This week I want to introduce an extremely intelligent and successful fellow self-storage mastermind and friend, Fernando Angelucci. He’s here to talk to us about the benefits of self-storage investing. Fernando is a 28-year-old Senior Managing Partner of Titan Wealth Group based out of Chicago, Illinois. At just 28, Fernando already has an impressive track record, but it all began when he was 16 years old and read “Rich Dad, Poor Dad” for the first time. Inspired by the book, Fernando started his first business at the age of 19 while attending University of Illinois at Champaign-Urbana. After receiving his degree in Ag-Bio Engineering in 2013, Fernando went on to work full-time at a Fortune 50 company while investing in single family homes on the side.
Fast-forward a few years and by age 23, he was able to replace his income and exited the 9 to 5 life to begin investing in single family and multi-family properties full time. A year later, he began investing in value-add self-storage facilities nationwide, and by 26 he started raising funds from his investors for self-storage syndications.
You can see now why we wanted Fernando as a guest blogger. He not only has an incredible story at a very young age, but has continued to make a name for himself in the self-storage industry. You’ve heard me talk about self-storage a lot and why I find it such a lucrative industry. Now, I’m excited to let you hear from another perspective.
Without further ado, here’s Fernando…
Basing Decisions on the Market
It is hard to get real estate investors to agree on most things. The statements “cash is king” and “buy when others are scared” come to mind as phrases that spark dispute.
However, one thing that all real estate investors can agree upon is that the market goes through cycles. Length, timing, and cause are all up for debate, but the fact of the matter remains that the market goes up and the market goes down.
Acknowledging the existence of market cycles while pursuing investing in income-producing or equity-growing ventures is the high wire act of real estate investors.
Therefore we all look to lower the wire closer to the ground, reducing exposure to the negative effects of market cycles, in a myriad of ways.
We do this by:
- diversifying across different ventures
- specializing in recession resilient assets
- timing the market to only deploy capital in certain conditions
And this is what led our firm to self-storage.
With eyes toward the next turn in the market, we sold the vast majority of our residential and multifamily commercial holdings in 2018. We fully committed to the “gospel” of self-storage. It was not a decision we took lightly.
Here’s how we reached the decision to dedicate our investing to self-storage:
The Top 10 Benefits of Investing in Self-Storage
1. Highest Return
As it turns out, it’s the highest versus any other real estate asset class. Using REIT data, from 1994 to 2017, self-storage returned an annual average of 17.43%. Based on that annual average, $100,000 invested in 1994 would be $4,026,413 today.
2. Recession Resilience
From 2007 to 2009, self-storage REITS dropped an average of -3.8% vs the S&P’s -22.0%. This was the smallest drop of any other REIT asset class.
3. High Bankability
From 2011 to 2018, self-storage had the lowest default rate versus any other REIT asset class. When those rare few properties did default, the banks only lost an average of 1.52% per default.
4. Low Management Costs
Many smaller facilities are unmanned or automated. Renters can rent or pay for units from a phone without the need to do a “showing”. The human to human nature of real estate now poses difficulties in the rising cost of wages and potential health risks (read COVID-19). Hence, the benefits of “easy management” goes beyond simplicity in processes and balance sheets. Asset classes such as multifamily or hotels now face a liability in the form of their management requirements. Even REIT grade self-storage facilities can be managed remotely in conjunction with one or two onsite personnel.
5. High Fragmentation
Of the roughly 70,000 storage facilities in the United States, only 18% are owned by the 6 large REITS, and another 8% by the next 100 largest operators. This means “mom & pop” operators own 74% of self-storage facilities in the United States.
The supply of self-storage facilities is far less than other real estate asset classes, which poses a difficulty of sourcing viable investment opportunities. Yet the nature of the supply is advantageous for sophisticated operators to identify value add opportunities amongst existing facilities. There is a large amount of new inventory coming on to the market due to new construction, mainly in primary markets. We can avoid this obstacle with proper due diligence and targeted investing. But that is the topic for another article…
6. Easy “Evictions”
Self-storage is governed by lien (property) law, rather than eviction (tenant) law. This means that less days are lost to renter default than any other asset class that physically has people in it. Lien law means that the second a renter is late on their payment, a manager can deactivate their gate passcode or can over-lock their unit.
In the case of a delinquent unit that does not come current, we can abide by local lien law timelines. In doing so we can collect the outstanding balance and fees through auction, and have a new renter in place in less than 45 days in most states. A far cry from residential classes, turnover costs are as low as sweeping a unit or disposing of any abandoned items post auction.
7. Low Break-even Occupancy
Unleveraged self-storage assets have break-even occupancies in the low to mid 30% occupancy. Leveraged self-storage assets have break-evens in the low to mid 60% occupancy. There is much lower overhead because there is no “tenants, toilets, and trash”. This also means minimal utilities in addition to minimal maintenance requests. As a result, typically the largest expense to a self-storage facility is property taxes followed by management costs.
8. High Sticky Factor
Renters generally use self-storage units for years at a time. A $20 increase on a $150 unit is not worth the $500+ moving bill to go to another facility but is a 13% increase to the bottom-line. The majority of renter agreements for self-storage facilities are month-to-month leases. Hence, this allows for price increases and other profit generating activities to occur throughout the life of a rental.
9. Reactive Pricing Model
When a certain type of unit (ex: 10’ x 10’) is in low supply in the market or at a self-storage facility, owners can implement reactive pricing and raise the rental rate in response to the demand for that unit. This strategy can therefore result in a specific unit type generating significantly higher returns than the standard rate.
10. High Ancillary Profit Centers
In addition to unit rentals, self-storage facilities can generate income from:
- packing and moving supplies
- truck rentals
- business center faculties
- renter’s insurance commissions
- vehicle parking
- cell towner leases
- billboard advertisements
- and many more ancillary profit centers.
Crafting a list of 10 benefits of investing in a specific real estate asset class should not be a difficult exercise, although I would suggest you try it for whatever asset classes you have been investing in. If you can’t come up with 10 good reasons specific to that asset class, it may be time to reconsider investing in that avenue. Every investment has its downsides. We have found self-storage to have less than others.
Challenges to Consider for Self-Storage
1. Entering a Saturated Market
The first challenge is the difficulty in sourcing investment opportunities as a result of fragmentation in legacy inventory or saturation of new developments. While these challenges actually exist with many real estate asset classes, they are certainly applicable to self-storage.
Other investors have found ways to overcome these challenges. But our firm has focused on secondary and tertiary markets with an emphasis on existing facilities with favorable market conditions. And we’ve found great success in doing this.
As for development opportunities, strong barriers of entry are in favor of the determined investor. The best development opportunities in self-storage are available to investors familiar with zoning variances, adaptive reuse, government coordination, and extensive market research.
2. Entry Level costs
The second challenge an investor would face is high cost of entry level assets. There are self-storage facilities out there in tertiary markets with only a couple dozen units that can be bought for the price of a small multifamily building.
But most of the time, the typical cost of a self-storage facility is going to be greater than the cost of a single-family home investment and many multifamily investments. For first time investors or one-man shops, this can be a deterrent from entering into the self-storage space. Just remember, syndications can be an excellent gateway into dipping a toe into the water.
Outside of those two downsides, it is difficult to find more for self-storage investing. A common misconception is that self-storage does not have the security of other real estate asset classes that fall into the realm of “necessities”: single family, multifamily, medical, assisted living. Outside of the historical performance of self-storage REITS to dispute this notion, we have anecdotally experienced an unexplained uptick in self-storage demand amongst our facilities during downturns such as the COVID-19 crisis.
Another common phrase among investors is “less risk means less reward”. We detractors contest that statement, and counter with the benefits of self-storage as hard-to-dispute proof that you can have less risk and more reward.
To hear more or connect with Fernando, contact (630) 408-8090 — Info@TitanWealthGroup.com
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