Self Storage Investing can be a great way to obtain tremendous cashflow without the headaches of tenants or toilets. You're about to discover why investing in self storage facilities can be so profitable, how to find the best deals, the 3 main types of self storage properties, the 2 ways storage building purchases are structured, how to find funding for these properties, the 2 most common myths and perhaps most importantly, what to watch out for. By the end, you'll walk through the numbers on a real life self storage investing deal. Enjoy!
Why Invest in Self Storage Facilities?
You may be asking yourself, "what are the benefits of investing in self storage?". While it may seem overwhelming, it is wise to consider the financial advantages of putting your money towards self storage. To begin, something that makes investing in self storage such a reliable source of passive income is the fact that people will always need a place to store their extra belongings! Self storage is utilized by 1 out of every 10 people in the US, making it a practical and steady investment for you. With over 50,000 self storage facilities in the US, there is plenty of investment opportunities. This $220 billion dollar industry is largely controlled by mom and pop operators, another fact that proves that ANYONE can invest in self storage.
What makes self storage so unique in comparison to investing in multifamily apartments is the relative absence of trash, toilets, and tenants. These three attributes are nowhere to be found in self storage, as the average stay is about 1-3 years. In fact, evicting a self storage tenant is extremely quick and easy. This will not only make it less of a maintenance burden for you, but also provide lower turnover costs, as your self storage customers lease their units for years, as opposed to months (as seen with apartment investing).
Perhaps the best reason for you to invest in self storage facilities is the cash flow that results from it. The sheer number of people who will be paying you for storage, as compared to a single unit investments, will provide you with enough cash flow to pay your bills without having to worry about the next time money will come in.
How to Find the Best Self Storage Deals
There are plenty of resources available to you to use and guide you in your self storage investment journey. There are both free and paid websites, broker communities to join and grow in, and direct-mail campaigns.
These two websites provide self storage listings for you to browse and hopefully invest in!
Some additional websites that are worth looking into as you begin to look for self storage deals are:
#2: Broker Community
Do not be afraid to take a leap of faith and begin building and nurturing positive relationships with agents in the broker community. When a real estate agent you know gets a listing, the goal is to be the first person they think of, giving you a first-mover advantage on a self storage deal. It is incredibly important that you focus on developing relationships with real estate brokers that are in the self-storage niche, as this will most beneficial to both you and the broker.
#3: Direct-Mail Campaign (Direct to owner)
A direct-mail campaign involves mailing letters directly to the owners of the self storage property who are looking to sell. This is not the quickest way, but it does start a direct line of communication with the owners of the property who are often mom and pop operators. The average response rate to these letters are 2-4%, but starting the process is super important!
3 Main Types of Self Storage Properties
During your self storage investment search, you will discover 3 main types of facilities, which have been divided into classes.
The first is Class A. These are the brand-new, beautiful properties built in 2000 to present day. They are often high priced facilities owned by larger institutions, and are not a great idea for beginners due to the large amount of competition that you will have to deal with, as well as very high prices in order to invest.
Secondly, Class B are facilities built in the 1980s or 1990s, and are owned by mom and pop operators, with stable numbers. They may not be in the most ideal locations, but nonetheless are a great first self storage investment that will remain stable.
Thirdly, Class C are much older buildings that have more maintenance issues and are often in poor neighborhoods. This is an extremely risky investment and is something that requires lots of experiences, either from yourself or from a more experienced real estate mentor. These properties are often only a few years from becoming obsolete, requiring renovations to bring back their value. This is absolutely possible, but should be saved for more experienced investors.
2 Ways Self Storage Purchases are Structured
There are 2 types of deal scenarios that you may run into while investing in self storage facilities.
Turnkey (stable) Deals:
Turnkey deals are often known to be very stable. They often include class A and B deals, as previously described above. These deals happen as follows: you buy, own, and receive the cash flow. It is much easier to get financing with turnkey deals and the locations are often more desirable.
In a Turnaround deal, it involves properties in distress that need to be "turned around". These properties are most often found in undesirable locations and involve a lot of time and involvement to restore. It is much riskier overall as compared to Turnkey deals.
Things to Look For:
When looking to invest in self storage, it is crucial to consider the attributes that it will have. Things such as size, unit mix, location, and visibility are just a few of the many characteristics that you should take into account when investing in this kind of property.
While it may seem obvious at first, knowing the size of the self-storage facility will help you get an idea of how many units you will need to manage. It is recommended that you have 30-40,000 square feet to be able to afford a full-time manager. If you plan to self-manage, you can simply start smaller, but know your numbers.
It is ideal to have a mixture of different storage unit sizes. Customers want variety and you will be catering to many different needs. By offering variation to your customer base, you will greatly increase your occupancy and income from this investment.
This can be measured with 1-3-5 mile radius. You will pull 90% of your customer base from this radius. Make sure to research this radius to ensure that you have enough potential customers for your self storage facility. Even asking nearby businesses can be an easy way to gauge how much traffic the area gets.
You ideally want your storage facility to be located in a growing area. If it appears that the city is expanding away from the area, think twice about investing there. Lastly, know your competition! How closely are they located to your facility? What are their prices? Is their facility newer? Consider these things before investing.
This is how many vehicles that might pass by your business on any given day. A simple Google search can actually tell you how much traffic is in the area of your business.
Signage and Visibility:
Your customers must know where you are located to be able to give you business. Make sure to understand local laws on signage allowances and invest in an area that is easily accessible.
Understand what the inherent management situation is. Ask yourself if the property is managed by the owner or a management company? Are you going to self-manage or hire someone? This will ensure that things run smoothly at your self storage facility.
From personal experience, having poor drainage will cause issues and prevent you from renting out the storage units. When you do due diligence the Property inspector will help find potential issues.
How to Fund Your Self-Storage Deal:
Bank requires 3 things for any income producing commercial real estate loans:
#1. Property’s income and expenses and what is leftover
#2. Property’s condition and location
#3. Borrower’s credit and financial situation
Sources of Money to Finance Your Self-Storage Facility:
Here are several sources of money to help you finance your storage facility.
- Local regional banks
- Credit Unions
- SBA (Small Business Association)
- The 7A Loan Program and 504 Lending Program are specifically tailored for storage units
- Private Investors
- Seller Financing
2 Biggest Myths of Self Storage: (26:35)
Myth 1: It’s a hands-off passive income business
In any commercial real estate business that is income producing you need the 4 M’s to be successful. These 4 M's include systems on handling the Money, the Marketing, the Management, and the Maintenance. If one falls down they all can fall down. The better you are at managing your business the more money you will make.
Myth 2: It’s a quick turnaround business
Wrong! Renovations take a long period of time to get stabilized, and in some cases up to 3 years to do so. It takes the 4 M’s to succeed, so make sure to remember them.
Let’s Analyze a Deal:
Deal was found on Loopnet.com. It takes place in a small town in Georgia, 270 units spread out in 32,000 sq. foot on 3.5 aces It has an asking price of $485,000, with 80% occupied, 20 years old, gated, and brought in $79,000 last year.
Is this a good deal?
You need the annual income, the annual expenses, and to know the debt services (mortgage payments a year)
- Income: $79,000 a year
- Expenses: Self-storage rule of thumb: 40% of income so $32,000 a year
- Income-Expense=NOI (Net Operating Income)=$47,000
- NOI-Debt services (Mortgage) =cash flow/money in your pocket
- Down payment is 25% of purchase price=$121,750
- Asking Price $485,000-down payment (121,750)= $363,750
- Mortgage rate is 5% 30 years
- Mortgage payments= $1953.69 a month
- Annual Payment is Mortgage Payment ($1953.69 x 12)= $23,432 = Debt Service
- NOI ($47,000) – Debt Service ($23,432)= Cash Flow of $23,568 a year
- Cash and cash return is Annual Cash Flow ($23,568) divided by down payment ($121,750)=19%
As you begin your self storage investing journey, keep all of these tips in mind and remember to remain steadfast, focusing on building relationships with other real estate agents in this niche and staying smart with your money when investing.