Why I like Self Storage Units
Why I like Self Storage Units as a Passive Commercial Real Estate Investment
In our daily travels, we most likely will see a Self Storage Unit business either nestled within a strip mall, behind an office complex, or all by itself on a rural road. And the more you are aware of them, it seems they are everywhere. There are good reasons for that.
There are many large companies that target specific communities to establish a Self Storage Unit complex as an asset in the chain (or portfolio) of Self Storage Units under their management. There are also several individual business owners that establish (build or purchase) an independent Self Storage Unit within a community. This has been an upward trend at least for the last 10 years.
Why do we see so many Self Storage Units being established?
The simple answer is “People don’t like to throw things away”. Our “treasured” belongings like grandma’s 1980s sofa, that princess dresser, or that collection of flatware, china, and stemware are very sentimental and considered keepsakes. And while we will admittedly agree that we don’t know exactly when we will ever use those heirlooms again, we just cannot get comfortable with departing from them, thus Self Storage Units are a very economical way for us to keep those treasured possessions.
Another reason you see so many Self Storage Units is that small businesses have found a very economical way to have a safe, climate-controlled mini-warehouse for their business.
Lastly, people who own large recreational vehicles such as motor homes, boats, campers, etc., most likely cannot store those assets at their place of residence, therefore renting a Self Storage Unit is required.
We can view the definition of a Self Storage Unit as nothing more than a small/large, indoor/outdoor storage space that can be rented out to an individual person or company. These units are usually divided into small spaces, starting anywhere from 6 Cu. Ft. to large storage units that are built with specific company needs in view, and outdoor spaces for large vehicles. Here are some statistics;
- 1 out of every 10 people in the US use self-storage
- There are 50,000 self-storage facilities in the US
- The self-storage business is a 220 Billion dollar industry
- 80% are owned by mom and pop operators
- The average stay in a self-storage facility is 1-3 years
- Lower turnover costs
As a Passive Commercial Real Estate investor, there are several reasons I like these types of investments;
- Similar to multi-unit apartment complexes, there are several “doors” that generate rental income. And the more doors you have, the more revenue you generate… and if there is a loss of one or two renters within a time period, it does not materially impact the business’s Net Operating Income.
- Most of the renters pay their monthly rent through credit cards thus minimizing the effort required to collect the rents.
- Self Storage Unit management benefits significantly through technology automation. Renters can identify the unit they want, sign the rental agreement, set up automatic payments, and get the key code to the unit all digitally without any human intervention. This optimizes speed to rent as well as minimizes operating expenses.
- If the renter does not pay their storage unit rent, the management can simply lock the tenant out without having to go through the courts for eviction. Also, the management can seize possession of the storage unit’s contents and recoup lost revenue for non-payment through disposing/selling the unit’s content.
- Most Importantly, Self Storage Units are as close to a recession-proof investment as you can get. While no investment is without its risks, the National Association of REITs (NAREIT) reported that during the 2008 financial crisis, self-storage was the only REIT sector to post a positive total return (5%, including dividends).
As a Passive Commercial Real Estate Investor, here are some of the things I look for when deciding on passively investing in a Self Storage Unit.
- Location, location, location. The physical location of the Self Storage Unit complex is paramount to investment performance. We need to know if there are several other Self Storage Units within a 3 Square Mile radius? Are there lots of open land fairly close to the complex? (if so, someone can quickly build a Self Storage Unit Complex and begin to compete for tenants).
- Business Model for the Investment. Is this a “Cash Flow” or a “Value Add” investment play?
- If this is a cash flow play, what’s the strategy to increasing income? Are the rents under market value, and if so what’s the spread between existing rents and the market…. What’s the timeline to increase all rents to market level? If the rents are at market level, where does the increased cash come from? Are there operating expenses that can be optimized?
- If this is a “Value Add” play, what’s the strategy for improving the facility, how will that capital project(s) improve rental income and minimize operating expense? If the complex is not “Stabilized” (>90% rental Occupancy), what’s the strategy to increase occupancy to >90%.
At the Investors Country Club, we are always on the lookout for passive investment opportunities in Self Storage Unit assets and when we uncover good deals, we will share them with the community. If you have not joined the community yet be sure to do that by clicking here.
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