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In this episode, Brandon and Thomas are joined by the nation's leading expert in self-storage, Scott Meyers. Today Scott gives an overview of the self-storage industry, the benefits of investing in self-storage for active and passive investors, the various ways to add value to self storage, where he believes we are in the current market cycle, and much more.
Scott began investing in single-family homes. Soon he moved to apartment investing but still didn't see the economies of scale and simplicity he was hoping for. This led him to the self-storage sector, in which the management process is simpler and the typical benefits of real estate are still present, such as appreciation, cash flow, and financing options.
Overview of Self-Storage Investing
Self-storage dates back to the 1700s with many houses in the new world dedicated to the storage of traded items. Since then, we've seen one of the largest booms in the self-storage industry coming out of the last recession.
Self-storage is not the warehouse industry. We're talking about monthly private leases, more like a public storage facility. The owners don't have access to the items stored in the unit, only the renters. The laws are friendly for self-storage investors: the borrower of the unit has all liability related to the items inside and it is not difficult to get a unit borrower out of your self-storage business, as opposed to the tenant eviction process.
Why Switch from Multifamily to Self-Storage Business?
Many passive and active real estate investors don't know the difficulties of multifamily investing during a recession. The value of SFH's and apartments plummet during recessions! You usually must hold these assets until another upward trend. On the contrary, self-storage actually experiences higher demand during tough times. Businesses are downsizing, people are moving in together, and this exodus means that many possessions get stored in individual storage units.
Interestingly enough, the liquor and self-storage market profit the most during economic downturns. This industry is inflation-proof and recession-proof. Better said, it's recession-resistant! It's going well in both times of economic growth and in times of recession. Once you start watching historic movements, you'll notice that self-storage has proven to be the most profitable investment for passive income.
Storage space in demand for everyone, not just "mom and pop" self-storage tenants. Millennials are looking for storage space to hold both their household items while they travel and their backup property types such as kayaks, motorcycles, etc.
When you think about the hassle of tenants, toilets, and trash, investing in self-storage facilities definitely seems like a very safe and passive investment option. Self-storage owners don't have a lot of management responsibilities but still have a stable cash flow.
Adding Value to a Self-Storage Facility
There could be distressed owners or a distressed facility upon acquisition. After purchasing, implementing items like kiosks, a website, and making small improvements can quickly add value to the storage facility.
Other ancillary income streams could come from adding supplies such as locks and boxes, renting moving trucks, selling renter and mover insurance, shipping services, propane filling stations, and climate-controlled storage. On-site managers can run these types of businesses within your self-storage business because there isn't much to directly manage for the self-storage itself.
Current Real Estate Market Cycle
What does the future hold for self-storage? From all the information Scott has been studying, he believes we are likely heading to a recession. Some may believe we are already in a recession with the inversion of the yield curve, bond rates, and the drop in the sale of luxury items.
Self-storage is a pretty static industry. The business model is not dynamic - it's a fairly simple and predictable business model. The supply and demand and break-even point are predictable, even in new markets so there aren't increased risks during times of economic decline.
Why Should Limited/Passive Investors Add Self-Storage to Their Portfolios?
As said, self-storage does well during recession and periods of inflation. Compared to other asset classes, self-storage is typically the safest. Demand and rates increase during downturns. In multifamily, rates drop, and development halts during the recession. In 2009, the top rates for other asset classes dropped 40% and self-storage rates increased 5% plus dividends. Self-storage has the lowest loan default rate with .5% as opposed to 12% for apartments and the mid-teens for single-family homes.
On top of this, if you invest in self-storage facilities, you'll diversify your portfolio. In the real estate business, it's very important to invest in different types of real estate properties so you can minimize the risk to your capital. You don't want to put all your money in just one real estate investment trust and be done with it because that's very risky. That's why it's suggested to have diverse investments running like a could of real estate investment trusts, multi-family units, vacation rentals, and, the safest, self-storage facilities. There are even a lot of storage REITs, you should definitely keep your eye on.
Tax Advantages of Investing in Self-Storage
No different than other forms, as a passive investor you will get a form K1. In self-storage, cost segregation and bonus depreciation can provide depreciation write-offs of 30-40% of the purchase price in two years.
Once you decide to invest in self-storage, you can find many old industrial buildings that other industries, such as retail or multifamily, have avoided. These self-storage properties are typically inexpensive after other industries have passed on the opportunity so you can actually have a higher return on your investment.
The Best Tech for Self-Storage Facilities
Kiosks that were implemented in 2005 are finally starting to be more mainstream. They add functionality and much value to the self-storage facilities. There are also wireless locks inside of the unit doors that are amazing! They can get locked and unlocked with an app and the property management system can also lock the unit, in case someone doesn't pay. Once the rent is paid at a kiosk, the software can automatically open the unit.
Adding this automation to interactive video cameras and screens allows the borrower to rent the unit right from the main office. They might not even need human interaction because the process is very simple. Human employees typically come into play, if the self-storage facility is very large. You can have people in the office to up-sell and offer any other services or amenities the borrower may need. That's why Scott likes to have a person in the office, to run his business, increase the value of self-storage units, take care of small business administration, and make sure everything goes smoothly.
Regions of the U.S. for Self-Storage
With 1 in 10 U.S. households renting at least one storage unit, there is a high demand for public storage. The self-storage companies are on the rise and the industry is still growing. Now the industry holds multi-billion dollar investments through the U.S.
Houses in states such as Florida typically don't have basements. Florida also has large multifamily housing in populated areas. That's why these places have high demand. Other areas such as college towns and military areas also have notoriously high demands for self-storage.
How Much Does It Cost to Invest in Storage Units?
Owning a self-storage facility can be very profitable but you have to calculate the costs and minor risks so you can create a business plan. Always look for the long term if you want your investments to be successful.
The biggest variable to your cash flow is the location. In the real estate business, location is everything. Storage units are usually located in urban and suburban areas (rarely in rural ones) and the rental prices are in direct correlation with the surrounding prices. However, unlike commercial real estate such as multifamily properties, self-storage facilities don't require a lot of money to maintain. You don't even have to hire a management company.
The vacancy rates are around 10% so you know what kind of cash flow you can expect. Naturally, you should also count in the marketing costs (for billboards or internet ads), legal expenses, and other operating costs. Once you take all this into account, compare it to the rental prices of the self-storage market and see if this kind of investment is worth for you personally. The overall cost of investing in storage units depends on the type of investment you're making and how cash flow you are expecting.
How to Invest in the Self-Storage Business?
There are several ways you can invest in self-storage. You should carefully examine your options before making investment decisions.
As mentioned, you should consider storage investment trusts. They provide one of the simplest opportunities for passive investments. It doesn't require much time on your end and you'll still receive a decent income through dividend returns.
As with all real estate investments, there are potential risk factors such as oversupply or unexpected vacancy rates. That's why it might be a good idea to start your investments with established REITs such as Public Storage, (PSA), Prologis (PLD), Americold Realty Trust (COLD), and others.
If you want to actively participate and increase your income, consider investing in your own facility. You can either build one from scratch or renovate and further develop an existing one. This type of investment is more expensive and time-consuming but it can be extremely profitable. However, you need to know exactly what you are doing to maximize your ROI. You need to have a lot of experience and knowledge or find someone who does.
Take into account how much time you have so you know if this is the investment option for you. Note that once the building/renovation process is done, you don't have to be involved with the facility's management. Small facilities with less than a hundred units can be managed by a part-time employee while larger ones might need an on-site manager or a third-party management company.
Purchasing an Existing Storage Facility
You don't have to build or renovate if you purchase an existing facility. All you need to do is carefully research to find the most optimal and most profitable self-storage facility for you. You can search online at the industry website or you can work with a commercial realtor, which is more recommended.
Make sure to do a detailed cash flow analysis and look at the operating costs before deciding on a particular building. Look for expenses such as:
- Real estate taxes
- Property insurance
- Marketing costs
- Maintenance costs
If you don't want to make additional improvements, find the building that's up-to-date with the latest industry standards. You want to generate a high income so find a facility that is:
- Climate controlled, which means it maintains steady temperatures and humidity levels.
- Attractive, with fresh paint, maintained lawn, and generally safe-looking
- Equipment with a solid security system such as automatic locked gate, security cameras, etc.
- Bright, even at night due to the proper lighting system.
- Modernized with adequate technology, has online payment options, kiosks, etc.
All these features can increase the property's value. You want to stay ahead of the competitors so make sure to always do market research. Sometimes you may need additional features if your competitors don't have any to stay ahead of the competition. Of course, everything depends on the location. For example, climate-controlled storage is a must in Florida because of extreme heat in the summer and high humidity levels. In states with moderate weather, you might not need these features.
Self-Storage Investing Secrets Revealed
Stop wondering if self-storage facilities are a good investment and see for yourself! Check out this free guide on how to retire earlier and enjoy dependable passive income with the best-kept secret in real estate – self-storage!
Learn more about Scott and his work: https://selfstorageinvesting.com/