Why a Storage Unit Is a Good Investment

Self-storage facilities are a resilient real estate asset class, providing space solutions for individuals and businesses. They maintain demand across economic cycles, making them an attractive investment.

Methods of Investing in Storage Units

Individuals can invest in self-storage through several pathways. Direct ownership involves acquiring or developing a facility. This provides complete control over operations and property improvements but requires significant capital and hands-on management.

Real Estate Investment Trusts (REITs) are another option. These publicly traded companies own, operate, or finance real estate. Investing in self-storage REITs allows individuals to buy shares, gaining exposure to diversified properties without direct management. REITs must distribute at least 90% of taxable income as dividends.

Private equity funds and syndications offer a middle ground. They pool capital from multiple investors to acquire or develop properties. These funds provide a more hands-off experience than direct ownership, with more direct property exposure than REITs. They typically cater to accredited investors seeking diversified real estate with professional management.

Financial Characteristics of Storage Unit Investments

Self-storage properties generate income primarily through monthly rental fees. Additional revenue streams include late payment fees, administrative fees, and sales of moving and packing supplies. Some facilities also offer truck rentals or tenant protection plans.

Common expenses for operating a self-storage facility include:
Property taxes
Insurance costs
Utility costs
Ongoing maintenance and repairs
Marketing expenses
Management fees
Debt service on loans

Financial viability is evaluated using Net Operating Income (NOI) and capitalization rates (cap rates). NOI is calculated by subtracting operating expenses from gross revenue, excluding depreciation and loan payments. This shows the property’s profitability before financing.

Cap rates express the relationship between a property’s NOI and its market value. A cap rate is determined by dividing NOI by the property’s current market value, representing the anticipated annual return. Cap rates vary based on market conditions, property quality, and location.

Financing involves commercial loans. These loans often require a down payment, with loan-to-value (LTV) ratios up to 70-80%. Loan terms vary, with interest rates dependent on market conditions and borrower creditworthiness.

Market Analysis and Property Evaluation

Location is crucial when evaluating a self-storage investment. Properties in high population density areas with good visibility and accessibility perform well. Proximity to residential areas indicates strong demand, as convenience is a primary factor for tenants.

Demand for self-storage is driven by societal and economic factors, including:
Population growth
Trends towards apartment living
Decreasing size of new single-family homes
Life events like moving, downsizing, or divorce
Growth of e-commerce, as small businesses use units for inventory

Analyzing the competitive landscape is crucial. This involves identifying existing facilities within a typical trade area. Investors should research competitors’ pricing, occupancy rates, and amenities to determine if the market is under-supplied, over-supplied, or in equilibrium. An under-supplied market typically has occupancy rates above 90%, while an over-supplied market may have rates below 80%.

Property-specific due diligence involves a thorough review before acquisition.

Financial Due Diligence

This includes scrutinizing financial records to verify income and operational costs.

Physical Due Diligence

A physical inspection assesses the property’s condition, identifying any deferred maintenance or structural issues.

Legal Due Diligence

This involves reviewing zoning, environmental assessments, and leases to ensure compliance and uncover liabilities.

Ongoing Management and Operational Aspects

Managing a self-storage facility, particularly for direct owners, involves consistent attention to tenant relations. This includes drafting and enforcing lease agreements and implementing efficient rent collection. Dealing with delinquencies requires adherence to local lien laws, which permit the auction of stored property after non-payment.

Facility maintenance is a continuous requirement for property appeal and function. This encompasses routine upkeep like cleaning, landscaping, and pest control. Regular repairs of unit doors, security gates, and fencing are necessary, along with maintaining security systems. For climate-controlled units, maintaining HVAC systems and monitoring humidity levels protects stored items.

Staffing decisions involve hiring on-site managers, implementing remote solutions, or engaging third-party management companies. Third-party companies handle daily operations, tenant interactions, and marketing. The choice depends on the investor’s desired involvement and the operation’s scale.

Marketing and maintaining high occupancy are ongoing priorities. Strategies include establishing an online presence, utilizing paid advertising, and engaging with local communities. Offering discounts, promotions, and referral incentives attracts new tenants, while focusing on customer service and retention helps maintain consistent occupancy.