What You Should Know About Self-Storage Investing

Self-storage investing is often seen as an alternative way to invest in real estate and experience the benefits of passive income. However, recent years have seen consumer interest in leasing storage units rise steeply, and with it, investor interest.

For some, self-storage investing is a way to get started in real estate with a manageable, small business model. For others, self-storage facilities are merely the next logical step in their plan to diversify assets and property types. 

No matter which boat you’re in, here are the basics of self-storage investing you need to know. 

Why Invest in Self-Storage Units? 

Why invest in self storage units in the first place? 

Given that the average profit margin for a self-storage business is 11% in the U.S., profitability is the major attraction for many. Even though units typically only rent at around $100 per month (depending on square footage and other factors), the sheer number of units an owner can manage at one time, usually between 400 and 600, allows this industry to generate an annual revenue of $29 billion. Clearly there’s money to be made in self-storage, and that’s good news for any investor. 

Additionally, the self-storage asset class is said to be highly recession-proof, as customers continue to need their services when the economy turns downward. More people are likely to be downsizing or dislocated (due to work, for instance) and need a place to temporarily store their belongings. Storage facilities also have low operational costs and support customers during uncertain times due to their flexible leases and terms. This helps explain why consumer interest in renting self-storage units increased drastically during the COVID-19 pandemic and why investors are still seeking out facilities to buy or lots to build their own.  

Research and Location 

If you’ve decided to pursue self-storage investing, where do you begin? 

Like any investment, you’ll want to start by doing thorough research. Before anything else, you must do your homework on the rental marketplace for storage units in the area you plan to invest.  

This means using networking connections and resources to talk to as many real estate professionals as you can in the area, including other self-storage facility owners, brokers, private lenders, property appraisers, or real estate agents. Ask them what they think about the opportunities for storage investors and where they see the industry going for their location in the next few years. 

Once you have some basic intel, you’ll want to conduct a formal cash flow analysis (or feasibility study), which considers all the factors relevant to your business and generates an estimated self storage return on investment. The study should include your estimated construction or closing costs, the cost and value of any improvements you plan to make, your predicted monthly operating expenses, and your predicted monthly revenue given various occupancy levels.  

Location is also a critical part of your analysis. SpareFoot reported Los Angeles, San Diego, Miami, New York, and Austin as some of the most popular cities for self-storage in 2022, but keep in mind that competition for customers will be higher in densely populated urban areas where there are already established self-storage businesses. In general, it will be easier to attract and retain customers in underserved communities further outside the city, even if this means investing a few hours away from where you live. Another strategy is to seek out communities that other developers are interested in and develop your business plan around catering to the individuals most likely to be interested in moving to the area (e.g., college students near a university, travelling nurses near a hospital, etc.).  

What you are ultimately looking for is long-term viability for your self-storage business based on sound market research. 

Build or Buy? 

Should you build your self-storage facility or buy an existing one? There are pros and cons to both options. 

Pros and Cons of Building 

Building a facility will require much more commitment and patience up front. Zoning and government entitlement can be troublesome issues that you will need to address initially, since you will need to get approval to re-zone a plot of land for self-storage. Even then, that approval may have caveats, as local governments and city planners may have requirements you need to follow. There is no telling how long this will take, nor how long the actual construction process will last. Supplies, labor, and extensive knowledge are required to develop a self-storage facility, and you’ll need to hire all the appropriate team members to pull it off.  

The trade-off is that you will have much more control over what your facility looks like and how it operates. You get to decide the type and size of units you offer and can cater the decision to your target customer (e.g., customers who are apartment renters may prefer smaller units, while homeowners may want units up to 10 x 20). You can also install climate-control or smart security, choose the number of stories, and design the layout exactly as you want it. 

Pros and Cons of Buying 

If you’re leaning towards buying an existing facility, you are likely to have high competition, especially in large cities. A facility in Austin, Texas might sell for tens of millions of dollars, while one in rural Ohio isn’t likely to cost as much. You’ll also have to thoroughly inspect any facility you’re interested in buying to ensure structural integrity and other factors are up to your standards.  

On the pros side, the land that an existing facility is on is likely to have already been appropriately zoned by the original builder, so you won’t have to worry about waiting to get approval by the government to use the space for self-storage. You’ll also have a much simpler set-up process, shorter wait times to get your business up and running, and you’ll avoid the headaches of construction.   

Creating a Business Plan 

The foundation of any successful business is a sound plan, and self storage investing is no different. As a small business owner, you will need a plan for ensuring your investment is manageable, reasonable, and most of all profitable. Your business plan should include: 

• An executive summary describing your business’s purpose, location, and goal. It should begin with a general purpose statement: e.g., “This business seeks to construct and operate a 150-unit self-storage unit facility on a 1-acre land parcel located in Ann Arbor, Michigan.” You should then summarize the key financial details a lender or partner would want to know, including your initial and monthly expenses, estimated revenue, and expected net profit.  
• A formal description of your business starting with the technical designation (LLC, S-corporation, etc.). Your description should include your plan for employees, insurance, maintenance, and management. Will you outsource to a third-party management company or manage your units yourself via self-storage unit software? 
• A detailed financial plan where you lay out all the financials in as much detail as possible – purchase price, construction/closing costs, management fees, monthly expenses, unit sizes and their rates, etc. Be sure to paint a detailed picture of the cash flow you predict for at least two years. 
• Your market strategy. What is your approach for your small business? This is where you should report on the market research you’ve done, lay out your findings, and explain why your business will be successful based on the data you found. Include any information about the demographic you’re targeting, supply and demand in the area, any competition you might face, and how you’ll advertise your units and attract customers. If you’re building your facility from scratch, explain how the appearance of your facility will suit the area and draw in tenants. For example, if the facility will be located near high-end apartments or offices, it needs to look sleek and fit in with the local vibe. 

Financing Your Self-Storage Facility 

One reason why it’s so important to write a thorough business plan is so that you’ll have something impressive to present to lenders when you apply for financing. If you’re an experienced investor or someone with access to a lot of capital, you may be able to purchase a facility outright. However, it’s more likely that as a small business owner, you will need to finance your property. 

Traditional bank loans and Small Business Administration loans (SBA 7(a)s) are common for new self-storage builds, and they can range anywhere from $1,000,000 to $50,000,000. If you plan to purchase a facility, an acquisition loan will be needed. The more detailed your business plan is, and the more market research you’ve prepared, the better your chances are of securing a favorable loan with a low interest rate. 

Conclusion 

Investing in self-storage units is a formidable but profitable endeavor. The steps described in this article will help you appropriately prepare for buying, building, and/or managing your first self-storage facility.