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Over the past few years, self-storage facilities have exploded in popularity.
The self-storage industry is expected to reach $64.71 billion by 2026, equating to a compound annual growth rate of 5.45 percent between 2021-2026. That growth stands in stark contrast to the sagging commercial office space sector.
And it makes sense: 10.6 percent of American households rent storage units. Demand booms in good times and in bad as households downsize or move or travel the world as digital nomads.
Private equity investors have noticed as self-storage properties have become a hot commodity. Yet mom-and-pop investors remain late to the trend.
Should you jump on the bandwagon or leave self-storage to institutional investors?
Why private equity has flooded into self-storage
There’s a lot to like about self-storage real estate. Consider the following upsides that have driven up demand among investors in recent years, especially during and after the pandemic.
Recession resilience
While there’s technically no such thing as a recession-proof investment, self-storage facilities are as close as you can get.
When people lose their jobs or their income shrinks, what do many do? They downsize — leaving them without enough space for all of their belongings. Sure, some hold garage sales, but many can’t bear to part with dear Aunt Sue’s chest of drawers.
So they rent a storage unit.
If you worry about a recession looming on the horizon, consider self-storage properties to steer your portfolio through a recession.
Minimal building maintenance
Houses are complicated structures, with basements, several stories and many complex mechanical systems.
Self-storage facilities are as simple as structures get. They’re basically glorified sheds without plumbing, with minimal electrical wiring and, in many cases, no HVAC.
That makes for simple maintenance and fewer ongoing repair costs.
Easy renter management
With less to break, there are few reasons for your renters to call up and complain. Most renters have no contact with self-storage facilities at all, beyond leasing a unit and non-renewing it.
Fast and simple evictions
The eviction moratorium during the pandemic scared a lot of real estate investors, myself included.
As expensive as evictions are, letting tenants squat in your investment property without paying rent is even more expensive. Lease agreements are bilateral legal contracts, but during the eviction moratorium they became enforceable in only one direction. Renters could break them, but landlords couldn’t.
For residential properties, that is — not for self-storage properties, which count as commercial real estate. If a renter stops paying, you send them a couple of notices and then remove their belongings from your property.
Compare that to the six to 12 months it can take to evict delinquent tenants in renter-friendly cities. And don’t scoff and tell me I’m exaggerating — it’s taken me 11 months to evict a tenant in Baltimore City.
While the pandemic eviction moratorium has ended, the precedent has been set. When it becomes politically expedient, you better believe the government will pull that maneuver out of its playbook again.
Minimal regulation
In tenant-friendly cities and states, landlords have to put up with more than just molasses-slow evictions. From rent control to rent stabilization, byzantine security deposit rules and more, some markets are downright hostile to investors.
For residential properties that is. Self-storage investors don’t have to put up with those headaches. In fact, it makes them a viable way to invest in real estate in otherwise tenant-friendly markets.
Easy property management
Likewise, storage property managers just don’t have much work to do.
Occasionally they have to evict a renter’s stored belongings. They have to monitor the (low maintenance) buildings and keep the grounds secure. And they have to keep occupancy rates high through marketing — their only substantial task.
The industry lends itself to automation, from renter entry to security to rent collection.
Cheap land
When you invest in residential, retail or office properties, the old adage of “location location location” still holds water.
But as long as you’re close enough to population centers to be accessible, you can put up a storage facility on cheap land without an obligatory Starbucks or Whole Foods down the block.
High profit margins
Self-storage facilities remain a high-profit real estate investing niche compared to many other types of real estate.
That includes a strong cash-on-cash return in addition to appreciation. The industry offers plenty of opportunities for upsells, from larger units to climate-controlled units to full-service storage.
As you explore what makes a good return in real estate, don’t leave self-storage out of your research.
Downsides to self-storage
Every investment comes with its share of drawbacks and risks, and self-storage is no exception.
High entry costs
Like many other types of real estate, self-storage costs a minimum of six figures, sometimes seven. If you plan to invest in a property by yourself, that means saving a lot of pennies.
I’m also not aware of any crowdfunding platforms that consistently offer self-storage properties, which makes it harder to invest with small amounts. You can invest in self-storage real estate syndications, but unless you invest through a real estate investment club (like, cough, SparkRental’s), expect to invest a minimum of $50,000 toward fractional ownership in a self-storage facility.
Niche property management
Few property management companies specialize in self-storage, and, especially in smaller cities and towns, you may not have any professional options for property management.
That leaves you with little choice but self-management in some cases. It proved a huge challenge for self-storage investor Hunter Thompson as he tried to scale his portfolio.
Hyperlocal market pressures
People only rent self-storage that’s relatively convenient to where they live, leaving you with hyperlocal markets that are sensitive to small changes.
Changes such as a big local employer going under or a new storage competitor moving in or any number of other micromarket-level changes.
Each local market comes with its own unique needs as well. You may need to provide climate control in hotter or colder climates, but not in temperate climates. In areas with higher crime rates, you might need dramatically more expensive security measures.
Before entering a market, put yourself in the shoes of a prospective storage renter and ask as many questions about the local storage needs as you can brainstorm.
Increasingly competitive for investors
There’s no sugarcoating it: Four years ago was a better time to invest in self-storage than today. Private equity investors have discovered self-storage and sent cap rates tumbling.
Then again, you could make the same argument about any type of real estate. The Great Recession was a great time to buy residential real estate as prices collapsed amid the foreclosure wave. That doesn’t mean you shouldn’t buy residential properties today, it just means you can’t expect the same bargains as once existed.
Is self-storage investing a good fit for you?
The average investor isn’t a good fit for going out and buying or building a self-storage facility by themselves. They simply don’t have the skills required or the capital.
But that doesn’t mean you can’t invest fractionally in self-storage facilities.
The easiest way to do so is through publicly traded REITs (real estate investment trusts). You can research REITs that specialize in storage properties and buy a few shares through your brokerage account.
You can also invest in private equity real estate syndications. While most require a minimum investment of $50-100K, you can pool your funds with a real estate investment club to meet that minimum.
Finally, you can keep an eye out for self-storage investments on crowdfunding platforms like CrowdStreet and EquityMultiple. Expect a high minimum investment of around $25,000 however, and only accredited investors are allowed to invest under SEC regulations.
Self-storage offers a lucrative and recession-resilient real estate investing niche. Consider it one more way to diversify your portfolio as you build a robust set of investments with little correlation to one another.
G. Brian Davis is a real estate geek and co-founder of SparkRental.
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