The Pros and Cons of Investing in Self Storage

What makes self-storage so successful within the greater real estate investment arena? It comes down to a few factors, especially flexibility and low overhead. Together with increasingly mobile lifestyles, the market is perfectly calibrated for a growing self-storage sector.

The pros of self-storage investing

During good times, people are buying lots of stuff and need a place to store it. And during downturns, people are downsizing their homes, so again, they need storage space.

1. Garners sticky tenants

People in this asset class are willing to put up with more rent increases than tenants in other asset classes.

2. A huge industry

The way in which things are optimally run within the industry is shifting. The strategy now is to buy mom-and-pop-owned facilities, upgrade them, increase the income, increase the value, then refinance or resell it to an institutional investor 

3. Simple, inexpensive value-adds

For example, adding truck rental can increase income by a few thousand dollars on a self-storage facility. Late fees, admin fees, raising rent, selling moving supplies, and putting in a showroom are other options.

4. Makes money when buying, operating, and selling

In other areas of real estate, it is said that one can only make money when they buy. But the self-storage value formula is to buy from a mom and pop, upgrade to an institutional standard, then refinance or sell to a REIT—and money is being made the whole time.

5. Business value not limited by comps

For residential owners and investors, value is limited by comparable properties in the area. This isn’t the case in commercial real estate. The value is calculated by dividing the net operating income by the rate of return (or cap rate). So, if the numerator is increased and the denominator compressed, it can dramatically increase the value of an investor’s assets.

The cons of self-storage investing

1. Needs to be located in high-traffic area, but away from competitors

This is ultimately what will drive profitability. The best storage units operate at a 90% capacity most months, have high visibility at their location  and offer something of value to the community.

2. Must meet the demands of the surrounding community

It is also important to offer the right mix of units (drive-up vs. interior) and amenities (conditioned, high security, 24/7 access, etc.) to meet the needs of the local community. Market research will clue owners with what they should offer based on the needs of the surrounding community.

3. Finding good help

It can be difficult to find good help in this industry, and most self-storage facilities are run by one trustworthy person. Many owners tend to manage their self-storage businesses personally because bad management can tank a company quickly.

4. Varying customer demographics

Your customer base could have very different needs, and people using storage facilities may be experiencing stressful circumstances (death of a loved one, job relocation, etc.). Dramatic interactions with tenants should be expected and managers need to be able to keep their cool and still provide excellent customer service.

5. Fluctuation of yearly occupancy rate

Most storage unit companies are encouraged to shoot for a 90% occupancy rate as a way to measure their annual income. But that number is not always easy to come by in this industry.

6. Protecting items

It is hard to protect the items in each storage unit 100% of the time. A facility needs several different security features to keep personal or commercial property safe: locks on the doors, security cameras, and other safeguards. Costly upgrades might be needed to sway customers to use the facility and help your business grow.

When it comes to self-storage investing it is about knowing—and moving with—the market. The flexibility to do that is what makes self-storage such a profitable investment in the first place.