Why Investing in Self Storage is Red Hot
Self storage isn’t glamorous, it isn’t a mystical money-making machine, and it isn’t recession proof (but it is recession resistant). Unattractive warehouse-type buildings, filled with cubicles that are crowded with people’s possessions do not have the sex appeal of a high-end shopping mall or a luxury apartment complex. Nevertheless, these humdrum facilities have become big business and are a fast growing sector that more often than not turns out to be a sound investment.
Investing in self storage offers a stable cash flow and an alternate asset class beyond the stock market. Turnover in these facilities is less of an issue than short-term lease contracts might predict. Because of the large number of rentable spaces, owners are less vulnerable to sizable fluctuations in vacancy rate.These factors protect against the peaks and valleys so often evident in the stock market. If self storage does have a negative year during a recession, history shows a strong comeback.
Why Self Storage is a Good Investment
Why is self-storage investment attracting single-family, multifamily, and other real estate investors who are looking for an alternate vehicle to increase their wealth? Here are a few of the reasons that it’s such a lucrative investment opportunity.
- People always need a place for clutter. People are reluctant to dispose of their belongings because “you never know; we might need it someday.” When the economy is bad and downsizing becomes necessary, people need a place to store their extra furniture. When the economy is good and people are buying lots of stuff and growing their businesses, they need a place to store the overflow.
- You make money when you buy, operate, and sell. In most areas of real estate, the standard thinking is that you make money when you buy. The self-storage formula is to buy under-managed, under-enhanced, and under-developed facilities, upgrade to institutional standards, then refinance or sell to a REIT (real estate investment trust). Cash flow is stable, and you’re making money through the entire process.
- Even ordinary investors can get in on this trend. Self-storage involves little capital outlay as compared to other types of commercial real estate. If you find the right buyer, you don’t have to be wealthy to invest in self storage. Investors can participate in the self-storage real estate market by purchasing shares of an REIT that focuses on this industry.
- Value isn’t limited by comps. For residential owners and investors, value is limited by comparable properties in the same area. Commercial real estate isn’t constrained by these approximations. To calculate value, divide the net operating income by the cap rate. If you can increase the numerator and compress the denominator, you can dramatically increase the value of your assets.
- Self-storage tenants are “sticky.” Self-storage tenants are willing to accept more rent increases than tenants in other classes. If an owner increases rent on a $100/month unit by 5%, it’s highly unlikely that tenants are going to waste time relocating their belongings for $5. It doesn’t make sense. An apartment dweller, however, might see a 5% increase on $1,000 as motivation to save money by moving.
- New college graduates love apartments. The majority of college grads don’t have the finances or the desire to immediately saddle themselves with a mortgage. Home ownership among this age group is around 13.2%. But they love spending money on toys like jet skis, boats, ATV’s and a variety of other items that need to be stored.
- A key demographic driver is the retirement of baby boomers. When baby boomers make the decision to downsize, they find it hard to let go of their beloved possessions. Self storage gives them that attic or basement that they no longer have. They can store items to eventually give to their children or other family members.
- High divorce rates prompt the need for extra storage. Sadly, a very high percentage of marriages end in divorce. This means that someone usually ends up in an apartment that is probably short on room compared to the previous home. The challenge is to find a space to store all the items that were accumulated during the marriage. Self-storage becomes the solution by providing the time and space needed to sort through combined possessions.
One final fact; the national historical average of foreclosure in self-storage is only 2%. As long as you buy it right, run it right, and time it right, you’re not likely to lose money.