Should You Consider Investing in Self Storage?
Self storage has been touted as the fastest growing sector of commercial real estate for years now. What is it about storage that makes it so attractive to investors? Are they really the cash cows people say they are? Do people really use those things? And if they do, do they ever stay more than a month or two? These are some of the questions I asked before diving into self storage and I've decided to start this little blog (and please bear with me as this blogging thing is entirely new to me) to facilitate a discussion about the industry that has freed me from the 'rat-race'. Simply put, I love storage and think others will too if they take a good hard look at it.
Ok, back to the questions I posed above. I'll answer each question somewhat superficially here and address these topics, and more, in future posts.
What is it about storage that makes it so attractive to investors? Lots of things. Storage is both physically and conceptually simple. Physically, there's a concrete floor, metal walls and roofs plus one rolling door per unit. It's pretty easy to maintain this asset. Conceptually, the idea is the same as with any other rental based investment. Buy low, rent out to maximize revenue/profits and sell high (or hold for long term cash flow). It's simple, but that doesn't mean its easy!
Are they really the cash cows people say they are? They sure can be. Obviously the numbers will differ from market to market but by in large, the expense ratios in self storage hover around 30%, meaning that 30% of gross income is used to cover operating expenses which leaves 70% to cover debt service. Anything left after that is profit. Compare this with the 50% expense ratios seen with apartments (we'll gladly leave the debate about the 50% rule for others to discuss) and its easy to see why storage has potential. Its important to keep in mind that money made in storage is not mailbox money (at least not at first). Its a business and deserves to be treated like one. So much so that we will certainly dedicate future posts to more in-depth discussions of what it takes to succeed with self storage. Storage facilities can also be dogs. There are plenty of folks who lose money operating storage. Its up to us, the savvy storage investor, to find these folks, identify the cause of their failure, determine if the problem can be fixed and intervene if appropriate. By intervene I mean, buy, fix and profit from the newly overhauled facility.
Do people really use those things? To which I respond a resounding YES. In fact, typical storage demand is roughly 7 sq. ft. per person within a 3-5 mile radius. Use 3 miles for high density areas and 5 miles for more rural locales. And if they do, do they ever stay more than a month or two? Again, the answer is yes. Industry average is somewhere between 8 and 12 months. This can be higher for facilities that cater to commercial tenants and lower for facilities plagued by highly seasonal clientele but the bottom line is that more people use storage than you could ever imagine and for far longer than you might expect as well.
I can hear you now, "that all sounds great Mike but it can't be that easy and I've heard that storage is way over built". You are absolutely right, it is not that easy at all. Its simple but not easy. its also true that this industry has recently endured a period of over saturation in many markets. Remember though, that storage (like all real estate) is a location specific enterprise and so while many markets are over built, many are severely under-served and therefore represent phenomenal opportunities for the savvy investor.
Wrapping things up for tonight, self storage can be a fantastic investment if done right. I hope to use this blog to share my thoughts on how to do it right.