Have you been wondering if investing in self storage could be a good idea? With its steady demand and attractive returns, self storage has emerged as a lucrative sector within the commercial real estate (CRE) market.
If you’re looking to expand your investment portfolio, self storage facilities may provide the consistent cash flow and lower risks you need. This hands-off investment lets you sit back and collect rental income with minimal hassles.
But is self storage really all it’s cracked up to be? Let’s take a closer look at what makes this asset class so appealing for investors.
A Bird’s Eye View of the Self Storage Industry
Before we dive into the pros and cons of investing in self storage, let’s get familiar with this industry.
Self storage facilities are those storage units you see along busy roads and highways. They provide a place for people and businesses to store their extra belongings securely.
The modern self storage industry began back in the 1960s and has grown exponentially since then. Today, there are over 51,000 self storage facilities in the United States alone.
While large public companies own about 37% of self storage units based on rentable space, the rest is owned by smaller private investors. This fragmentation provides opportunities for new investors to enter this market.
In recent years, the industry has experienced impressive growth. The number of self storage customers rose to 14.5 million in 2022, up by 970,000 since 2020.
Occupancy rates also remain high nationwide, averaging 92% in 2022. All signs point to continued demand among consumers.
Why Is Self Storage an Attractive Investment?
So what makes investing in self storage so worthwhile for many real estate investors? There are several advantageous factors to consider.
Reliable Customer Demand
Self storage enjoys consistent demand year-round. Peak rental season is typically between April and September. But even during slower months, the need for extra storage space remains.
People and businesses require storage units when they’re:
- Moving to a new home
- Downsizing to a smaller living space
- Staging their house to sell
- Renovating or remodeling
- Opening a new business location
- Storing excess inventory or equipment
Because of this inherent demand, self storage facilities maintain lower vacancy rates and a steadier income stream than other commercial properties.
Limited Competition in Most Markets
The self storage industry is still highly fragmented, with many local and regional owners. Large national chains have not yet dominated most markets.
This lack of major competition provides opportunities for smaller investors to enter and thrive in this sector. Building new self storage facilities or buying existing properties is certainly feasible.
Strong Cash Flow Potential
Ask any investor – robust cash flow is the name of the game. Fortunately, self storage delivers on this front.
The month-to-month leases allow owners to regularly increase rental rates for existing tenants. As operating costs rise, your rental income can rise too.
Self storage also benefits from relatively low operating expense ratios, especially compared to managing residential rental properties. The hands-off approach results in lower overhead costs.
Lower Operating Expenses
Managing a self storage facility is generally simple and straightforward. The cost of running these properties typically ranges from 30% to 40% of effective gross income.
The bulk of operating expenses stem from utilities, payroll, maintenance, and marketing costs. Since tenants look after their own units, there’s no need to fund repairs or renovations.
The limited time staff spends on-site also controls payroll costs. Many facilities even use self-service kiosks and software to automate rentals and payments.
During tough economic times, self storage stands strong while other real estate sectors falter. Facilities may even see increased demand when people downsize their living situations or businesses cut back on space.
Renters still need a place to store their belongings even if they’re saving money elsewhere. The affordable rates and flexible lease terms also appeal during periods of financial restraint.
So self storage can provide healthy returns no matter the state of the overall economy. That’s reassuring for any investor.
Potential Risks and Drawbacks
Clearly, self storage has some stellar benefits. But this industry isn’t completely without its potential downsides. Some key risks to note include:
Achieving Optimal Occupancy Rates – While self storage tends to have high occupancies nationwide, individual facilities aren’t guaranteed to see the same. Choosing the right location and effectively marketing to renters is critical.
Rising Construction Costs – Bringing new self storage facilities online can be expensive, especially with today’s high material prices and labor shortages. Investors building new will need deep pockets.
Location, Location, Location – As with any retail-oriented business, the site you choose heavily impacts success. Make sure to pick areas with ample traffic and target demographics.
Existing Competition – In some metro areas, the self storage market may already be oversaturated. Carefully assess the competitive landscape before buying or building.
Rising Interest Rates – If you need financing to fund new facilities, higher interest rates could significantly impact your returns. Compare loan terms meticulously.
While these factors warrant consideration, none seem detrimental enough to scare off savvy investors. Weighing the pros and cons of self storage still comes out largely positive.
Shopping the Self Storage Investment Marketplace
Convinced self storage is a smart investment move? Now let’s explore the different avenues available to make your first foray into this sector:
Build Brand New Self Storage
Constructing facilities from the ground up provides full control over the design, location, and offerings. Though building new costs more upfront, there’s potential for better returns long-term.
This path also avoids the uncertainty of maintenance and repairs that existing properties bring. Brand new construction translates into peace of mind.
Just be ready to research sites meticulously and account for rising construction costs. Opening new facilities also takes patience to achieve high occupancy.
Purchase Existing Properties
For investors focused on speed, buying a currently operating self storage facility may be the answer. This provides an instant income stream without the headaches of development.
Look for well-located and maintained properties with strong existing occupancies. Analyze historical performance carefully to project future returns.
Ask pointed questions about any repairs needed and factor those costs into your offer price. With smart due diligence, buying existing can pay off nicely.
Invest in Public Storage REITs
Want truly passive income from self storage? Consider investing in public real estate investment trusts (REITs) focused on this sector.
Major players like Public Storage, CubeSmart, Life Storage, National Storage Affiliates and Extra Space Storage are publicly traded. This offers easy investment through stocks and liquidity when needed.
REITs earn revenue from various streams like rental income, management fees, and late charges. While you sacrifice some control and returns, REITs provide stable hands-off income.
Join a Self Storage Syndication
If you don’t meet requirements to invest solo in commercial real estate, join a self storage syndication group. This pools money from multiple investors to buy facilities.
Often structured like private REITs, self storage syndications let investors earn passive returns without handling day-to-day operations. Ensure syndications come from trusted sponsors with a solid track record.
Crunching the Numbers on Self Storage
Still unsure about sinking money into self storage assets? The latest industry performance metrics may convince you:
- Typical occupancy stays strong at 89% to 95% nationwide
- Average cap rate is around 6.5%, higher than many property types
- Construction pipeline currently has over 4,700 facilities in progress
- Recent 12-month sales topped $28 billion across almost 5,000 properties
- Average cash-on-cash return ranges from 9% to 15% for well-run facilities
These impressive figures demonstrate the profit potential and continued investor appetite for self storage properties.
Time to Explore Investing in Self Storage?
At this point, you hopefully have a solid grasp of the self storage investment landscape.
You now know the primary benefits like steady demand, limited competition, attractive cash flow and recession resilience.
And you’re also aware of potential risks like achieving full occupancy, rising construction costs and choosing the right market.
Armed with this overview, you can make informed decisions about whether self storage belongs in your broader investment strategy. Those desiring a hands-off approach with consistent returns will find this asset class appealing.
If you decide to pursue self storage investing, choose an entry point that matches your risk tolerance and involvement preferences. Allocating even a small portion of your portfolio to this sector can enhance stability and diversification.
Self storage remains a smart and lucrative real estate investment target in today’s economy. Just be sure to enter this market carefully and strategically to optimize your profits over the long haul. Wishing you the best of luck as you grow your wealth!