Have you seen the show Storage Wars? Did you know there’s is an actual giant industry behind the self-storage business? No, I’m not talking about the business of buying abandoned storage units and reselling the content, but the actual operation of running the self-storage facilities and charging rent with companies like Public Storage, CubeSmart, and Extra Space that are all giant publicly traded with multiple billion valuation (PSA – $40B, CUBE – $6.2B, EXR – $13.5B market cap).
For the last 25 years, self-storage nearly doubled the returns of the S&P 500 (17.43% vs 7.54%). You can attribute part of this above market returns to the recession-resistant quality of self-storage. Let’s get into that along with 8 other great reasons to love self-storage.
*** This post is a summary of our regular monthly Snowball Real Estate Meetup. We meet on third Wednesday of each month. We hope to see you in person at the next one! ***
Easy to rent
Self-storage has been around since the 1960’s. Because everybody is already familiar with it and it’s a proven need for folks who haves to move, downsize, or just need the extra space, you don’t have to do as much marketing as say a Rolex watch. People often think “oh I just need a unit temporarily like 2-3 months” but they end up paying for a year or 18 months. It’s the same with gym memberships or other subscription services, people often forget they have it and just keeps paying.
No tenants
In self-storage you don’t have tenants, you have customers. That is a big difference. With customers you don’t have to worry about rent control, maintenance calls, or damage to the unit. It’s a big metal box, what is there to damage? If your customer default, which on average about 2-5% of them will, you simply follow the local governing law. Usually you send the renter a notice, after that you advertise in the local newspaper, and after the appropriate time has past you auction them off. Often you can re-market the same unit and get it rented on the same day.
Simple and scalable
Self-storage is a business and much of it can be streamlined and automated with the technology and tools available today. Customers can shop for a unit and sign the contract online. They use auto-pay for first month payment plus the deposit from the beginning and all the subsequent recurring monthly rent. From there they get an email or text message with gate and padlock code for access. Voila! You should know how to do awareness marketing such as Google AdWords but that can all be outsourced nowadays as well.
Low Capital Expenditure
Again, self-storage units are big metal boxes. There’s not much to them other than roof, metal walls, metal roll up doors, shared gate & fence, and some security systems. Versus residential units you have to worry about carpet getting stained, paint getting chipped, cabinets or counters getting damaged, HVAC plumbing or electricals crapping out on you. All this and many other items you will need to reserve capital for in your account and business plan.
Recession Resistant
No matter the economic cycle, there’s a steady demand for self-storage spaces. In up cycles, people buy more stuff. In down cycles people need to down size. It really is just part of human nature or our culture that we have a hard time letting things go, no matter if they bring us joy or not (sorry Marie Kondo!)
quick and easy turnover
In residential, a turnover can kill your returns. When you have a bad tenant, not only does it take time to serve the eviction notice with appropriate time to move out, you have costly repairs to make before showing and renting out the unit again. Often the security deposit doesn’t cover all of that cost either. To re-market it and coordinating all the showings will take usually at least another 30 days. With self-storage, best case the property manager takes a leaf blower and blow through the unit, worst case they call a dumpster to haul the leftover stuff out and market it the same day.
Sticky customers
Moving sucks. Once a customer moves into a storage unit, the convenience to keep all their stuff there often outweighs the monthly cost of the unit. This is why people tend to stay longer than than planned and less turnover for the investor to worry about. It’s similar to cable companies. Say Comcast raises the rate by $5, how likely is someone going to rip the old equipment out, go down to the local office for an hour or two to return the boxes, sit through a 30-60 min customer service call with another cable company, make an appointment, and then take a 4-hour block time out of their schedule to wait for the technician to show up to install?
Great Financing
Banks extend very favorable SBA 7(a) that investors can utilize for purchasing self-storage facilities. Created and insured by the Small Business Administration, a government agency, SBA 7(a) is typically extended to encourage small businesses to take the leap of faith. However, it can also be used for self-storage because it is a business. SBA 7(a) loans is great because they are for 25-30 year terms at fully amortized fixed rate. The loan to value ratio generally is high and can go up to 90% for qualified borrowers. Banks such as Live Oak Bank specialize in this kind of loans at around prime plus 2% rate for a recourse loan, or about 1-1.25% over the rate what most apartment financings get through Fannie/Freddie.
Additional income source
Businesses can cross sell or up sell create additional revenue. Think of it as the “would you like fries with that” approach. Self-storage is no exception. If you have an on-site office and staff at your facility, you can add truck or trailer rentals and sell boxes, tapes, and locks for customers that are getting ready to move out. On top of that, you can sell insurance for the storage units people use. Insurance companies pays you back in a form of referral or affiliate fee. Let’s say you make $5/unit each month for a 100 unit facility that’s trading at a market cap rate of 8% >> $5 * 12 * 100 / 0.08 = $75,000 additional value created for your self-storage facility.
Keep in mind, commercial real estate is a team sport. Make sure you budget for on-site staffing and third party management. To be successful at it, you will need to operate at scale to spread the fixed costs around lots of units, otherwise congratulations you just bought yourself a job.
Also, because self-storage is simple, the underwriting is straightforward and hard to find an edge over other competing investors. The real value in this space is through conversion and development, which has much higher barrier to entry. Not only is it hard to find a property zoned appropriately for self-storage, the acquisition for the land and build out can be quite high.
Hope you guys enjoyed this post on an asset class that is overlooked by some because it’s not as sexy but could be a great opportunity for you. If you find it valuable be sure to subscribe or come join us in person at our monthly Snowball Real Estate Meetup on 3rd Wednesday of each month. If you want to find out about the latest self-storage or other deals that come across my desk, add yourself to our monthly newsletter.
