How to Invest in Self Storage Facilities

Investing in self-storage facilities involves acquiring properties where individuals and businesses rent space to store their belongings. The self-storage sector has demonstrated consistent growth and appeals to investors due to its unique characteristics. Demand is driven by various life events such as moving, downsizing, or business inventory needs.

Ways to Invest

Individuals interested in the self-storage market have several avenues to consider. These methods range from direct hands-on management to passive investment strategies. Understanding these different approaches helps align an investment with personal financial goals and risk tolerance.

Direct Ownership

Direct ownership involves purchasing an existing self-storage facility or undertaking the development of a new one. This approach grants investors complete control over operations, management, and strategic decisions, offering the potential for higher returns through value-add initiatives like facility improvements or operational efficiencies. Acquiring an existing facility allows for an immediate income stream, bypassing the initial work of development. However, this method demands significant upfront capital and entails ongoing operational responsibilities, making it suitable for those willing to dedicate time and resources to active management.

Developing a new facility provides the opportunity to design a property optimized for current market demands and technology, potentially leading to higher long-term profitability. Construction costs for self-storage facilities can be considerably lower than other commercial buildings. This option, however, involves greater development risk, including securing appropriate zoning, permits, and managing construction timelines and budgets. Both direct ownership paths require an understanding of real estate acquisition and property management.

Self-Storage Real Estate Investment Trusts (REITs)

Investing in self-storage Real Estate Investment Trusts (REITs) offers a more passive approach, allowing individuals to gain exposure to the sector without directly owning or managing properties. REITs are companies that own, operate, or finance income-generating real estate, including portfolios of self-storage facilities. By purchasing shares in a self-storage REIT, investors own a piece of a diversified portfolio of properties.

This method provides benefits such as liquidity, as REIT shares are traded on public exchanges, allowing for easy buying and selling. It also offers diversification across multiple properties, reducing the risk associated with a single facility’s performance. While REITs offer professional management and a lower entry barrier, investors have less direct control over specific properties and are subject to stock market fluctuations. Some of the largest self-storage REITs include Public Storage (PSA), Extra Space Storage (EXR), and CubeSmart (CUBE).

Syndications and Private Equity Funds

Syndications and private equity funds involve pooling money from multiple investors to acquire or recapitalize larger self-storage projects. These group investments are managed by experienced sponsors or operators who handle all aspects, from acquisition and management to eventual sale. This structure enables individual investors to participate in larger, institutional-grade deals that would otherwise be inaccessible due to high capital requirements.

Investors in syndications benefit from passive income and access to professional expertise, as the sponsor manages the day-to-day operations and strategic decisions. While offering the potential for higher returns than REITs due to their targeted nature, investors have less control over individual investment decisions and rely heavily on the sponsor’s performance and transparency. Due diligence on the sponsor’s track record and the specific project’s financial model is important before committing funds.

Real Estate Crowdfunding Platforms

Real estate crowdfunding platforms provide another accessible entry point for smaller investors to participate in self-storage projects. These platforms allow individuals to invest in specific real estate deals, including self-storage facilities, with lower minimum investment amounts compared to direct ownership or traditional private equity funds. Crowdfunding can offer diversification by allowing investment across multiple projects, potentially spreading risk.

Investors select projects based on their criteria and receive returns based on the project’s performance, often through rental income and property appreciation. While offering accessibility and diversification, investors should review the platform’s fees, the specific deal’s terms, and the project sponsor’s experience and track record.

Key Considerations Before Investing

Before committing to a self-storage investment, an analytical process is important, regardless of the chosen investment method. This involves gathering and evaluating information to assess the viability and potential profitability of the opportunity. Understanding market dynamics and property specifics helps in making an informed decision.

Market Analysis

Market analysis is important to any self-storage investment. This involves researching local demand drivers, such as population growth and housing trends, including new residential developments or a high percentage of renters. Demographic data, such as income levels and the prevalence of homeowners versus renters, provides insights into the customer base and their storage needs.

Analysis of existing supply and the new construction pipeline in the target area is also important. An oversupply of units can lead to increased competition and downward pressure on rental rates and occupancy. Examining the average occupancy rates of existing facilities in the area helps gauge the current demand-supply balance. The self-storage industry had an average occupancy rate of 92% nationwide in 2022.

Location Factors

The location of a self-storage facility impacts its success. Visibility from major roads and accessibility for customers are important. Easy ingress and egress, along with ample space for moving trucks and trailers, are practical considerations that enhance customer convenience. Traffic patterns around the proposed site can indicate customer flow.

Local zoning regulations are also an important factor, as they dictate whether a self-storage facility can be built or expanded in a particular area. Understanding these regulations early in the process can prevent delays or outright rejection of a project. Proximity to residential areas, commercial zones, or major transportation hubs can provide a steady stream of tenants.

Property Assessment

For direct ownership or when evaluating specific syndication opportunities, a property assessment is necessary. This includes examining the unit mix and the proportion of climate-controlled units. Climate-controlled units command higher rental rates and appeal to a different segment of the market. The condition of the facility, including its buildings, pavement, and fencing, impacts immediate repair costs and long-term maintenance needs.

Security features are important for attracting and retaining tenants, including:
Surveillance cameras
Gated access
Individual unit alarms
Adequate lighting

The potential for expansion on existing land is another consideration, as it allows for future revenue growth without needing to acquire new property. An assessment of the facility’s current technology, such as online booking capabilities and management software, can indicate its operational efficiency.

Financial Projections and Metrics

Understanding the financial health and potential of a self-storage investment requires analysis of financial indicators. Occupancy rates, both physical (percentage of rented units) and economic (percentage of potential revenue collected), are important for assessing current performance and forecasting future income. Rental rates per square foot directly influence revenue generation.

Operating expenses, which are lower for self-storage compared to other commercial real estate, include:
Property taxes
Utilities
Insurance
Maintenance
Management fees

These expenses should be analyzed to project the Net Operating Income (NOI), which is the property’s income after deducting all operating expenses but before debt service and income taxes. Capitalization rates (cap rates), calculated by dividing NOI by the property’s value, provide a way to compare the relative value of different self-storage investments. The average cap rate for self-storage facilities was reported around 6.5%.

Acquiring and Operating a Self-Storage Facility

For those pursuing direct ownership, the process involves a series of structured steps, from due diligence to securing financing and managing ongoing operations. This section outlines the actions required to acquire and run a self-storage business.

Due Diligence Process

Once a potential self-storage property is identified, a due diligence process begins to verify all aspects of the asset. This phase involves legal due diligence, where a title search ensures clear ownership and identifies any encumbrances on the property. Reviewing existing permits and zoning compliance confirms the facility’s legal operation and potential for future development or expansion. Environmental reports are important to identify any hazardous materials or contamination, which could lead to liabilities.

Financial due diligence entails a review of the facility’s historical income statements, expense reports, and lease agreements to validate the seller’s financial representations. This includes examining rent rolls, delinquency rates, and ancillary income sources like retail sales of packing supplies or tenant insurance. A physical inspection of the property assesses the condition of buildings, roofs, asphalt, security systems, and individual units, identifying any deferred maintenance or capital expenditure needs.

Financing Options

Financing a self-storage facility involves commercial real estate loans, with various options available depending on the investor’s profile and the property’s characteristics. Conventional bank loans are a common choice, offered by local, regional, and national banks, requiring a down payment ranging from 20% to 30%. These loans have terms of 5 to 10 years with amortization periods up to 20-25 years.

Small Business Administration (SBA) loans can be viable for self-storage acquisitions, particularly for owner-operators. SBA loans feature lower down payments, sometimes as low as 10% to 15%, and longer repayment terms, which can improve cash flow. Private financing or seller financing can also be negotiated, offering more flexible terms for certain deals. Lenders will assess the property’s income-generating potential and the borrower’s financial strength.

Closing the Deal

The closing phase involves the legal transfer of ownership and the finalization of all financial arrangements. This includes signing the purchase and sale agreement, loan documents, and other legal instruments. Funds are transferred from the buyer to the seller, and the title to the property is conveyed. The closing process also accounts for prorations of property taxes, insurance, and rental income.

Working with an experienced commercial real estate attorney and a reputable title company is important to ensure all legal requirements are met and the transaction proceeds smoothly. The buyer receives the deed and other ownership documents, officially taking possession of the self-storage facility.

Facility Management

Effective facility management is important for maximizing profitability and maintaining high occupancy rates. Tenant acquisition and retention involve marketing efforts, including a strong online presence, search engine optimization, and local advertising to attract new customers. Providing good customer service is important for retaining existing tenants and generating positive word-of-mouth referrals.

Rental rate management involves operators adjusting prices based on demand, occupancy levels, and competitor rates. Unlike traditional real estate, self-storage uses month-to-month leases, allowing for flexible pricing adjustments. Regular maintenance and timely repairs of the property, units, and equipment are important to ensure a safe and appealing environment. Implementing security systems, including surveillance, access control, and adequate lighting, protects tenants’ belongings and the property itself. Leveraging technology, such as management software for billing and unit assignments, and online booking systems, streamlines operations and improves the customer experience.