As the author of a popular book on multifamily investing (with a not-at-all arrogant title: The Perfect Investment), I’m often asked why I’m now investing in self-storage. I never dreamed of making this switch, but when I learned about the fundamentals driving self-storage investing, I was stunned. And I came over to the dark bright side.
In this post I’ll discuss the variety of factors that are driving the steady growth and popularity of this wonderful commercial asset class. You’ll see why our Wellings Capital funds are bullish on investing here!
So Many Reasons to Love Self-Storage Investing
1. A Fragmented Market
There are almost 55,000 self-storage facilities in the United States. That’s more than the combined total of McDonald’s, Subways, and Starbucks.
The great news is that about 40,000 are run by independent operators. Many are mom-and-pops, and they run their facilities that way. They don’t need to run them better. They’re making a profit and they’re happy.
2. The Power of Acquiring from a Mom-and-Pop
This fragmentation means that there are many acquisition opportunities that are unique to the self-storage asset class.
Acquiring an under-performing independently-operated facility has so many advantages for an operator/investor. It is less risk and hassle than ground-up construction, and it can provide significant upside in income and value.
3. The Power of Operating like a Franchise
Small operators often view their facilities as a passive parcel of real estate that throws off mailbox money. That’s fine for them.
But if you have the desire to take an asset like that and apply best-in-class marketing and operations practices, you may be able to create a wonderful income for yourself and your investors and add millions to your net worth.
Great operators apply a multitude of professional operations and marketing techniques to make a lagging facility into a best-in-market operation.
In addition to the ongoing income, you should be able to unlock significant value by refinancing the debt or selling to a larger player. Like a REIT.
4. Refinancing or Selling to an Institutional Buyer
If you can take your small-time asset to the level of a best-in-class operation, you will be able to achieve much higher income levels and potentially unlock a lot of value by refinancing your debt. Many operators are able to refinance all of their (and their investors’) original principal back out of the deal, leaving them a profitable income stream with no cash at risk. This effectively results in an infinite ROI.
You may also be able to be acquired by a REIT or another institutional buyer. If your operation is franchise-like and your revenue is stabilized, and especially if you have several similar assets in a portfolio, a REIT may come knocking at your door.
A REIT bought several facilities that my friend (who our fund invests with) operated. Though the going rate for these types of facilities was about a 7% cap rate, the REIT paid about 5.5% (lower % = higher price). This one maneuver (selling to a REIT) created about a 27% increase in value at the asset level.
But it was much better than that. Because the seller had 60% leverage on his assets, he was able to multiply the asset-level appreciation by 2.5x (1÷ (100% – 60%)) = 2.5x). So, the operator and his equity investors actually benefitted by equity appreciation of over 68% (27% * 2.5x).
And that didn’t include all of the other income and value that was generated by the operator/seller’s efforts to increase income and value through professional operations and marketing, which generated far more.
5. Sticky Tenant Base
Self-storage has among the stickiest tenant bases of any real estate asset class. No, I’m not talking about guys with Velcro suits (though it could include those people – I’m not one to judge).
If you’re renting an apartment for $1,000 and get a 6% rate hike, you may leave rather than commit to a $720 rent hike this year.
But if your $100 storage unit (auto-debiting your credit card) goes up by 6%, you’re probably not going to rent a U-Haul… spend a Saturday… recruit reluctant friends… brave the heat or cold… to move your stuff down the street just to save $6 per month.
Especially when you think, “I’ll probably only need this unit a few more months anyway. I’ve got to block out time to go clean that junk out of there. Maybe I’ll do it on my vacation.” (Or next year. Or next decade.) See my point?
6. Recession-Resistant… Yet Performs in Booms
So, the tenants are sticky… prices can be raised… operations and marketing can be upgraded… and equity is leveraged by income and positioning.
What about the upcoming recession? (There is always one around the corner. We just don’t know when. Or how severe.) Wellings Capital specifically chose self-storage, in part, because of its recession-resistance.
In good times… People are filling up their carts at Amazon and Wal-Mart. Baby Boomers lose their parents and e-Commerce vendors need a place to store inventory.
In bad times… most of what I said above is still true. Yet people are tightening their belts. Cutting costs. Thankfully, self-storage is a relatively small cost in the scheme of things.
And check out these images. This speaks to the extreme value-add and ground-up potential of self-storage as well as its income overall.
I like, no, LOVE self-storage, and its all-around profitability and recession-resistance are two good reasons.
7. Ancillary Income Opportunities
There are many ways to add income and value to self-storage facilities. Self-storage is both a real estate business and a retail business. Many mom-and-pop owners, who operate as a passive real estate parcel, won’t have a showroom. This hurts marketability in so many ways.
Your self-storage facility will have the opportunity to sell all kinds of needed items to your prospective tenants and to the public at large. Many tenants and others need…
- Rental dollies and carts
- Your kids’ school raffle tickets
Ok, well not that last one. But there are probably other things that you could think of to sell to the public. I can imagine some items of local interest that could be marketed to locals or those who are moving to the area.
You could also provide other profitable services from your self-storage facility. Like…
- Propane filling station
- eBay pack and ship station
- ATM, cell tower and billboard rentals
8. Additional Low-Cost Value-Adds
When I think of value-add in the multifamily world, I typically think of shelling out capital in order to get a return.
And that is often the case in self-storage, too. For example, one of the highest returning projects is to utilize some vacant land to build a beautiful state of the art climate-controlled building. This can serve as a marketing piece as well as an income generator on land that is essentially paid for.
But there are many other self-storage value-adds that cost little or nothing to implement. Some result from a mere change to policies and procedure. Like:
- Implementation of administration fees
- Implementation of late fees
- Timely evictions
- Fees for paying by cash or check (small discount to pay by automatic ACH)
- Implementation of moving truck rental (U-Haul or Penske)
The implementation of truck rentals costs almost nothing in most cases and it can generate up to $3,000 or more per month in revenue. And it can lead to increased occupancy of up to 3 to 5% (“Would you like a U-Haul rental with that storage unit ?”).
Let’s get to the last two reasons to LOVE self-storage investing:
9. Low Operating Costs
Self-storage has one of the lowest cost structures among commercial real estate asset classes. It is fairly predictable, and with no toilets, water lines, and other hassles endured by other real estate types, it is well-suited for operators who want to minimize their hassles and expenses.
Here is a breakdown and comparison of the cost structure and profitability of commercial real estate in general (on the left) with self-storage (on the right).
10. Lenders Love Self Storage
It is widely known that lenders love to provide debt for self-storage facilities. Lender Neil Gussis published an Inside Self-Storage article detailing why in 2018.
Concluding Thoughts on Self-Storage Investing
I’ve just skimmed the surface. There’s truly so much to love about self-storage investing. If you haven’t checked it out yet, I hope you will. You may decide to invest actively, as an owner, or passively, with a fund or syndicator. The new economy has opened the doors for investors to play on fields only reserved for big league commercial investors in years past. This is a great time to invest in this profitable niche!
Paul Moore is the Founder and CEO of Wellings Capital and manages two recession-resistant commercial real estate funds. He has been investing in real estate for decades and is the author of three real estate investing books, a popular blogger and speaker at BiggerPockets.com, and host of the How to Lose Money podcast. His newest book, on self-storage investing, will be released in late 2019.