How To Get Started Investing In Storage Units Passively
One of my goals this year was to invest in a different asset class. I’m currently invested in several apartment syndications and hotel investments.
One particular asset class that’s peaked my interest has:
- annual revenue of $40 billion
- an occupancy rate of over 90%
And roughly 1 out of 10 households currently rent them. The asset class I’m talking about is self storage investing and it’s a little wonder why it’s caught the attention of so many investors lately.
Especially those of us that have little time seeking relatively low-maintenance property with a high annual yield income.
Real estate investors are always on the lookout for ways to multiply their returns. Many focus on high-growth sectors with the potential for unlimited development.
And the rapid growth of the self-storage industry has made this asset class an optimum choice especially as we’re in an age where people are both obsessed with decluttering and reluctant to part with their belongings.
With regards to investing in self storage facilities, it’s:
- overhead is low
- less hands-on management than other commercial real estate
Here’s what you need to know before you get started investing in a self storage business.
Don’t Miss Any Updates. Each week I’ll send you advice on how to reach financial independence with passive income from real estate.Sign up for my newsletter
Self-Storage Market Basics
The main reason the self storage industry was started in the first place was to give people a place to store:
- household goods
- business materials
- anything else that needs to be stowed
Self-storage units are seeing tremendous growth (especially after the pandemic) as almost 10% of American households utilize them annually.
Research shows that there are around 50,000+ storage facilities in the U.S. with a total rental space of more than 1.7 billion sq. feet generating over $40 billion in revenue.
This popularity was picked up by the media which created the storage-based reality show, Storage Wars.
As you can imagine, the storage growth has also attracted investors with the majority of facilities still being in the hands of individual owner-investors.
When you think about commercial real estate, you may imagine a large, upscale apartment building. But most self storage facilities aren’t like this. The majority are mom and pop owned in rural areas or within industrial areas.
The lease structures are different too. Instead of some of the longer term leases standard in commercial real estate ( i.e. triple net leases), self storage tenants can usually end their tenancy on a short term basis. This also causes a higher turnover vs other asset classes although turnaround costs are significantly less than most commercial buildings.
4 Types of Self Storage Facilities
While multifamily apartments are graded based on how new or old they are (Class A, B,C, etc.), self storage facilities are different.
They’re categorized by their:
- style of construction
Self storage properties can range from one-story buildings with drive-up auto access, to multiple stories, with climate control which are accessed through secure entrances.
Some are built specifically to be storage centers while others have undergone a conversion process.
For example, you could purchase a vacant warehouse or other commercial building and repurpose it into a storage facility.
Here are the four main types of self storage facilities:
In my area in Louisiana, the outdoor/drive-up type of facility is the most popular. These facilities typically feature narrow rows of buildings with roll up access doors.
Most allow you to drive up to your unit which makes the storage process easy.
As far as security, most have a gate with coded access as well as video cameras.
These types of properties tend to be the cheapest due to low costs, maintenance, and little to no staffing.
#2. Climate Controlled Storage
Out of the for-storage types, climate controlled has seen the biggest increase in popularity.
You may ask yourself, “what do people store in these types of facilities?”
You can store anything that needs to be protected from extreme heat, cold, or moisture.
- family heirlooms
- classic cars
Typically, these facilities can charge a premium as they’re servicing a very specific niche in the market.
#3. Vehicle Storage
One of the top growing sectors within the self storage industry is vehicle storage.
You may see these advertised as boat or RV storage.
Occasionally they’re outfitted with the same climate and temperature controls offered at other storage facilities.
#4. Mixed-Use Storage
There’s more than one way you can make money owning storage units. How? Other business opportunities could be added.
And one of the more popular ones are also U-Haul affiliates.
If people occasionally have to rent a truck to move, then you could pick up more business by having them store some of those items in your units too.
If you’re in an area where there’s a need for RV owners to store their recreational vehicles, then this could lead to further increased rented space.Join the Passive Investors Circle
5 Benefits Of Investing In Storage Units
#1. Recession proof
Research has shown that self-storage facilities have performed extremely well in all economic cycles (including the 2008 crash and during 2020 pandemic).
During a downturn in the market, consumers tend to downsize into smaller homes. This causes them to occasionally move excess furniture and other items into storage units.
When the economy is good, storage units are still in demand. People who are moving need temporary place to store their furniture. And those starting new businesses also need places to keep supplies for their start-ups.
The average storage facility will have anywhere from 50 to as many as 500 units. Unlike owning a single family home, if one of your tenants leaves, you don’t have to worry.
The cash flow is coming from many different sources (instead of one). If a tenant or two leaves, then you’ll have plenty of other units producing income.
#3. Less headaches
Speaking of tenants, you’ll see much less issues with tenants as a storage investor vs single family owner or apartments.
Also, storage units have lower overall maintenance costs as well.
#4. Increase rents easier
Most self storage properties have tenants on a short lease schedule (some are month to month).
Because of this, owners can increase rents more frequently without tenant pushback.
This helps to keep a consistent cash flow even with frequent turnover.
#5. Increased owner protection
Most state eviction laws for storage owners are more landlord-friendly vs multifamily property.
For instance, if a tenant renting storage space doesn’t pay rent, owners can both:
- evict the tenant
- obtain unit’s contents (which could be sold)
For apartment owners, it could take months to evict someone, and they can still live in the unit while the process makes its way through the courts.
5 Disadvantages Of Investing In Storage Units
As with all investments, there’s both pros and cons. Here’s some of the disadvantages of investing in storage units.
The location is one of the most important factors to consider when building/purchasing storage units.
If you find an existing facility that’s not been fully occupied that you think can be turned around, it may turn out not be the case.
One of the main reasons why a storage unit continuously operates under a low capacity could be due to a poor location.
If word gets out in a particular area of “how great” self storage investing is doing, then they could become a victim of their own success.
Too many new investors in any one area could potentially oversaturate a market, driving down occupancy rates and rents.
This “overbuilding” can affect any type of real estate asset class.
#3. Large commitment
To be successful, you must be willing to take action, work hard during the process and make a large commitment.
Owning storage units is a business. If you’re not willing to do your part such as keeping up with maintenance and security along with other business issues, then the likelihood of finding success is low.
#4. More hands-on work
If you decide to actively own a self storage business vs passively invest, then this will require more hands-on work.
Unless you have a management team to assist, you’ll be responsible for:
- collecting rents
- replacing tenants moving out
- other administrative tasks
If you plan on building a new facility from scratch, you’ll have to make sure you’ll get enough tenants in order to achieve the right level of occupancy in order to make a profit.
#5. Competition can be high
Because storage units can be cheap and easy to build, competition could be high. Especially if the demand is there too.
Now that there are several large, national companies in this space, you can bet every location is being scrutinized.
How To Invest In Storage Units
Here are the three main ways to get starting investing with storage units.
#1 Active participation
If you want to become an active owner, you’ll need to decide on whether to develop a new self storage facility or purchase an existing one.
a. Developing a new facility
Developing a ground up facility can be a great direction to start from as long as you have sufficient experience and knowledge.
For instance, a friend of mine has an engineering background and has developed several self-storage properties. He informed me that each time he builds a new one, he learns from mistakes he makes from the previous one.
An example has to do with wasted space. He claimed that the design on his first property wasted a lot of square footage but was able to correct this issue with the second facility he built.
Other areas to consider with a new build:
- Building and construction costs – The average cost to build is $25-$40+ per square feet for single story or $45 – $75+ per square foot for multi-story units. These figures don’t take into account any site improvement costs.
- Land costs – Typically the average land cost is going to be 20-30% of the total development cost. As with anything else regarding real estate, it all boils down to location.
Don’t forget about being fully informed regarding local zoning details, municipality permits, etc.
Building a property from scratch is possibly the most difficult and risky way to invest in real estate, but it can certainly be the most rewarding, too.
It’s all on you to make it work by lowering costs and maximizing profits. But again, with more risks comes the potential for higher returns.
b. Purchasing an existing self-storage facility
Like building a new facility, purchasing an existing one also requires a large amount of knowledge and experience as these will need to be improved and managed more efficiently.
The key to real estate success, especially self storage, is to:
- buy the right asset
- choose the best location
- get the best price
The first step in this process is to find the right facility to purchase (which happens to be the easiest step).
Most of the time you can find what you’re looking for online such as:
- List Self Storage
The next step is to analyze the cashflow to figure out the net operating income (NOI). Many times, self storage investors will look for assets with a significant value-add opportunity.
Related article: 3 Reasons Value Add Real Estate Investing Can Work For You
Many of the current self storage facilities are owned by mom and pop operators which brings opportunities for those looking to get a good deal with opportunities to add value through improvements, management and/or expansion.
Once a property is placed under contract, the next step is performing due diligence including physical inspections, surveys, and taking a deeper dive through the financials.
After securing the financing and closing on the property, you must consider the improvements that need to be made.
Finally, you’ll need to set up the management system.
This includes things such as:
- leasing units
- collecting rents
- ongoing maintenance
#2 Investing in self-storage REITs
Another way to invest in self storage units is via a REIT or real estate investment trust. When investing in this manner, you’re buying stock in a company that invests in commercial real estate.
They can either be private or public.
Most REITs are listed on major stock exchanges which makes them easy to invest in. You can do this directly, through mutual funds, or via ETFs online.
One of the advantages of investing in REITs is that you’ll have access to your money (it’s liquid). So, at any time you can either buy or sell shares of your REIT.
If you’re like me, a busy professional that prefers NOT to get their hands dirty, then investing in a self storage syndication maybe the right choice for you.
Early on in our real estate journey, my wife and I developed specific financial and personal goals. To us, our TIME with our kids was the most important thing and so we chose to invest passively in real estate instead of the active route.
Syndications allow you to partner with other, more experienced investors (general partners) to passively invest while still benefiting from many of the tax advantages.
Similar to any type of syndication investment, you’re relying on the capability of the sponsor (general partner or GP) to perform all of the work for you as a limited partner.
The GPs choose which property to buy along with planning and executing the asset improvement and management plans.
As you can image, the MOST important part of syndication deals is finding sponsors you can trust which is why I’ve created the Passive Investors Circle.
If you join, you’ll have access to those sponsors I seek out and the invest opportunities they have available.
Click below to join today…Join the Passive Investors Circle