Self-storage is one of the niches of the real estate market that’s not hard to love. It offers high upside potential, performs well in any economic situation, creates high cash flow, needs relatively low CAPEX, and it can run with minimal supervision. Self-storage businesses are also known for their minimal construction costs, low overheads, loyal tenants, and monthly leases.
So, if you want to invest in this segment, you can become either a passive or active investor. Passive investors are the ones who invest in publicly-listed companies while active investors acquire existing facilities or start new ones. If you want to learn more about self storage real estate investing, read more below!
An Overview of the Self-Storage Industry
The global self-storage industry is estimated to be worth around $49.24 billion in yearly revenue by 2024. There are also more than 45,000 to 60,000 self-storage facilities in the US alone that offer 1.7 billion square feet of available space. But the industry is still considered to be fragmented as the top self-storage companies only control 16% of the market while independent owners account for 77%.
Since the industry is fragmented, you may find it appealing to buy a self storage facility for sale that’s run by independent owners, turn the business around by increasing profits, and create a stable cash flow or put it in the market for a real estate investment trust (REIT). By doing so, you’re using the strategy called “consolidation play,” where some investors make the first move by acquiring assets to gain more market share.
Terms You Need To Know When Investing In Self-Storage
These are some of the jargon that you need to learn when you start self storage real estate investing:
- Physical Occupancy: This is the number of units that are currently leased by customers as a percentage of the total number of units that are rentable.
- Economic Occupancy: This is the amount of rent that you collected as a percentage of your actual or gross rent. This number can be affected by several factors such as the number of vacant units, discounts, unpaid rent payments, etc.
- Stabilized Occupancy: A self-storage facility is stabilized if it reaches 80% to 90% occupancy in a year.
- Lease-Up Schedule: This refers to the amount of time that it takes for new self-storage facilities to attract customers and reach a state of stabilized occupancy. Most properties usually take around three to four years to stabilize.
- Net Operating Income: You can get this value by subtracting operating expenses from gross income.
- Debt Service Coverage Ratio: This is a measurement of a facility’s cash flow to cover its liabilities. It can be calculated by dividing the net operating income by the total debt service for the same period. If it results in a value greater than one, it means that the facility has positive cash flow, while it is generating less income if it’s less than one.
- Capitalization Rate: This is the initial yield on a real estate investment. You can determine your investment’s cap rate by getting the NOI from the first year of operations and dividing it by the price of the facility. If you want to get the cap rate for new facilities, you can substitute the price of the facility with the estimated total development cost. But cap rates are generally more useful for facilities that are already stabilized.
If you want to consult a professional to help you take a deeper look into the market before making an investment, you should reach out to Self Storage Investing to learn more about self storage real estate industry.
The Main Benefits of Having Self Storage As An Asset
These are the two main benefits of investing in the self-storage market:
Stable, Consistent Cash Flow
Self-storage customers have a lot of reasons for leasing a unit. Some do it to store non-essential household items, some do it when they need to move to a new area, while some need a secure space to store their extra car, boat, or RV. Since people have so many reasons to rent a storage unit, it is the reason why this segment got its resilience from economic turmoil. So, there are only a few risks in investing in self storage real estate properties instead of those in the residential segment.
Since storage facilities are still even important regardless of the situation of the economy, the industry has a counter-cyclical quality. Also, since there’s less turnover in the market compared to others, and the storage units are smaller, you won’t be as affected by fluctuating vacancy rates.
In contrast to other types of commercial properties, such as retail stores or restaurants, self-storage facilities require less care and maintenance. Normally, a storage unit would only need some sweeping for it to be ready for the next customer. In the worst-case scenario, you’ll need to auction off the stuff that people left behind and make a quick buck from it.
Also, you won’t need to pay leasing commissions to make agents bring enough customers to bring the facility to full capacity. You also don’t need to make improvements for tenants like replacing lights or keeping hallways clean. Marketing self-storage businesses are also much easier and more affordable than other commercial properties. You only need to make a website and have an active phone number to enable customers to reach you.
In terms of staff, you may only need to hire part-time maintenance staff, either a full or part-time manager and a security team. Since labor is very pricey in other industries, having the ability to operate a business without needing a lot of people to help run it adds to the appeal of self-storage facilities for investors. So, it’s one of the best ways to create a passive source of income.
This article sheds some light on the factors that you need to consider before you start investing in self storage real estate properties as well as the segment as a whole. Remember a few things if you want to be a successful self-storage investor such as doing a market analysis by determining several factors (e.g. capitalization rates, NOI, DSCR, etc.). But it’s almost a guarantee that your investment would be protected from the trends in the wider market, and it may have a good chance of becoming a stable source of cash flow. Visit our blog to learn more.