As an overlooked industry for many decades, self storage is now a highly sought after investment property due to its low operational overhead and high customer demand. Storage facilities range from outdoor warehouses to multi-story climate controlled indoor facilities. Below we take a deep dive into everything you need to know about self storage properties.
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Self Storage Definition
Self storage is the business of renting storage space, also known as “storage units,” to tenants, usually on a short-term basis. Self-storage tenants can include businesses and individuals
Self Storage Explained
Self-storage is an industry that focuses on providing storage space for rent, usually on a short-term basis. Self-storage facilities offer a variety of unit sizes for rent, including specialty spots that can accommodate vehicles like cars, RVs, and boats. Rental periods for self-storage facilities are usually month-to-month, giving owners a great deal of flexibility compared to other commercial investment types.
The self-storage industry has grown rapidly in recent years. There are now over 50,000 self-storage facilities in the United States, with a total of over 2.3 billion square feet of storage space. Additionally, the self storage industry has an annual revenue of close to $40 billion per year. Growth in the space is driven by several factors, including the increasing number of people who are moving to smaller homes and the growth of the ” mini-storage ” industry.
Self-storage can be an excellent solution for people who need a place to store their belongings but don’t have the space in their home or apartment. It can also be a convenient option for businesses that need to store inventory or equipment. Investors seek out self storage assets to gain access to regular cash flow, appreciation, and tax benefits not present in other investment classes.
History of Self Storage
The basic concept of public self storage for rent is speculated to date back to over 6,000 years ago in China, where people would store their possessions in clay pots that were then stored in guarded underground pits for a fee. Fast forward to present day, and the modern version of self storage in the united states started coming to be in the early 1900’s. Two brothers (Martin Bekins and John Bekins) from Omaha Nebraska, started storing goods or help people move them across the state. As business grew, they moved to Los Angeles to start facilitating cross country moves. In 1906, the brothers built the Bekins Warehouse and later expanded these across southern California. In the 1950’s larger self-storage facilities as we see them today started to pop up across the US and have continued to grow and evolve.
Types of Self Storage Properties
There are seven main types of self storage facilities: 24 hour storage facilities, business storage facilities, indoor climate-controlled storage facilities, drive up facilities, military focused facilities, portable container facilities, and vehicle storage facilities. We take a look at each type below.
24-Hour Self Storage
24-hour self storage facilities give self storage tenants the ability to access their unit 24/7, usually 365 days a year. This storage type is valuable for people who work odd hours or those who may need to access whatever is being stored at a moment’s notice.
Business Self Storage
Many tenants in the self-storage niche are actually businesses. Prospective business storage tenants range from small to large businesses, storing a wide variety of items, from retail goods to business equipment and beyond. Many business tenants will also seek out 24-hour storage due to the ability to access goods and materials 24/7, 365, as business demand requires.
Indoor Climate-Controlled Self Storage
Climate-controlled storage units are designed to maintain a consistent temperature and humidity level inside the unit, which helps to protect your belongings from the elements. Most units are kept between 55 and 85 degrees Fahrenheit and have humidity levels between 30 and 50 percent. Some of the items that benefit from climate-controlled storage include:
- Furniture
- Electronics
- Musical instruments
- Artwork
- Photographs
- Antiques
- Books
Drive-Up Self Storage
Drive-up self-storage units are just like regular storage units, with the key difference that they’re located outside so that users can drive their cars right up to the door. This makes loading and unloading belongings a breeze, and users don’t have to worry about lugging their things up and down stairs or dealing with elevator access.
Military-Focused Self Storage
One of the hallmarks of military life is the fact that families must be able to pack up and ship out at a moment’s notice. Military families may utilize military-focused self storage to help make this process easier and more economical. Military families use this type of storage in a variety of moving and relocation-related situations, including:
- Permanent Change of Station Storage
- Temporary Duty Storage
- Temporary Additional Duty Storage
Portable Container Self Storage
Portable container self storage has dramatically increased in popularity over the last decade or so. With a traditional storage model, your items are stored in a centrally located facility that you visit when you need to access your unit. Portable container self storage such as PODS, flips that model on its head. Instead, the storage company delivers the unit to your home or business, where you can store items as you wish. After the container is full, the company will bring it to whatever location you choose. This self storage type is great for moves or business relocations.
Vehicle Self Storage
Vehicle self storage facilities are among the most popular storage options used by consumers. As homes trend smaller and rent and home values go up, many vehicle owners simply do not have the space to keep their secondary cars, boats, RVs, ATVs, and other vehicles on hand. Business owners also utilize vehicle storage, from auto dealerships with an excess of cars to a boat repair shop that needs a place to store their latest project or even a storage space for a propeller plane or jet. Vehicle storage facilities range from a luxury indoor collector car facility such as Westside Collector Car Storage in Los Angeles, to simple unpaved outdoor lots, or a combination of both.
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Pros and Cons of Investing in Self Storage Properties
Self storage investing has become increasingly popular in recent years as more and more people are looking for ways to invest their money into real estate, beat inflation, and avoid volatility among many sectors of the global economy. However, like any investment asset, self-storage has its own unique advantages and disadvantages. The following is a comprehensive list of the pros and cons you need to know before investing in storage properties.
Self Storage Investing Pros
1. Self storage is a recession-resistant industry. People will always need storage space, especially in tough economic times. During a recession, people often downsize their living space. At the same time, it might not be so easy to sell excess stuff. This gives self storage a countercyclical resistance to recessionary pressures – a very desirable quality for a cash-flowing commercial real estate asset.
2. Self storage properties can be easily converted into other uses, such as office space or retail space, if the need arises. As we saw with the COVID-19 pandemic, market forces can change, sometimes drastically- leaving investors and property owners in the lurch. Should the worst occur, self storage property owners can more readily convert their properties to other uses, like office space or industrial space. As many self storage properties already sit in areas zoned for other uses, the permits and paperwork are considerably less onerous when compared to, say, converting an industrial space to residential.
3. Self storage properties are typically low-maintenance, meaning you won’t have to spend a lot of money on upkeep.When you’re operating most types of commercial and residential real estate, you’re going to have substantial property upkeep and management costs. This can come in the sweat equity you put into the business, as well as financial costs like maintenance, landscaping, management fees, and so on. Self storage properties are significantly easier to manage, with few of the onerous rules and regulations you’ll find in other property types. Leases also tend to be far less complex, avoiding a major source of headaches for investors- just look at the recent foreclosure crisis to see the value in a simpler tenant process.
Self Storage Investing Cons
1. Self storage properties have shorter leases than other types of cash-flowing real estate. In most cases, self storage leases work on a month-to-month basis, compared to yearly or even multi-year leases for other property types. This means that you’re looking at a lot of turnover and time and money spent acquiring new tenants.
2. Oversupply is a real possibility for the self storage industry. Self storage facilities are comparatively cheap to construct and maintain when compared to other property types. This means that properties go up quickly during boom times, which may also cause an oversupply should demand pull back. A fastidious market analysis of nearby competition can help reduce this risk, but you can’t control what properties go up after yours.
3. Self storage property demand is hyper-dependent on local market conditions.Self storage facilities tend to follow other types of real estate development. For instance, let’s say a 500-unit apartment block goes up in a small city. Those tenants are likely to need somewhere to store their stuff. Self storage investors count on these projects to create more demand for units, and when other development slows or stalls, it can have a knockdown effect on self storage property vacancies and cap rates.
Self Storage Property Management
If you are wondering how to manage a self storage property, look no further. Various aspects of the property such as its size, type, and location will determine the amount of complexity of management required, however with the right approach and an understanding of the fundamentals of the business, you can successfully manage your self-storage facility – or hire the best possible person or company for the job.
How to Invest in Self Storage Properties
Self storage is a great investment for those looking to diversify their portfolio and earn a passive income. But before you dive in, there are a few things you need to know. Here are our top tips for investing in self storage properties:
1. Do your research. The self storage industry is growing rapidly, so it’s important to do your research and choose a reputable operator. Look for an operator with a good track record and a strong online presence.
2. Location, location, location. When it comes to self storage properties, location is key. Look for a property in a high-traffic area with good access and plenty of parking.
3. Consider the competition. Self storage is a competitive industry, so it’s important to choose an operator with a competitive edge. Look for an operator with a unique offering or a niche market.
4. Know your numbers. Before you invest, make sure you understand the financials. Look at the operator’s financial statements and make sure you’re comfortable with the numbers. Self storage facilities are businesses – so a detailed look at profit and loss statements, expenditures, tax payments, and other granular financial data is imperative for a successful acquisition.
5. Have an exit strategy. When you’re investing in any property, it’s crucial to have an exit strategy. For self storage, you can either sell the property or lease it to an operator. That doesn’t mean you have to sell the asset- just that you’ve got a way out should market conditions or your financial situation change.
Different Ways to Invest in Self Storage Properties
There are several different ways to gain exposure to self storage assets, including direct ownership, real estate syndication, or self storage oriented REITs or real estate companies.
Direct Ownership of Self Storage Properties
You can opt into direct ownership of self storage properties. This means you’re responsible for finding the right property to acquire or developing a new self storage property from the ground up. You’ll also be responsible for ongoing management – although it is very common to hire a property manager to oversee your portfolio of properties.
Self Storage Syndication & Self Storage Real Estate Crowdfunding
Real estate crowdfunding and syndicated investments offer investors the ability to pool their capital with other investors in order to acquire a property or properties that might otherwise be beyond their price range or their level of expertise in a given market – like the self storage sector.
Most crowdfunded deals will involve a sponsor who manages the daily operations of the project, alongside other passive investors who provide funding but little in the way of guidance. When using crowdfunded real estate, you can invest in ongoing cash-flowing projects or short-term projects that focus on value add and property appreciation.
Self Storage REITs
You can also purchase fractional ownership in self storage properties or companies that operate within the space via REITs, or real estate investment trusts. Self storage REITs own, manage, and operate warehouse storage facilities. They generate returns via regular tenant payments, other revenue streams like selling boxes, tape, etc., as well as property appreciation.
Trading in REITs tends to be much more liquid than direct ownership or real estate crowdfunding options – in many cases, you can sell shares on the open market during trading hours. You can buy REITs via your broker or brokerage apps like Robinhood, Charles Schwab, Merril Lynch, and so on.