Table of Contents
Why Invest in Self Storage?
In today’s tumultuous and fast-moving investment landscape, it is understandable that one might ask why they should invest in self-storage. Admittedly, this is not as sexy an investment as crypto, options trading, or even NFT’s. Yet the self-storage market was estimated to be worth $48 billion USD globally in 2020, with some growth projections suggesting a $64.71 billion value by 2026. However, self-storage has many positive benefits as an investment and can even be fun. Self-storage is an investment that can provide a good ROI as well as a variety of ways for investors to participate, allowing the investor to craft their own experience in keeping with their risk tolerance, skill set, and time.
Storage is an issue that plagues Americans. No matter what, we always seem to have too much stuff and nowhere to put it. As wise as Marie Kondo might be, minimalism just isn’t for everybody. As a result, the self-storage industry has sprung up rapidly in recent decades, seeming to provide a happy medium between getting rid of everything and having to live with everything you own.
Chances are you’ve used a self-storage facility if you’ve ever had to put your belongings into storage because of a home renovation or repair, or because your real estate agent told you that your house would never sell if you kept your life-size Chewbacca in the living room, or because you’ve had to temporarily relocate, such as for a rotation or externship. Self-storage might have come into your life during difficult times, such as a divorce, an elderly parent’s move into an assisted living facility, or the process of cleaning out a relative’s home after a death. Maybe you had a good experience with self-storage and were able to navigate a difficult life change, a stressful home renovation, or achieve something impressive for work, and you have a positive impression of these facilities because you’ve seen how they can streamline the complexities of life. Or maybe you had a poor experience, and grumbled about how much you paid the self-storage company when it seemed like you did all the work! Either way, 1 in 10 Americans has used self-storage at some point, and that number is likely to grow in this $220 billion a year industry. Maybe you can contribute positively to this industry and gain a nest egg while you’re at it. If that sounds good, read on.
Please note, though, that this article is not financial advice, and you should always discuss potential investments with your financial advisor before moving forward. Nevertheless, this article is a broad overview that will answer many of your questions about self-storage as an investment. By the end, you will see that some of the greatest benefits of investing in self-storage come from the positive industry growth and opportunities to craft your own experience. This article will discuss whether storage units are a good investment, some baseline costs to begin investing in this space, and the different types of storage unit facilities that exist as well as how these facilities have changed over time. The report will also dispel some of the storage industry myths that commonly spread and outline how one might begin to invest in this space through a number of vehicles and investment strategies, ranging from traditional stock investment to owning a facility through building or purchase to REITs and some compelling new business models, such as investing as an independent owner-investor in a private company. Throughout, you will learn about this sector’s growth and how it has shaped some of the opportunities that exist today.
Are storage units a good investment?
The question of whether storage units are a good investment ultimately has an answer that only you can provide, ideally after seeking the advice of your financial counselor. However, to answer this question, you need to understand exactly how investing in storage units works. Maybe you’ve seen reality TV shows where people buy up abandoned storage units, hoping to find valuables and flip them. While that practice may make for moderately interesting television, that is not the type of investment we are discussing today. When we discuss storage units as an investment, we mean the purchase, either individually or in a fractionalized fashion, of storage unit facilities. Certainly, owning such facilities might give you opportunities for interesting stories, even if you do not regularly obtain rare valuables as a result. The “self” of self-storage refers to the fact that customers generally access units themselves, moving goods into and out of them without active participation from the facility staff.
This means that these facilities can operate in a lean fashion without as many employees as one might think. Storage units offer many strengths and opportunities that other investments do not. There are not many other investments that can provide you with the opportunity to be as hands-on as you desire while also providing a service that can make a positive difference for people, especially during difficult times such as moves, divorces, or grieving the loss of a family member, while also providing an impressive ROI. Few other investments let you craft your individual experience to the degree that self-storage investing does.
Self-storage is known as an industry that can turn a profit even with low occupancy levels, which sets up a positive and powerful contrast to traditional business or real estate investment opportunities. Some have even described self-storage as a recession-proof industry! Even better, self-storage expenses tend to be fairly low, with an average expense ratio of 34.34% as of Q1 2018. Off-site management fees are an impressive 5.41% nationwide across all sector classes. The average monthly consumer cost of a 5-foot by 5-foot unit is $45.18, and a 10-foot by 20-foot storage unit can generate around $122.38 per month in revenue. The average self-storage tenant stays from 12 to 36 months, so this industry tends to be far more stable and to experience less rental unit turnover than many other rental arrangements.
For these reasons, self-storage might seem to be something of a money printer, considering the relatively low effort that owners in the self-storage industry might have to expend to maintain or even rent these units.
As you can see, storage units offer many strengths and opportunities that other investments do not. Between this customizability and the generally positive ROI, it is clear that self-storage can be a good investment for many people, from many walks of life, with differing risk tolerance, and with many different investment goals. However, you probably – hopefully! – have many more questions about this investment. The good news is, the rest of this article contains answers to many of the questions that you doubtless have about this intriguing investment.
How much does it cost to invest in storage units?
By this point, you’re probably wondering exactly how much it costs to invest in storage facilities and whether you can afford it.
After all, today’s investment landscape can offer points of entry for only a few dollars for retail investors through apps like Robin Hood, even though this type of app-driven and fractionalized retail stock investing is not generally how one invests in self-storage facilities. But when people can access investments like stocks or cryptocurrency with pocket change, they may get an inaccurate picture of exactly how accessible a particular investment vehicle is. When it comes to self-storage investing, however, there is no specific or universal price floor because costs can vary significantly based on region, specific type of facility, differences in fixed and variable expenses, and so on. Maybe you’ve lived by the adage that if you have to ask how much something costs, you can’t afford it, but self-storage may be a much more affordable investment than you think it is.
This is particularly true with the advent of REITs, which are investment vehicles that can allow you to enter this sector much as you might purchase a mutual fund. These investment vehicles ensure an additional layer of individualization for the investment experience, particularly because their entry points are low relative to many other types of investment.
With that being said, investment in self-storage facilities requires both liquid capital and time, and the specific amounts depend on the type of facility being purchased, whether one is constructing a new facility, purchasing an established one, or franchising, and many other factors.
One of the most popular ways to invest in storage facilities is with a franchise. Even if you are not interested in franchising, the start-up costs associated with these companies can provide a baseline number that answers the question of how much it costs to invest in storage facilities. There are many self-storage brands that work on a franchise model, and many of these publicize their start-up and investment costs. For example, Go Mini’s offers portable storage containers and storage facilities for an initial investment of $224,604 to $453,000 and an initial franchising fee of $45,000. UNITS Moving and Portable Storage, founded in 2004, requires an initial investment of at least $460,022 and a net worth of over $1 million. The boldly named 1-800-PACK-RAT requires an investment of at least $100,000, while Storage Authority requires at least $500,000 minimum and an ongoing royalty fee of 6%.
It is worth noting that many of these franchises are not pure storage facilities, and instead offer a variety of services including moving, vehicle rental, and even retail (if you love to sell boxes and tape, this could be for you!). In addition, the growth of PODS (Portable, on-demand storage) has led to the industry’s movement towards moving and storage, which has also facilitated the growth of large chains with the national footprints and infrastructures necessary to provide moving as well as storage. However, if you are not interested in a self-storage / moving investment, there is still enormous growth in the self-storage industry itself, which remains in a time of powerful growth and positive returns.
In addition, there are many other ways to invest in self-storage facilities that are not franchises. One way to consider the investment floor price is to evaluate the costs associated with the square footage of the facility because this is typically how units are rented. However, customers increasingly want or expect features like climate controlled facilities and video monitoring or on-site security, and these can increase costs dramatically. It can cost upwards of $65 per square foot to build a modern, climate-controlled facility – and these typically contain 60,000 to 80,000 net rentable square feet, so costs for administrative facilities, walkways, parking lots, and other spaces must also be factored in.
Naturally, if you intend to build a facility from the ground up, the costs will be higher. Some estimates of costs suggest that there is a cost of around $25 to $75 per square foot when you are building a self-storage facility, but many variables can impact these costs: You must consider taxes, licenses, density, crime rate, insurance, and your strategy for managing the facility. For example, if you intend to contract security to a company, they may charge your company differently based on the square footage that must be patrolled. Generally, operating costs for self-storage facilities are between $2 and $4 per square foot, considering utilities, maintenance, marketing, and administrative expenses such as insurance or payment processing fees.
The Self Storage Association, the largest trade organization for self-storage, suggests that individual self-storage investors building a facility from the ground up generally spend about $3,000,000, usually with a patchwork of financing options in addition to personal capital. They advise investors to limit land costs to about 25-30% of the overall development costs.
As you can see, there is unfortunately no straightforward numeric answer to this question because there is so much variety in terms of location and the type of facility in question. That is why you might be wondering what the different types of storage facilities are. We’ll discuss these in detail in the next section.
What are the different types of storage unit facilities?
Although the industry is continually changing, there are generally five major types of storage unit facilities. Some of these reflect changes in the industry over time and some of them reflect the specific needs of particular markets and niches. These types are best understood in conversation with each other because they represent the history of this industry and how it has changed over the years in the face of evolving demand, new technologies, and trends. Note that these types are not mutually exclusive and that some facilities may have characteristics of more than one type of facility. In addition, self-storage facilities may contain some light retail in addition to the core business competency of providing storage solutions: Common retail options in this space include moving supplies, such as boxes or tape. Finally, it is also important to note that to some degree, the nuances of the business compared to the restrictions of zoning have driven the type of storage unit facilities more than market demand has driven it.
Outdoor or drive-up facilities represent what the Self Storage Association refers to as “second generation” facilities, in contrast to the “first generation” facilities that were generally little more than warehouses and that sprung up sporadically in the late nineteenth and early twentieth centuries. These second generation facilities are typically row buildings, usually consisting of only one story, and are most often found in areas that are zoned for light industrial use. The customer usually accesses the unit directly from the roadway or parking lot. They often look like garages, with units sporting roll-up style doors. As the name implies, they are optimized to make it easy for people to load things into and out of cars. Consequently, these facilities tend to be located in areas that are car-dependent rather than in walkable cities or in densely populated areas. Brands like Public Storage, with its unmistakable orange trim and doors, have pioneered this look even if they have evolved over time such that many newer Public Storage facilities feature different architecture. These facilities, being outdoors, are generally not climate-controlled and therefore are not well-suited to storing items that could be damaged by extreme temperatures.
Climate-controlled facilities are largely what The Self Storage Association refers to as “third generation” facilities. These facilities differ from the outdoor or drive-up facilities because they are more typically located in retail or light commercial zones, and sometimes even in multi-family residential neighborhoods: In other words, they are increasingly part of an urban landscape whereas the drive-up facilities tend to be located in suburban or even rural areas. These facilities are either part of a larger building with air conditioning and heating or are air conditioned and heated as part of the facility itself: Even units whose doors face a parking lot can be climate controlled under this model, though it tends to dramatically increase facility costs. They also tend to have more aesthetically pleasing construction than the drive-up facilities and are intended to blend in with the surroundings, rather than having a design that is purely functional, as in the case of the drive-up facilities. These properties tend to be more pleasant, with professional landscaping, well-designed and modern-looking administrative offices, and even hydraulic elevators, allowing for a more efficient use of space.
Vehicle storage is another major type of self-storage facility or product type, and it is one of the segments of the self-storage industry that overlaps somewhat with other industries because, technically speaking, a parking lot falls under this umbrella. Because of the legalities and insurance requirements, vehicle storage is distinct from other segments of this industry. Some units in drive-up facilities offer vehicle storage, and many traditional self-storage units are sufficient for storing motorcycles, jet skis, and even small boats, which will generally fit in a 10 x 15 foot storage unit. Compared to the costs for storing watercraft at marinas, vehicle storage can be much more affordable.
However, vehicle storage has some unique needs that differ from the traditional storage of personal items that drives most self-storage facility growth. Therefore, this segment of the industry generally consists of either indoor or outdoor vehicle storage. Some vehicle storage options are effectively parking lots granting parking rights, such as in cities where parking is at a premium; these options may or may not have roofs, but generally provide tenants with quick, self-serve access to their vehicles. However, other vehicle storage options are designed for longer-term storage and a high density of vehicles. These can include RV storage units, as well as specially designed parking lots that may provide valet parking to tenants. They may also include parking lots that require a certain amount of notice before the tenant can access their vehicle because it is stored in a location that is inaccessible without special equipment. Vehicle storage tenants must ensure that their vehicles are properly titled with up-to-date license plates, and depending on the length of their vehicle’s stay, tenants might have to remove batteries or empty gas lines prior to parking.
Yet just as vehicles represent a fast-growing segment of storage, another fast growing facility type represents the opposite trend. Because the self-storage industry is subject to broader market trends, it is no surprise that one of the fastest-growing facility types is that of the mixed-use facility. Mixed-use retail is a fast-growing trend in urban planning – and in self-storage. It refers to buildings that may have multiple purposes, such as street-level retail and upper-level housing, or a combination of housing and office space, or any other combination of both business and housing. Within the self-storage sector, this concept might look like ground-level retail and upper-level self-storage facilities, or large facilities anchored by self-storage but that also contain retail establishments.
Mixed-use self-storage facilities have taken the form of revived shopping malls or industrial facilities. For example, the Clybourn Galleria in Chicago, Illinois transformed a former factory into 60,000 feet of self-storage on the third floor and 65,000 square feet of office space on upper floors, with ground-level tenants including upscale national chains like Trader Joe’s alongside the administrative and tenant offices for U-Stor-It. The renovation provided storage tenants with convenient drive-up access on one side of the property, and the end result was a facility that bolstered the affluent development of the neighborhood and helped to prevent urban blight. It repurposed the urban space in a way that met many needs.
Mobile storage is another fast-growing segment of the self-storage industry. Like vehicle storage, this segment represents a crossover of self-storage into adjacent sectors, in this case, moving. Mobile storage may not always involve a household or business move, but it has created opportunities to integrate self-storage into the moving sector and vice versa. Mobile storage refers to 7 to 20 foot-long and 8-foot-high portable containers that are usually (but not always) constructed of steel and aluminum, delivered to the customer at their location, and then stored elsewhere and / or transported to the customer’s desired location. This has become popular for household moves and renovations because it solves problems of storage and logistics at the same time.
Companies like PODS® offer moving, storage, or both to consumers, effectively providing logistics as well as the core storage service. Consumers appreciate the flexibility. From a business perspective, consumers who store the containers on their own property absorb more of the risk. Further, when customers host a mobile storage unit on their own property, the storage company is not responsible for upkeep on that property. Mobile storage can sometimes have lower maintenance costs because fewer of the company’s assets represent property that it must insure or maintain. Because moving is already a large industry and because storage represents an adjacent need, this has created natural synergy between these industries, with the result being the growth of the mobile storage segment.
These facilities can contain overlap, representing the adaptability of the self-storage industry. Many drive-up facilities offer vehicle storage or mobile storage services. Increasingly, facilities are being retrofitted to offer climate-controlled storage and changing regulatory and city planning atmospheres are also changing the possibilities for how space is used and the types of facilities permitted in various areas. Therefore, these facility types should not be understood as fixed, or rigidly defined. The typical day of an owner or investor in these facilities may not be substantially different, but there are different tasks associated with each type of facility, as you might expect. However, before you can decide whether this might be a good investment for you, you need to evaluate whether the impression you have of investing in self-storage is accurate.
Common storage investing myths
Before you invest in self-storage, or anything else, for that matter, you should learn as much as you can about the industry. In this case, it is also important to learn about the “ugly” side of the industry. The good news is, there are no skeletons in the closet of the self-storage industry (and customers rarely put actual skeletons in their storage units). However, many pervasive myths have continued to circulate over the years and have driven many people to make rather foolish investment decisions that they later regretted. These include the myth that self-storage represents effortless, passive income. They also include the myth that the bigger the facility, the bigger the profit and the myth that it is cheap to buy into a self-storage facility. There is also the myth that the location of a self-storage facility is irrelevant, to say nothing of the myth that self-storage is always a great investment guaranteed to produce cash. Yes – sadly, all of these are myths. However, this does not mean that self-storage is necessarily a bad investment, an oversaturated market, or an industry that is too late to get into.
Myth #1: You can get rich fast with self-storage investing!
The first myth about self-storage investing is that this is a way to get rich quickly without lifting a finger. Sorry – there are no ways to get rich quickly without lifting a finger, but if you find any, please let us know. As with everything else in life, if it sounds too good to be true, it is. Ownership of a self-storage facility comes with the same headaches and hassles that are part of owning any business or property: Taxes, responding to maintenance surprises, and staffing issues are just some of the tasks that you might find taking up your time if you choose to invest in a self-storage facility.
In addition, like any business, you need to market. With so many options for self-storage out there, you would have to clearly explain to customers why they need to be your customers. You have to make your value proposition clear, and part of this is also management. You need to proactively manage your facility and your staff so that they become compelling parts of your value proposition.
Some people have gotten wealthy off of self-storage investments. However, in virtually all of these cases, it was a story of someone getting rich over time and after expending effort into ensuring that their investments pay off by bringing value to customers.
Myth #2: The Bigger, the Better: Bigger Facilities Mean Bigger Profits!
As you might have noticed in the earlier discussion about the price floor for investing in self-storage facilities, there is no distinct, linear correlation between larger facilities and revenue. Naturally, any building or facility has associated maintenance costs, and the larger the facility, the greater the likelihood that at any given time, lightbulbs will burn out, walls will get dented, or drivers will back into fences or roll-up doors. In addition, self-storage facilities are subject to taxation like everything else and larger facilities are more likely to be taxed at a higher rate, which can impact profits. Climate-controlled facilities are naturally more expensive if they are large.
Although the numbers quoted above indicate that the revenue from the self-storage business model is generated on a per-foot basis, larger facilities do not always mean more profits. In many cases, larger facilities mean larger expenses, particularly if vacancy levels are high and they require significant staffing.
The good news? You can invest in a smaller facility and still enjoy great profits – if you are willing to put in the work!
Myth #3: Location, Location, Location…. Doesn’t Matter!
Perhaps because the sector got its start in light industrial zoned areas, the myth persists that location is irrelevant when it comes to self-storage facilities. However, this could not be further from the truth.
Many location-based factors impact profitability and revenue in self-storage. Even though mixed-use and urban locations are increasing in popularity, the industry has still largely gotten its following from locations that are car dependent, meaning that customers must be able to easily identify the facility from the road. Therefore, it is critical to locate facilities in areas that get enough traffic to generate potential interest from customers and that also have an infrastructure that can support traffic into and out of the facility.
Relatedly, self-storage facilities must also have significant visibility. Public Storage has perfected this with its characteristic orange hues and architectural design featuring towers and turrets that create visual interest and visibility. A clean, well-maintained and pleasant-looking facility will go a long way in generating new interest among consumers. After all, customers cannot use a storage facility they are not aware of, and one drawback of self-storage as an industry is that it cannot be conducted entirely online because it is inherently and intrinsically physical. Whether you are putting in existing business or building from the ground up, it is important to look for a facility or location site that promotes visibility as well as easy access to roads, ideally for numerous types of vehicles.
Likewise, accessibility is also important. This refers not simply to ADA-compliant facilities, but also to ease of access across the site. Moreover, accessibility is a difficult balancing act, because on the one hand, self-storage facilities must be easy to access for tenants, but on the other hand, they must also be secure to prevent crime and even damage from the elements (e.g., stray animals, falling trees, bodies of water prone to flooding, etc.). Therefore, location does at her because inaccessible sites will discourage customers, but overly accessible sites will also discourage customers or, even worse, encourage criminals.
The surrounding area for the storage facility is also important. According to the Self Storage Association, the ideal location for a storage facility is a densely populated and affluent urban area with the anticipated customers located within a 3-to-5-mile radius of the site. In addition, commuter traffic patterns should be considered because studies show that people who pass the facility often on their typical routes, such as to and from work, are more likely to become customers.
Therefore, the idea that location is an important for self-storage facilities is nothing but a myth. Self-storage is fundamentally real estate, and the old saying that it’s all about location, location, and location is still true. It is critical to place these businesses near where it is anticipated that customers will be, utilizing an infrastructure that facilitates access to the units, that is visible to the affluent consumers without being perceived as an eyesore, and that makes access to the site seamless and intuitive for customers, but difficult for criminals, trespassers, or animals to breach.
Myth #4: Self-storage investments are cheap!
The final myth about self-storage unit investing is that it is cheap to acquire or build, particularly when compared to other investments or facilities. Perhaps poor perceptions of early facilities, with their uninspiring garage rollup doors and beige walls, drove the idea that construction is cheap, and investors who had previously encountered landlord headaches like leaking pipes assumes that self-storage investing was comparatively inexpensive. However, this is untrue. The cost of land and facility development, along with increasing demands for quality from consumers and higher expectations for building quality from policymakers drive up prices. Furthermore, if you want to invest and build a business over time, it is important to build and maintain a facility that will hold value. As the saying goes, land is valuable because they are not making any more of it. Often, cheap land is unsuitable for building or comes with unique hazards. Therefore, even low land costs can be canceled out by high development costs. Furthermore, consumers today have higher demands of quality than in the past. The first and second generations of these facilities were little more than garages located away from people’s homes, but today’s consumer is far more discerning and tends to look for a facility that can house items even in extreme temperatures. Relatedly, more today is known about safety, environmental impact, and building design than in the past, and as a result, contemporary self-storage facilities must adhere to more sophisticated and complex building codes than prior generations of facilities. Although investors may find this frustrating, in the long run, this may be a benefit because it could create more durable facilities that are better able to withstand adverse events. Finally, a simple explanation of investment value is critical for dispelling the myth that storage investing is cheap. One might be able to develop cheap construction for a facility, this will eat into profits in the short or long run because greater maintenance costs will erode profits. In addition, even if one is able to develop, launch, and stabilize a new facility, problems can arise when you eventually sell the business because investors such as yourself should conduct due diligence and will quickly discover low-quality materials. This could give them greater leverage in the selling process, impacting the original investor’s profits.
Myth #5: Self-storage investments are practically guaranteed cash!
Nothing in life is easy money or “guaranteed cash,” with the possible exception of Monopoly money – and even then, you only get the money if you pass Go. On principle, you should be suspicious of anyone suggesting anything is a way to get easy, fast money. However, this particular myth has endured regarding the self-storage sector, perhaps because self-storage facilities often appear to run so seamlessly and to do so without visible owner labor. This is a credit to the hard work owners put in, because anything that looks effortless is doubtless the product of exceptionally hard work that is excellent at both effectiveness and invisibility. Yet the perception that someone is not working hard (or even the perception that they are) should not be used to guide one’s entry into an investment.
All investments carry risk. In addition to the inherent risk that is present in all investments, however, self-storage facilities carry some unique risks. They are perceived as recession-proof, largely because they enjoyed a boom during the Great Recession of 2008 to 2009. However, the industry has experienced contractions as well. Some of the reasons for this market contraction will be discussed in greater detail later in the report, but analysts have generally agreed that there is an oversupply in the self-storage industry and that this oversupply has driven declines in revenue and returns in recent years. There are many who have gone into this industry with misconceptions and the goal of easy money, and there are also many who have invested with good intent and due diligence but who have failed.
Thus, the perception that self-storage is an easy, fast investment that generates money effortlessly is wrong. Like any other investment and every other industry, there are winners and losers in self-storage. To some extent, the outcome of these investments is luck. You can try and prepare for adverse market conditions, but you cannot control everything. Yet there is much you can control to increase your chance of generating significant value from your investment. This includes due diligence and finding an investment that matches your skill set and commitment.
The point of dispelling these myths is not to dissuade anyone from investing in self-storage facilities. Rather, it is critical that people do research and educate themselves on every possible scenario before investing. Hopefully, some of these sobering facts of help to enlighten you on your potential investment. Therefore, if you are still interested in this dynamic and fast-growing investment opportunity, we will now turn to the question of how people can invest in self-storage. Some of these answers may surprise you!
How to invest in self-storage
There are almost as many ways to invest in self-storage as there are types of self-storage facilities and organizations.
In addition to this more traditional way to enter the market, there are many other ways to invest that do not require participation in the stock market. Three of the most common non-stock related ways to invest in self-storage are to become an owner, a.k.a. active participation, to become an independent owner-investor in a non-publicly traded company such as Luxelocker, and by investing in storage REITs. For the most part, this article is focused on active participation models. This is because these are the most common means of investing, because this model is generally what occurs when you enter the industry with the franchising agreement, and because it is generally the most traditional and best documented means of entering the market. However, for these reasons it is important to revisit and to discuss this process in detail.
All investments carry risk. In addition to the inherent risk that is present in all investments, however, self-storage facilities carry some unique risks. They are perceived as recession-proof, largely because they enjoyed a boom during the Great Recession of 2008 to 2009. However, the industry has experienced contractions as well. Some of the reasons for this market contraction will be discussed in greater detail later in the report, but analysts have generally agreed that there is an oversupply in the self-storage industry and that this oversupply has driven declines in revenue and returns in recent years. There are many who have gone into this industry with misconceptions and the goal of easy money, and there are also many who have invested with good intent and due diligence but who have failed.
Thus, the perception that self-storage is an easy, fast investment that generates money effortlessly is wrong. Like any other investment and every other industry, there are winners and losers in self-storage. To some extent, the outcome of these investments is luck. You can try and prepare for adverse market conditions, but you cannot control everything. Yet there is much you can control to increase your chance of generating significant value from your investment. This includes due diligence and finding an investment that matches your skill set and commitment.
The point of dispelling these myths is not to dissuade anyone from investing in self-storage facilities. Rather, it is critical that people do research and educate themselves on every possible scenario before investing. Hopefully, some of these sobering facts of help to enlighten you on your potential investment. Therefore, if you are still interested in this dynamic and fast-growing investment opportunity, we will now turn to the question of how people can invest in self-storage. Some of these answers may surprise you!
Becoming an owner of a self-storage investment (Active Participation)
If you plan to become an owner or active participant in self-storage investing, prepare yourself for a lengthy process of planning/research, regardless of whether you intend to build or to buy a facility. First, you must consider how you would manage and market the facility. If these tasks are within your skill set, then you are ahead of the game, but no matter what, you must consider both strategy and tactics for promoting the facility. Moreover, these strategies and tactics must apply to both the initial launch or takeover as well as to the plan for running the facility in the long run. Even though marketing strategies generally change over time, it is essential to develop a plan of action for communicating with customers as well as tenants, determining which marketing channels will be used, how social media will be managed, and so on.
Next, research and planning should coincide with developing this strategy. You will need to conduct in-depth market research, competitor analysis, assessment of various financial/loan types, conduct economic occupancy calculations, and do a deep dive into the proposed or anticipated location. The Self Storage Association suggests that prospective buyers conduct a detailed study of one, three, and five-mile radii from the proposed site. These studies should evaluate many critical metrics that can provide insight into consumer growth. The Self Storage Association also suggests choosing a site located in a growth area, with lots of residential inflow. This is because these locations tend to be more affluent areas with higher density, meaning that people are moving into smaller homes. The organization also recommends high ratios of single and multifamily residences, as these tend to drive demand for smaller units and smaller units tend to have higher ROIs. In addition, they recommend conducting demographic studies and obtaining census material for the current population. It is critical to know the average and median incomes in the area, data points such as the average square footage of a typical home in the area, the number of people who own bulky, and seasonal vehicles like jet skis or boats. It can even be useful to skin Craigslist, searching for yard sales or offers of goods being sold or given away due to a lack of space. There could be great advertising potential in neighborhoods with lots of yard sales, for example! Furthermore, if there is a distinct population in the area who are speakers of a different language, it will be very useful to be able to provide written materials in that language, provide leasing agents who are fluent in the language, and so on.
Although research may ultimately become one of the most time-consuming steps in the process of becoming an owner or active participant in the self-storage industry, the research is primarily designed to aid you during the next several steps. This is because you must write a business plan. Not only will an effective business plan guide you as you embark on your new journey as a storage facility owner, but it can also be an important document in securing additional funding if you do not have the liquidity necessary for this investment. Ideally, the business plan can function as both a blueprints and part of a stack to show to potential investors. The business plan should clearly and unequivocally answer why your leadership of this specific company in this particular location is a great match that will improve lives in this area and should also demonstrate precisely how these goals will be achieved and over what time frame this will ideally occur. The business plan for a storage unit facility should outline market need, rejected growth, type of facility, how funding will be secured, proposed marketing strategies, anticipated staffing levels, maintenance plans, how you will address compliance and administrative costs, and virtually every other aspect of the business that might seem relevant. If you did not enjoy lengthy writing projects while in school, do not despair: while many outsource business plans and even the research within them, there are innumerable guides, courses, and resources for developing this important document. Research and developing this plan should not and must not be rushed. This is not just a hoop to jump through, but rather, should ideally form the cornerstone of future operations and strategy. Thus, the importance of research and the business plan cannot be overemphasized.
If you want to build a storage unit facility, you will have concerns and decisions that differ from someone who is purchasing or franchising one. There are benefits and risks of building a self-storage unit facility, as you have likely already guessed. One of the benefits is that you will have the greatest amount of say over what the facility will look like, how it is laid out, the types of materials used, and many other factors. You will be able to specify each detail from the ground up, and even better, you will know about every planning detail and material used, which will likely make ongoing maintenance and repairs simpler. Likewise, new constructions are usually guaranteed against severe defects, so if something should arise, the owner might be able to be made whole for repair expenses, whereas purchasing a facility may not shield the investors from these types of expenditures and the exact provenance of every material may not be known.
Building a facility also requires different types of financing than purchasing or franchising a facility. Because this would technically be a commercial real estate loan, as opposed to a more general small business loan, banks require information about the property’s income, expenses, and profits, the condition and location, as well as the borrower’s financial profile and, of course, their credit report.
This process will also be somewhat dependent on how you have established or plan to establish the business organization, such as an LLC or partnership. The process of applying for a commercial real estate loan may be slightly different in different states and for LLCs versus S-corporations or other business organization forms. You should look into the specific rules in your jurisdiction. In addition, because commercial real estate loans require such detailed information about the property’s potential revenue and expenses, the business plan will be particularly useful during this step. However, there are other ways to finance your self-storage facility besides, or in addition to, a traditional bank loan. Local banks and credit unions may have their own funding for real estate development. Government and non-profit grants may also be available, particularly if you meet certain criteria. You should look into opportunities in your jurisdiction.
The Small Business Association (SBA) has grants and resources as well. Some of these include the 7 (a) Loan Program and the 504 Lending Program. The 7 (A) Loan Program and the 504 Lending Program are two SBA offerings that are particularly well-suited to storage unit commercial development. The 7 (a) Loan Program is the most common SBA loan, and has a relatively easy application. This loan is considered to be one of the best options for small businesses purchasing real estate. The loan is available for up to $5 million for businesses that operate for profit, meet the SBA’s definition of a small business, operate in the US, have at least some equity, have exhausted alternative financial resources, can demonstrate needs, will use funds for a legitimate business purpose, and are not delinquent on federal or state financial obligations. It is also worth noting that these loans are not available to real estate investment firms, and some franchise agreements may preclude the owner from pursuing this type of loan. For more information, you should contact a financial advisor or go to the SBA website.
As for the 504 Program, this program requires a 10% borrower contribution and then conducts a relatively unique financing package. Like the 7 (a) Loan, the 504 Program is capped at $5 million but is structured as a conventional mortgage in which approximately 50% of the anticipated costs are covered by a third-party lender and 40% are backed by the SBA. The intended goal of this program is to allow small businesses to retain greater amounts of working/operating capital, and hence, these loans feature low interest rates and flexible payment terms. The 504 Program can be an excellent way to finance real estate purchases for business because of the way the risk to the lender is reduced through the specific funding and structure of the loan.
Private investors may also pave the way for your storage facility dreams. Private investors may be angel investors or others, and once again, a professional, well-written and well-presented business plan or presentation stack could streamline this process and increase interest. Private investors can be very diverse, because this term can encompass everything from a benevolent grandparent with an open checkbook to an investing club to the television show Shark Tank a loose network of affiliated investors to an investment firm. Once again, if you have done meaningful research, you will find it easier to seek out and effectively apply to these opportunities. If you can access an alumni network for your college, university, or fraternity / sorority, this can be a great way to find leads for potential private investors.
Seller financing may also make your self-storage investment possible. This could be part of your negotiations when purchasing land or, if you are purchasing a building with the intent of knocking it down and building a storage facility, may also be on the table. If you are obtaining financing through this type of contract, you should be certain to consult a legal professional.
Therefore, although there are meaningful and compelling benefits to building a facility on your own from the ground up, the process can also be complex. However, this does not mean that purchasing an existing facility is necessarily cheaper or easier. Purchasing a facility may be akin to purchasing a turnkey business, meaning that the businesses already operating with employees and materials, has a set of customers, and all you need to do is turn the key. However, things are seldom simple, and even purchasing a “turnkey” facility is not without potential problems. While everyone might dream of purchasing established business from an owner hoping to retire, this does not render due diligence and research any less critical. Buying a self-storage unit facility might also mean buying tax liens, leaking roofs, unhappy customers, underperforming employees, or a facility that costs a fortune to insure. It might mean buying a business that is been run in a way that is simply and fundamentally different from your preferences and goals, meaning that even if nothing is materially wrong, you will have work to do to transform the organizational culture and operations into something you can work with or something that makes you comfortable. As discussed earlier, buying a facility through a franchising agreement is one popular way to enter the self-storage business. These franchises can be good opportunities because they provide an in-road to the industry through a recognizable brand with a successful playbook, but they also have extraordinarily strict liquidity and investment requirements, and the agreements can limit entrepreneurial and creative endeavors because of the strict requirements for operations, communication, and so on.
If you have done effective due diligence, then you know that you are purchasing a business that has proven to generate paying customers and, ideally, growth. If you purchase an existing facility and take your time researching its books and the market surrounding it, you may even find ways to reduce costs right off the bat, because a fresh set of eyes often adds value to problem-solving situations, meaning that your perspective – along with your own network – could result in changes in revenue. For example, perhaps you purchase a facility from an owner who has always enjoyed landscaping and who is looking to retire, but who has let his facility’s landscaping fall by the wayside due to encroaching age. Perhaps you have a friend or relative who only landscaping business, and you can quickly negotiate for professional landscaping at a discount. This may not have been possible for the previous owner, but you may make it possible with your perspective. Alternately, perhaps you will purchase a business from someone with little handiwork skills who has previously relied on professionals and contractors for exceedingly minor repairs, like replacing doorknobs in the administrative office. This type of situation illustrates that the individual preferences and skills that someone might have can lead to distinct benefits and the small business setting. Because self storage facilities encompass real estate, service, and many other aspects, the chances are very high that you have an important skill that could help your self storage business.
Just as you have hopefully already conducted significant research into the business you are buying, you should also expend significant energy on deal analysis. You should get as much information as possible and get as much input as you can. You should contextualize the business, the marketplace, and the competition in the place you are hoping to buy. You should seek out all information, good and bad, about the business you are contemplating the purchase of and the location of its market. That might mean reading negative Yelp reviews or comments from employees. It might mean developing your own marketing surveys online and requesting that people fill them out, offering their perceptions about self-storage businesses in their community, price points, and other issues. The goal should be to develop a detailed and effective case study of your potential purchase. The old saying goes that one stitch in time saves nine, but in this context, an hour spent on research could save you thousands or hundreds of thousands of dollars. The headache or annoyance of research will be more than worth it if it prevents you from pursuing an adverse deal or spending more money than you have to.
If all of this sounds like too much, though, there are other ways to invest in this exciting and fast-growing industry. One of the easiest is to become an independent owner-investor in a private company.
Becoming an independent owner-investor in a non-publicly traded company
Active ownership is not for everyone. Many people would like to reap the benefits of self-storage as a concept, but lack the high levels of liquidity required – and some people are justifiably uninterested in running a business because they are aware they lack the skills or time. However, there are still ways to invest in the storage industry. One means of investing is by becoming an independent owner-investor in a non-publicly traded company. While this designation is a mouthful, this model of investing offers unparalleled flexibility and impressive returns without the need for business acumen.
If you choose to invest in a non-publicly traded storage company such as Luxelocker, you can enjoy unique benefits in a more passive way than traditional owner / active investing in self-storage units might provide. As with any other investment in self-storage or anything else, there are inherent risks and benefits to this approach. However, understanding these risks and benefits could be the first step to evaluating how this investment approach might fit into your own investment strategy.
With Luxelocker, you aren’t buying someone else’s business, nor are you franchising for a fee, so you don’t need to do a deep dive into a particular business, location, or market segment. You aren’t involved in the day-to-day operations of the self-storage industry, so you can put away your hammer and close your spreadsheets. What you get with a Luxelocker investment is unique, and generates returns that could make you richer in both finances and time. You get a property that can store big-ticket items for a high-quality market segment. With Luxelocker, you get ownership rights to real property that you can customize to meet your needs and that you can sub-lease over time as your needs might change. The Luxelocker infrastructure means that if you want to sub-lease your unit, you simply need to inform the team.
Already own land? You can even pledge your land and enjoy the returns as Luxelocker builds and manages the space, which would provide an authentically passive form of investing and an experience that would be much closer to the “myth” of self-storage as a passive investment.
Perhaps best of all, an investment in Luxelocker means that you will not get priced out of the fast-growing RV and boat storage segments of the self-storage industry. The vehicle storage sector was discussed above, and it continues to grow. In addition, the higher-end vehicle storage sector is experiencing rapid growth due to both increases in the number of vehicles owned by the wealthy and the same forces that have increased demand for storage to begin with.
Luxelocker represents the next generation in top-shelf storage units for high-value clients.
Luxelocker is at the cutting edge of storage facilities and is poised to be at the vanguard of the the next generation of high-end storage facilities.
Any investment has risks, and Luxelocker is no different. Adverse market conditions or other factors could impact the investment although numerous factors could impact the specific value of your return on investment (ROI). Although numerous factors could impact the specific value of your return on investment (ROI), you can enjoy returns of 10% or even more. Considering that the price floor is as low as $100,000, which is much lower than virtually all traditional building or purchasing opportunities in the self-storage industry, Luxelocker could provide a compelling investment opportunity that provides the best of many possible worlds. If this sounds amenable to you, you should start a conversation with a financial advisor to more closely evaluate whether this type of investment is right for you.
If the independent owner-investor role does not seem like it would meet your needs, there are some other ways you could invest in self-storage. One emerging concept is that of the REIT, which can provide an investment vehicle that differs from owning a self-storage facility or individual unit. The REIT approach may be ideal for those with limited investment funds, no need for personal storage, or those with lower risk tolerance.
Invest in storage REITs
A REIT, or real estate investment trust, is an investment model in which a company owns real estate that generates revenue. Investors have the same rights as they would in other investments, and are not obligated to contribute labor or any capital beyond the purchase of the share(s) of the REIT. Although REITs traditionally and most often own commercial real estate, they also own residential properties. REITS are subject to unique regulations in the United States, and often specialize in particular sectors or types of properties, such as the storage REITs. Unlike some of the other investment methods discussed earlier in this article, REITs can be traded on stock exchanges. Within the world of storage, however, these REITs specialize in owning and operating self-storage facilities. There are currently (as of 11/1/21) several different storage facility REITs, having yielded a 2020 total return of 12.91% and a 2021 YTD total return of 39.06%. These REITS include CubeSmart (NYSE: CUBE), Extra Space Storage, Inc. (NYSE: EXR), Global Self Storage, Inc. (NYSE: SELF), Life Storage, Inc. (NYSE: LSI), National Storage Affiliates (NYSE: NSA), and Public Storage Associates (NYSE: PSA).
Of these, Public Storage Associates is the largest by market capitalization, at $36.02 billion. However, all of these REITS can boast of impressive market capitalization in the billions of dollars. All represent companies with a commanding footprint and property portfolio spanning multiple states and, in some cases, multiple countries.
One can purchase shares of REITS using apps like Robin Hood or Stash, or using more traditional investment means, such as through a broker or financial advisor. Because there is already so much material about retail investing, this article is not focused on stock purchases of self-storage investments such as through investing apps.
It should be clear by now that there are many different ways to invest in self storage. Whether you are a hands-on owner with a great deal of entrepreneurial skill, someone who just wants to invest some resources into the concept, or someone who could benefit from storage but wants to own their own space, there is a way for you to enter this industry if that is what is right for you. There is doubtless an investment vehicle that meets your needs for effort, floor price, expertise, and interest.
Conclusion
Even though shifts in population density have been favorable for self-storage facilities as people have flocked to smaller homes in cities, the industry itself has had a difficult few years. Some analysts have noted that it is precisely because these facilities are perceived as “easy,” “cheap” investments that the industry has declined, with revenues and returns plummeting as supply has soared after an unprecedented demand spike during the 2008-2009 recession. However, this decline might be a function of both facility oversupply as well as of a glut of underqualified people entering the sector and attempting to operate businesses: Oversupply as well as a decline in quality due to new entrants in the market perceiving it as a get rich quick scheme might have contributed to the dramatic decrease in the sector from 2016 to 2017.
In addition, black swan events like COVID-19 have transformed the self storage industry once again. Prolonged lockdowns spawned innumerable temporary moves away from cities and offices, resulting in yet another demand spike for self-storage facilities with new interest from commercial, as well as consumer, clients. Emerging investment models like the independent owner-investor business model can provide ways for people to both get the storage they need while also developing a powerful revenue stream – and in a COVID-conscious world, independent, hands-off experiences command a premium.
The ups and downs in the self-storage market show that even though many of the myths surrounding the sector are just that, there are also opportunities. Some may see market downturns as red flags for the industry itself, but others might see them as challenges or space in which they can apply their unique skills and qualities to improve the industry. In the final analysis, these ups and downs might be useful for both market correction and for selecting out those who have entered the self-storage industry due to misinformation, myths, and misperceptions.
The key takeaway should be that if you understand the risks and what is required within each particular investment approach, then this investment could be right for you. Consequently, if you are right for this sector, then there remains space to enter the market.