3 Ways to Invest in Self Storage
Generally Speaking there are 3 primary strategies for self storage investing. You can build storage on vacant land, convert an existing warehouse/building to self storage or buy an existing facility (either a well run, turn-key property or a struggling value-add property). Let's dive into each strategy.
Conversion: Conversion involves purchasing an existing building (preferably a large clear span warehouse) and installing self storage conversion kits into them. This can be an incredibly effectiv e strategy especially in times when self storage is all the rage. I have done a couple small scale conversions in the past but am currently building out my first large scale conversion project. It is 70,000 square feet of warehouse space in South Carolina and I am loving the learning curve that comes with trying something new.
Development: Great wealth can be created by developing storage from the ground up. Simply put, the cost to build is far less than the value achieved once the property is stabilized. This is due primarily to the fact that storage facilities are valued on their income stream. As such, it is quite conceivable to build a facility for $30-35 per square foot and sell it for 2 to 3 times that once full. The drawback to this strategy is that it is pretty complex and certainly not for the faint of heart. For one, it requires pretty deep pockets as well as a good bit of patience. In order to develop a facility, you will need to buy land and then, perhaps the worst part, get that land approved and shovel ready. Once approved the earth work begins. This earth work can easily cost hundreds of thousands of dollars. While that alone wouldn't be a deal breaker, the resulting wrench that it throws into how you approach your investing might be. At least it is for me and here's why.
Once you commit to buying land and getting the 2-5 acres parcel ready for building, you will be at least a couple hundred thousand dollars in the hole. As such, you can't just put up a 10,000 square foot building and expect your project to be financially viable. Because you have so many sunken costs, you basically have to swing for the fences in order to make the deal viable. You'll likely need a minimum of 30,000 to 40,000 square feet of storage to justify the upfront costs of development. In other words, your ability to “phase” the project is severely limited. Add to that the fact that you are starting with zero dollars in income on day one and you can expect be on the wrong side of zero for 24-48 months.
All that being said, if you have a high risk tolerance, very deep pockets and/or an incredibly strong relationship with a lender who can provide lots of extra working capital to float your project during ramp up, there is good money to be made in developing storage from the ground up. Just know that this strategy requires that you “swing for the fences”. While I love the massive wealth that development offers, I prefer to mitigate risk whenever possible and that's what lead me to develop my hybrid model of storage investing.
Hybrid Model: (Buy Existing AND Expand) This is themodel that I recommend most folks start with as it offers the best of both worlds (especially for folks getting into storage for the first time). It offers the same 'equity explosions” seen in ground up development while reducing the risks involved.
This Hybrid Model of storage investing is, in my opinion, the single best method for investing in self storage. Here's how it works. I look for under-performing facilities that I can Add Value to. This added value comes primarily from implementing an operational overhaul to increase occupancy and income while also decreasing expenses. What I do is look for facilities with low occupancy and once found I work to answer two very simple but critical questions:
1) Why is it under performing?
2) Can I fix it?
Often times, the reason a facility is under performing is that it is, quite simply being neglected and /or mismanaged. In these cases, many of the same things that cause home-owners to be “distressed” and “need to sell” are to blame; Divorce, Death, Health Problems, etc. Clearly, this mismanagement is what we are looking for. Mismanagement is not a fatal flaw and can often be fixed with greater ease than you might expect. You should note however that sometimes the facilities have some sort of fatal flaw that no amount of operational improvements can fix. If the property, for example is the ugliest property in a market that is over-saturated with other far more attractive storage options, improving the management won't be enough. In that case, we simply move on. We can fix ugly but over-saturation is a different story. What about its strategic geographic location compared to other options in the market? It is very difficult (but not impossible) to convince storage customers to drive past one facility to get to another on. As such, you want to be closer to the customers than your competitors are if at all possible. Location, like market saturation, is one of the things you can't “fix”.
So, simply put, we are looking for properties that have fixable problems!
I hope you are finding some value in my storage musings and would love it if you'd post comments or questions below. And please be sure to subscribe below so you don't miss out when the next post goes live!