Why Is Self-Storage Investing so Lucrative?
• It performs great during good or bad economic times. During good times, people are buying lots of stuff and need a place to store it. And during downturns, people are downsizing their homes, so again, they need storage.
• Self-storage garners sticky tenants. People in this asset class are willing to put up with more rent increases than tenants in other classes. Let’s say an owner increases rent by 6 percent. Self-storage customers paying $100/month aren’t going to take a Saturday to rent a moving truck, get friends together to help them lift things, and relocate all their belongings elsewhere to save $6. But apartment dwellers paying $1,000/month might be motivated to move to save 6 percent.
• It’s a huge industry. The size of the self-storage industry is on par with Starbucks, McDonald’s, and Subway combined. But the way in which things are optimally run within the industry is shifting. The strategy now is to buy mom and pop-owned facilities, upgrade them, increase the income, increase the value, then refinance or resell it to an institutional investor.
• There are a lot of simple, inexpensive value adds. For example, adding truck rental can increase income a few thousand dollars on a self-storage facility. Late fees, admin fees, raising rent, and putting in a showroom are other options.
• You make money when you buy, operate, AND sell. In other areas of real estate, it’s said that you make money when you buy. But the self-storage value formula is buy from a mom and pop, upgrade to an institutional standard, then refinance or sell to a REIT—and money’s being made the whole time.
• Value isn’t limited by comps. For residential owners and investors, value is limited by comparable properties in the area. This isn’t the case in commercial real estate. The value is calculated by dividing the net operating income by the rate of return (or cap rate). So, if you can increase the numerator and compress the denominator, you can dramatically increase the value of your asset.