Everything You Need to Know About Renting Out Self-Storage Units
June 12, 2023
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A Guide To The Self-Storage Industry
For many in real estate, self-storage is the industry to watch. Accounting for more than 1.7 billion square feet of U.S. commercial space in 2023, self-storage has grown tremendously over the last five years. Its record-breaking return on investment has helped the industry attract remarkable interest from customers and investors across the country.
If you’re thinking about investing in self storage units yourself, you’ll need to acclimate to this unique and niche industry.
In this article, we break down everything you need to know as an investor getting started in self-storage.
Self-Storage Industry Outlook
Customer interest in self-storage units surged during the COVID-19 pandemic but remains high today. Storagecafe reports that 52.6 million square feet of new self-storage space is planned to be built in 2023 alone. Whether you’re planning on buying a facility or building your own, you are sure to attract sustained interest in your units.
But self storage benefits don’t stop there. In addition to high demand and occupancy rates, self-storage investing can offer you:
- Lower start-up costs. Compared to traditional commercial and residential rental buildings, self-storage facilities have fewer expenses, lower construction costs, and lower purchasing costs.
- High return on investment. With an industry-wide yearly revenue of almost $40 billion, self-storage businesses have some of the highest return on investment (ROI) of all small businesses in the U.S.
- Recession resistance. Self-storage has already proven itself to be resilient during economic downturns. It’s an industry that thrives on movement and change, both common during recessions.
- Low maintenance. Most tenants move their belongings into their units and leave them be. You can expect quiet tenants, few conflicts, and little regular maintenance.
- Maximum automation. With smart locks, self-service kiosks, and online rent collection, it’s possible to manage your facility entirely remotely.
- Straightforward rental agreements. Self-storage units have few utilities and no need for guest or pet policies, so leases can be short and sweet.
Choosing Unit Sizes and Types
The most common size for self-storage units is 10×10 feet—a medium-sized unit able to hold up to three rooms’ worth of furniture and items. The average monthly rate for a 10×10 unit is around $1.08 per square foot (~$110 per month), while 10×15 and 10×20 units commonly rent for $0.78-$0.93 per month (~$140 to $160 per month). Smaller units like 5×5 and 5×10 units typically hold one room’s worth of items, while larger 10×25 or 10×30 units can hold five rooms or more.
Storage units vary in type in addition to size. There are drive-up units, indoor access units, climate-controlled units, units with electricity, vehicle storage units, and full-service facilities. Climate control is one of the most popular amenities, although many owners include a variety of types of units in their facilities to give renters the most options.
Marketing/Advertising Your Units
Marketing any rental property takes patience and insight, and it’s no different with self-storage facilities. You’ll first need to determine your target customer—who will be most interested in renting your storage units, and what are their wants and needs? Keep in mind that most storage unit customers tend to live in a 3- to 5- mile radius of the facility, range from early 20s to retirement age, and fall in middle and upper-middle income brackets.
Once you have your target customer, you’ll need to develop a marketing plan for that clientele. Create a company website, get your storage business verified on Google Business, and list your properties on online storage unit advertisement sites like SpareFoot. You can also advertise your vacancies on social media and eventually start a referral program or review campaign to reward your best customers.
Managing Your Units
As the owner of a self-storage facility, you’ll also need to develop and implement a management plan. Managing a facility involves:
- Implementing security measures
- Performing monthly maintenance on units and common areas
- Updating your advertisements regularly
- Leasing to new customers
- Collecting rent and tracking payments
- Keeping accurate financial records of expenses and revenue
- Hiring employees or contractors
- Overseeing renewals, lease terminations, tenant turnover, and evictions
There are several self storage business models used commonly by facility owners. You could manage your storage facility on your own for a lower cost, but you may lack the expertise, time, or resources to do so. You could also hire a self-storage management company to limit your day-to-day responsibilities and take advantage of the company’s vast experience and resources. Lastly, you could combine either of the above approaches with property management software for a low-cost, streamlined management approach.
Your rental storage business also needs to be insured. As an owner, you’ll need to purchase a storage facility insurance policy—small business insurance that combines property insurance and liability insurance. Most storage facility policies cost around $400 to $700 a year, and they cover anything from property damage to your facility/individual storage units and general liability (lawsuits and injury/casualty coverage) to business income and crime insurance.
Most storage businesses also require their renters to purchase insurance. Storage units are sometimes covered under a traditional renter’s or homeowner’s insurance policy, but renters can also purchase a separate policy for their unit. For around $15 to $30 per month, storage unit insurance typically includes fire, lightening, vandalism, and theft coverage. Some policies may also offer insurance for flooding, water damage, or power failure.
Requiring your renters to purchase insurance is the best way to protect yourself against liability and conflict should a security breach or severe weather damage your renters’ belongings.
Writing Rental Agreements
For the most part, self-storage unit leases are similar to their traditional commercial counterparts. However, there are a few lease clauses you should include that are unique to the self-storage industry:
- Individual unit details. Be sure to include the storage unit’s designation, size, dimensions, and any included amenities or security features.
- Liability/value limit. This clause establishes a limit on the value of property tenants can store in their units. A common liability limit is $5,000, although individual states may have laws regulating liability limits for self-storage facilities.
- Release of liability and indemnification clause. In signing off on this clause, a self-storage tenant agrees to release you from responsibility for any damage to their property while it’s stored at your facility. The indemnification clause states that tenants are ultimately responsible for personal injuries or damage.
- Storage restrictions. List restrictions on any hazardous, flammable, illegal, or otherwise dangerous items which cannot be stored in your units.
- Lien and auction process. The lien and auction process allows storage unit facilities to place a lien or claim on a tenant’s property if they default on rent for a certain period of time. Eventually, the property can be sold at a public auction to cover the rent. In your leases, specify how this process works as per your state’s laws. Explain how long the notice period will be, what the tenant must do to reclaim their belongings, and whether the tenant is entitled to any leftover proceeds from the sale after deductions for unpaid rent and fees have been made.
Installing Smart Technology
If you want to give your competition a run for their money and become the top self-storage facility in your area, you need to invest in the newest and best technology for your facility. Self-storage owners are turning more and more responsibilities over to smart technology. From smart locks and thermal motion sensors to mobile entry and self-service kiosks, smart technology can elevate your storage units to the next level, not to mention attract higher-paying clientele and generate more revenue. Surveys show that climate-controlled units already rent up to 60% higher than units without climate control. By investing in the latest gadgets and automation for your facility, you’re investing in your business’ future ability to succeed in an ever-changing digital business landscape.
Unfortunately, your job as a self-storage facility owner won’t all be watching rent payments roll in and installing exciting new technology. You’ll also be responsible for enforcing rules and late fees, and if you have a particularly bad tenant, even resorting to eviction when all else fails.
The eviction process for self-storage tenants varies by state, so be sure to read the specific statues for your region. However, all storage unit evictions follow the same general process:
- Determine the lease violation. Possible reasons for eviction include nonpayment, damage to the unit, aggressive behavior on the premises, attempting to live in the storage unit, or using the unit improperly, such as to conduct illegal activity.
- Send a lease termination notice. For month-to-month leases, a 30-day notice is standard, but check your state’s statutes for specific regulations on the notice period.
- For nonpayment cases, sell the tenant’s belongings. If the violation was nonpayment and the tenant has not responded to the notice or moved out, you can begin the lien and auction process. In most states, you can place a claim on the tenant’s stored property and sell it to recover costs without involving the courts as long as you follow all applicable legal procedures and give the tenant notice of the sale.
- For other lease violations, file an eviction lawsuit with the court. If the tenant violated another lease term, you can file for eviction officially with a local court and present your case to remove the tenant at an eviction hearing. For certain nonpayment cases, this may also be the faster or better option (for instance, if your state’s lien notice period is particularly long or if you expect the tenant to challenge the lien/auction process).
- Receive a court order to enter and empty the unit. If the judge rules in your favor, you can terminate the tenant’s lease and remove their belongings.
It’s especially important to remove tenants who attempt to live in their storage units, as it is illegal to do so in all fifty states for health and safety reasons.
Understanding Self-Storage Legislation
The laws that govern self-storage units are constantly changing. From one year to the next, there are likely to be adjustments and changes you need to keep track of. However, most states have laws regarding:
- Lien rights – The lien notice period, the type of notice required, how the public sale should be conducted, etc.
- Late fees and bad checks – Regulations on the amount of the fees you can charge for late rent or bad checks.
- Sales tax – A few states (like Ohio and Michigan) require landlords to pay sales tax on outsourced services or even charge tenants sales tax on their rent.
- Zoning laws – These laws dictate how and when land can be used for self-storage purposes. Ensure your property is zoned properly before commencing operations.
- Liability/value limits – As previously mentioned, these are limits on the value of property tenants can store in a single unit.
- Vehicle towing – Laws about when owners can tow abandoned vehicles and how to inform tenants that their stored vehicle will be towed.
Complying with laws that affect your self-storage business is one of your most crucial responsibilities as an owner. If you want to avoid lawsuits and steer clear of court, be sure you review and understand your state’s statutes on self-storage.
Filing Your Taxes
Just as important in following the law is filing your self-storage business taxes properly.
Taxes can be complex and confusing, so we’ll keep it simple here. Our number one tip is to keep diligent and accurate records—track every rent payment, invoice, expense, and fee in an organized and systematic fashion. Neat records will benefit you in many ways, but they will especially help to distinguish between key repairs and improvements, as these are handled differently on your tax return. Repairs are operating expenses, while improvements (e.g., roof replacements, major renovations, etc.) are depreciated more slowly over time and need to be reported differently.
Another crucial tax strategy for self-storage facility owners is cost segregation, a system of accelerated depreciation. Rather than depreciating your entire property over the designated 39 years for commercial properties, you can divide your facility into its individual components and depreciate them more quickly. Ask your CPA or another expert about cost segregation as well as other deductions (like bonus depreciation and energy-efficiency deductions) to get the most savings out of tax season.
As a prospective or emerging investor in the self-storage arena, you have much to look forward to but plenty to learn as well. Reading more about self-storage topics on our blog or other sources will prepare you to tackle this challenge. Before long, you’ll have built the base of knowledge and resources you need to make a successful debut in self-storage.