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. He then moved to apartment investing and still didn't see the economies of scale and simplicity he was hoping for. This led him to self storage, as the management process is simpler and the typical benefits benefits of real estate were still present, such as appreciation, cash flow, and financing options.
Self-storage dates back to the 1700s with many houses in the new world dedicated to storage of traded items. Since then, we have seen one of the largest booms in the industry coming out of the last recession. Self-storage is not the warehouse industry. These are monthly private leases where 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 business, as opposed to the tenant eviction process.
Why Switch from Multifamily to Self-Storage?
Many passive and active investors haven't made it through a market cycle and aren't aware of the difficulties of multifamily investing during a recession. The value of SFH's and apartments plummet during recessions and you usually must hold these assets until another upward trend. During recession, self-storage actually experiences higher demand. Businesses are downsizing, people are moving in together, and this exodus means that many possessions stored in individual storage units. Interestingly enough, liquor and self-storage are the two industries that profit the most during economic downturns. This industry is inflation proof and recession proof. When you combine that with the hassle of tenants, toilets, and trash, self-storage can be a very safe and passive option.
Adding Value to Self-Storage?
There could be distressed owners or a distressed facility upon acquisition. After purchasing, implementing items like kiosks, a website, and raising rents if they haven't been touched in a while are quick and easy ways to add value. Other ancillary income streams could be selling moving and storage 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 businesses within the business because there isn't much to directly manage for the self-storage itself.
Current Market Cycle - What Does the Future Hold for Self-Storage?
From all the information Scott has been studying, Scott believes we are likely heading to a recession, and 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 breakeven point is relatively predictable, even in new markets.
Why Should Limited/Passive Investors Add Self-Storage to Their Portfolios?
Generally, 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 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.
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.
With storage, there are many old industrial buildings that other industries, such as retail or multifamily, have avoided. This leaves self-storage as the use for these properties and they are typically inexpensive after other industries have passed on the opportunity.
The kiosks that were implemented in 2005 are finally starting to be more mainstream and add functionality. There are also wireless locks inside of the unit doors that can be locked and unlocked with an app. The management of the facility can be even further automated, and if anyone doesn't pay, the property management system can lock the unit. If someone pays for a unit 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 and they may not even need human interaction.
Human employees typically come into play depending on the size of the facility and the office hours of the facility. Scott actually likes to have a person in the office to up-sell and offer any other services or amenities the borrower may need.
Regions of the U.S. for Self-Storage
With 1 in 10 U.S. households renting at least one storage unit, there is a demand for self-storage. States such as Florida typically don't have basements and have large multifamily housing in populated areas, so these areas have high demand. Other areas such as college towns and military areas have notoriously high demands for self-storage.
Learn more about Scott and his work: https://selfstorageinvesting.com/