates in the storage facilities in your area are in the 90-100% range, you can safely assume you’re looking at a lot of demand. Whichever route you choose, if the vacancy rates are low, you can be confident you’ll find customers. If you’re investing in a facility, you’ll want a high occupancy rate.
How many square feet of storage space is there already per person in your market? According to Perl, the national average is seven, and you’ll want to be at or below that number in your area before deciding to invest. A higher number per person, within a facility you’re considering investing in or in your market as a whole might mean in terms of supply and demand, there’s not enough demand.
Look at this metric to determine the level of competition in your area. If the prices per square foot in all of the facilities that you’re considering investing in are high, that’s another sign of healthy demand.
Some self-storage units are climate controlled to cater to specific item, say, a piano. Offering this option may help diversify your customer base, but there will be additional overhead and maintenance involved for the HVAC and related systems that keep climate control working.
If you’re building a facility from scratch, or even buying an existing one, it will be a safer investment if the homes and apartments in your area are small. That means the people living in them will have a bigger need for additional space to store their belongings, which is where your self-storage facility can help.
According to Perl, local banks are the best bet for someone just breaking into the industry. They’ll have knowledge of the local market. While their financing might not be as high as the 70-75% of a debt fund, the downpayment will likely be lower, but still around 20% for a conventional loan. Another option is a Small Business Administration or SBA Loan. In this case, the loan is made by a bank. But, as Live Oak Bank explained, the debt is partially guaranteed by the SBA.
The terms are also better for borrowers, with no surprise balloons after a certain number of years, and amortization and terms of up to 25 years. SBA loans are a good option for borrowers struggling to get conventional financing from a bank. Debt funds, which might offer higher financing up front, are another option, but they will usually have higher interest rates and other less borrower-friendly terms. Every project and every investor has different needs. An experienced commercial mortgage broker can steer you in the right direction. With a vast network of debt fund lenders, private hard money lenders, banks and credit unions at their fingertips, they can help you find a lender with experience in self-storage.
Self-storage is a great way to explore the world of CRE investments without as much cash and pressure as other asset classes, but it’s not without a few drawbacks. Understand the level of risk you’re willing to take, and perhaps start out with investing in a public REIT before deciding to buy or build a facility of your own. If you need additional resources, check out Self-Storage Investing, which offers tutorials and masterclasses to get you started.
How much does it cost to start a storage facility business?
In general, Perl said, you’re going to be putting 20-30% of the downpayment on any financing you obtain for your facility, save for SBA loans, which might be a little less. Just how much the 30% comes out to will depend on a variety of factors. You can get a multi-unit facility for as little as $100,000 or $200,000, and your down payment can be as little as $30,0000. But, Perl cautioned, “it really depends on the market and the business plan and the operations because you can easily be outdone by a bigger competitor who comes into the market.”
Is self-storage a passive income?
Investing through a REIT, self-storage can be a passive income. As Perl warned, however, when you buy an existing facility or decide to build your own, you’re going to be much more hands-on when finding tenants, dealing with leases and rent payments, overseeing maintenance and other administrative tasks a REIT would take care of for you.
You need to achieve scale with multiple facilities, or at least one large facility, before profits can begin to stabilize. It’s not that it won’t happen (there’s a reason why self-storage is popular), but you might have to put in a lot of time and effort before the income you receive is truly passive.
Is self-storage a good investment?
Usually yes. But, as Perl noted, “Storage is a great asset…but is it a good investment? [That’s] going to depend on the price you’re paying for it…And for each investor that everyone has a different target return and threshold.” If you’re looking for passive income with stable but not necessarily astronomical returns, investing in a REIT might be your best bet for getting to know the space, without taking on the additional risks of owning or even building your own facility.
