Self-Storage Investments

Learn why these facilities are popular investment properties.

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Self-storage properties could be a beneficial asset to have in your investment portfolio. Self-storage facilities have many practical uses. They provide additional storage space to your tenants and create room for spare furniture, valuables, commercial equipment and much more.

The following guide concerns self-storage investment for beginners. Learn about the most important aspects of investing in self-storage facilities and how to manage your investment successfully.

What are Self-Storage Properties?

These properties provide storage units for rent to businesses and private consumers. Property managers monitor, care for and rent out each unit. Many of these facilities rent on short-term leases or even by the month, but it’s also possible to establish storage units with annual contracts.

Incorporating long-term rental leases is as simple as adhering to federal and state laws. For example, tenants are prohibited from using rented units as a residence, although household goods are allowed in a storage facility. Some jurisdictions might also ban businesses from storing sensitive records or food inventory items off-site. It is important for self-storage investors to research local laws and procedures for facilities before purchasing.

Landlords make the following items and services available at storage facilities:

  • Personal lockboxes
  • Padlocks or security key locks
  • Packaging supplies
  • Truck rentals
  • Insurance for purchase

How a property is organized depends on the target market and the ideal price range for the rent payments. A property manager can incorporate supplies and transport with the storage service to make management more seamless, though supporting staff may become necessary.

Self-storage facility employees lack access to the units, which is a different procedure from most warehouse facilities. The lack of access and ownership of tenants’ items reduces liability for theft since the management at self-storage

Benefits of Self-Storage Investing

Benefits of Investing in Self-Storage Properties

Consumers benefit greatly from renting additional storage space, but how can you benefit as an investor? These facilities are popular investment properties for several reasons, namely their profitability. The annual industry revenue for self-storage units is about $39.5 billion. There are five primary benefits you can enjoy after investing in storage facilities.

1. High Demand Creates a Stable Income

Self-storage facilities offer a secure, practical place to store residential and commercial items, and these facilities meet the needs of various consumers. Homeowners and renters acquire storage units after downsizing or relocating to a new area. Businesses use them to hold backup equipment or sometimes important financial records. Frequent travelers use them as valuable storage space for their vacation residences. The demand for self-storage facilities is widespread and has the potential to provide reliable income for property owners.

2. There Are Fewer Factors in Choosing a Great Location

Location is one of the most important factors in real estate. A visible and well-maintained self-storage facility will attract customers. The right location can help customers determine what advantages a self-storage facility offers, such as large or small units and secure storage space.

There are fewer factors in choosing a great location for a self-storage facility than other asset classes. For example, investors looking for medical office buildings must consider location demographics, size requirements and competition. They must also consider nearby employer’s insurance policies, proximity to other healthcare facilities and timing. 

Self-storage facilities can exist almost anywhere. The most important factors are visibility, population density and size, which open up a multitude of opportunities for investors.

3. Turnover Results in Minimal Issues

One factor that commercial property owners are concerned about is tenant turnover. Each time a tenant leaves, you have to find another reliable tenant to fill the space. Fortunately, with self-storage facilities, turnover is easy to handle.

The benefits of turnover for self-storage facilities are as follows:

  • Low rates: Although many contracts for these properties are short-term leases, turnover rates are typically low. Tenants will keep items in storage for various reasons, such as when they realize they need extra space for storage or simply for convenience. Some tenants leave personal items in storage for several years.
  • Multiple spaces: One of your facilities can house numerous rental spaces, which means a sudden vacancy would put less strain on overall occupancy.
  • Auctionable items: There are several reasons a tenant might stop paying rent to store possessions. After legally claiming possession of a tenant’s storage unit, you can auction off the items inside for additional income. 
  • Low improvement costs: When tenants move out, retail, office and other asset classes require extensive improvements to prepare for new tenants. Self-storage facilities don’t usually require the same renovations, and the building materials keep maintenance costs low.
4. This Sector Is Adaptable

For property managers who work primarily with commercial tenants, long-term vacancies could result in some dips in income. Self-storage properties carry less risk overall while allowing you to achieve high profit margins. Finding new tenants takes less time, and you can work with the public at large. A self-storage facility could have as low as 40% occupancy and still make enough money to pay all associated costs.

5. Item Storage Is Highly Marketable

Self-storage facilities have a history of holding popularity with consumers during economic challenges or life disruptions. Self-storage is a growing sector with a wide net of consumers, simplifying the marketing process. A self-storage facility can be advertised to a variety of consumers.

Some examples of self-storage target audiences could be:

  • Homeowners who want to remove clutter or store valuables, furniture and other large household items at a secure, reliable facility.
  • Renters who are living in a temporary apartment or dorm with limited space, such as college students.
  • Business owners who require commercial storage space.

How to Get Started Investing in Self-Storage

Buying storage units as an investment is similar to investing in other kinds of real estate. When learning how to invest in storage units, you can consider a few different ways to run your business. 

Older couple happily looking out window

A REIT is an investment company that works with multiple sector-specific assets, including self-storage facilities. Since REITs perform historically well, they are a profitable way to invest in storage. A company must meet a series of requirements to be considered a REIT, including:

  • At least three-fourths of the company’s assets must be real estate properties of some kind.
  • At least three-fourths of the company’s income must come from the real estate assets that it owns.
  • At least 90% of the company’s taxable income must go to its shareholders.
The advantages of REITs include:
  • High-yielding dividends: REITs can deliver significant income through dividend payouts, which tend to increase throughout the years and often grow faster than the inflation rate. 
  • Total returns: REITs can become more valuable as their underlying assets appreciate. You have the opportunity to achieve capital appreciation with a REIT.
  • Profitable sell-offs: With publicly-traded REITs, you can buy and sell shares during a trading session when the REITs market value has increased. This option can give investors the potential for an additional source of income. 
There are a few disadvantages to REITs, including: 
  • Market risk with real estate: REITs are traded and sold on the market stock exchange and are subject to price changes. An investor may receive less for their REITs than what they initially paid if their shares are sold in the public exchange. Additional causes of market risk include recession, interest rate changes or natural disasters. When any of these causes occur, the entire financial market is affected, making it difficult to eliminate portfolio diversification.
  • Better as long-term investments: Sometimes, real estate devaluation and other factors can affect your REITs, but they earn income over the years. You can use them as a long-term investment strategy with a stockpile of disposable income to ensure that you generate a profit.
  • Sensitive to changes in interest rates: REITs are susceptible to interest rate fluctuations, which can cause their value to change slightly. Holding onto your REIT shares for a longer period helps lessen the effects, but with the cyclical nature of interest rates, the changes still may affect your investment.

A DST allows you to hold the title of one or more commercial properties from which you earn an income. DSTs are an alternative to REITs for the average investor who can’t purchase the entire self-storage facility on their own. Any commercial property can be a DST, including self-storage facilities, which streamlines the investment process.

The advantages of DSTs include:
  • Multiple assets: A DST can contain multiple assets, but you might have to file a tax return for each location if the DST covers more than one state.
  • Beneficial interest: You own an interest in the DST, which then owns the property. This entitles you to a pro-rata share of the income made and the assets’ appreciation.
  • Low minimum investment: Most DSTs have an established investment minimum of $25,000-$100,000.
  • Diversification: Lower minimum investment amounts allow an investor to diversify more easily versus buying a whole storage facility.
  • Convenient cash distributions: Your income gets distributed to your bank account each month, but distribution schedules vary by offering.
Disadvantages of DSTs include:
  • Limitations on new capital: A DST is unable to raise new capital.
  • Longer hold-term periods: If you want to sell your DST earlier than the 5-10 year term, you might have to sell or transfer their interests to an accredited investor. Also, DSTs are unable to be refinanced.
  • Less controllable: DSTs have sponsors, such as real estate firms, making management decisions about your assets. Investors should investigate and choose reputable sponsors to ensure quality property management.

Exchange-traded funds (ETFs) offer investors a different option to REITs and DSTs for self-storage. These funds act as security that tracks assets while allowing them to be purchased or sold. ETFs are traditionally organized around an industry-specific index fund or stocks.

Investor demand has increased the growth of ETFs, and technological improvements have made them easier to trade and at a reduced cost. There are multiple types of ETFs, including equity, bond, commodity and factor ETFs.

In terms of self-storage facilities, ETFs can offer returns comparable to REITs and a reduced possibility for volatility. There is a short supply of ETFs in the sector, and the majority of ETF stocks don’t focus on self-storage, but there is considerable room for growth.

The benefit of ETFs include:
  • Flexibility in trade: Mutual funds are usually traded once during the day after the market has closed. ETFs are traded throughout the day during the open market.
  • Diverse portfolios: ETFs can allow investors to gain potential exposure to multiple specific sectors without prior expertise in the area. 
  • Potentially reduced costs: ETF costs can be streamlined compared to mutual funds. Brokerage firms handle operating costs and monthly statements, and notifications and transfers also incur lower expenses for investors.
  • Tax benefits: Mutual funds usually sustain higher capital gains taxes than exchange-traded funds. ETF capital gains are also only paid once the investor has made the sale.
There are some potential drawbacks to ETFs, including:
  • Potential for high trading costs: While there is the potential for reduced costs, ETFs can cost more than the savings gained from tax efficiency and management fees. If you regularly invest large sums of money, you might spend more on commissions costs than management and taxes.
  • Potential for tracking errors: ETFs can drift from their index for several reasons. Tracking errors have the potential to be costly for investors.

Invest with 1031 Crowdfunding

Deciding on an investment strategy takes time and careful consideration. You may have multiple investment options or be limited when looking for a self-storage facility. With so many possible scenarios, it’s easy to get overwhelmed. 

1031 Crowdfunding provides all the information you need about key real estate. Join the crowd at 1031 Crowdfunding and start investing in quality self-storage properties. Register today to get started.

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