Storage units... the new frontier?

Question

Hi all,

Recently I was talking with a buddy of mine who is hell-bent on having a storage unit facility as his primary real estate investment. It seems like an interesting opportunity (when done right of course), so it would be great to get some of your feedback, especially if any of you currently own storage unit facilities.

Here is a quick list of some pros/cons that I came up with after a little bit of research:

Pros:

- Very little tenant face time and maintenance, due to nobody living in it

- Less upkeep and maintenance than live-in properties

- More secure as there are no tenants, and only one way into people's property

- Utilities are more controlled, as you set the climate conditions and not a tenant (or offer non-climate controlled)

- A small number of property managers can manage a large number of units

- Potential to also sell ancillary supplies for profit (boxes, packing goods, moving supplies, etc..)

- Potential to sell your own insurance for your own facility units (legal hoops with this I am sure but a large number of facilities have this)

Cons:

- High price point to obtain a facility, you can't just buy a handful of units within a facility (that I know of)

- Vacancy rate is relatively high at ~8-12%

- Current supply trend for facilities is outpacing consumer demand in most markets

- However, investor demand is very high which is driving up price/sqft of many facilities

- Potential for turnover is higher with tenants, unless marketing towards businesses storing excess goods/supplies

- Large facility with a lot of sqft to maintain and upkeep

Would be great to get some feedback from you savvy investors! Of course just like with the housing market, this varies based upon your geographical region..

This is by no means a conclusive list of everything that would go into owning a facility, but below are a few of the resources and current market reports I used if you would like to explore..

2019 self-storage market report

2019 self storage investment forecast

2018 second half storage report

2018 Q4 results

Michael Wagner · Answer

As someone who invests solely in storage, my biggest piece of advice would be to remember that this industry is a MICRO market industry...so as while the "trends" you mention are worth acknowledging, they can very easily steer you astray. For example, you say ''Current supply trend for facilities is outpacing consumer demand in most markets"....I'd say that may be true if you tack on "that are big enough for the industry experts and talking heads to study" to the end of the statement. There are literally THOUSANDS of markets that are under-served. There are even "pockets' to be found WITHIN the "over-supplied" markets referenced. While Houston may be grossly over-supplied, there are likely many neighborhoods within that market where one could do quite well. Another example that you mention is "Vacancy is quite high"....that might feel high if you are comparing it to other assets but the simple truth is that in the storage world we TARGET 87-88% occupancy as the OPTIMAL occupancy. I get that investors love the idea of 100% occupancy but storage properties are MORE profitable when you put upward pressure on rents to move occupancy downward from 100% to 87%. The idea is to create the same amount of revenue at 87% with higher rates than at 100% with lower rates. This decreases operating expenses and management expenses some as its easier and cheaper to handle 87 customers than it is to handle 100 AND it leaves us with product to offer new customers. These are just a couple insights to keep your wheels turning. Storage truly is the best investment class that I know of and wish you well as you delve into it!

You might find some value in the little blog I post here on BP:

https://www.biggerpockets.com/member-blogs/3915-all-things-self-storage

Mike

You might find some value in the little blog I post here on BP:https://www.biggerpockets.com/member-blogs/3915-all-things-self-storageMike

George Fitz · Answer

I'd like to clear up a few misconceptions that I've seen posted here.

@Eric Mayer I'm not exactly sure what tax benefits you are thinking of, but storage is just like any other real estate asset, and it can be depreciated the same. As a matter of fact, it lends itself very well to a Cost Seg, which can provide enormous tax benefits. For example I have personally used Cost Seg analysis to speed up depreciation and pay ZERO state and federal income tax on a property I currently have owned for over 4 years. I have also used 1031 exchange to defer capital gains taxes on properties I've sold, after a nice large profit at sell. I own houses and apartments as well, and there is little difference from an income or property tax perspective, at least that I'm aware of.

@AJ Osborne, I would actually argue that storage has LESS risk than residential RE, because of the volume of units. At least at the scale I have invested. For example, say I'm grossing $10,000/mo at a residential property that has 10 units renting for $1000/mo. If 2 tenants move out, then I'm down $2000/mo until I can re-rent, which might take a while depending on needed repairs. If I have a 135 unit storage property that grosses $10,000/mo (with a single unit renting at $75/mo), then it would take 27 people moving out before I've lost $2000 in revenue. I can also get those units back on the market on the same day as move-out.

Anyway, lots of good points as well in this thread. I just wanted to point out my personal experiences. Happy investing!

AJ Osborne · Answer

@Derek Hutson You've done a great job outlining some of the pros and cons of storage investing. @Michael Wagner great points as well.  Some things to keep in mind: Storage acts more like retail, not real estate, and is more competitive by nature. It is a business and it's not hands off or passive. You have tenants that come in and out every single day, and if you're doing it right, you SHOULD have turnover, which obviously creates the need for active management. The pro to apartment buildings or multi-family is that you can change the underlying revenue much quicker with less capital expenditure. The downside to storage is risk, because people can move in and out month to month and this means that it is more susceptible to be affected more by overbuilt markets. There's still a lot of opportunity in self storage, and more opportunity in storage than multi-family in my opinion. Reason being - there are a lot of under performing facilities that are family owned (or Ma and Pa's). So in the future, there's a lot more opportunities to buy under performing facilities and turn them around. The industry will consolidate massively over the next 10 years and there's opportunity to be a part of that consolidation. But that is something that people have caught on to and there are a lot of misconceptions about how storage works. Such as how people think that if you build it... they will come. And this will drastically affect supply and demand over the next five years. With a little effort you can get amazing returns out of self storage, you just need to be careful that you are not caught in the windfall of over supplied markets.

AJ Osborne · Answer

@George Fitz The reason storage should not trade at the same cap rate and can be riskier then multi-family is the contractual nature with the tenant. There are no long term contracts in storage and yes you can fill it up same day but only if there is demand. So in overbuilt markets occupancy can drop quickly. We have facilities in some of our markets that are at 50% occupancy, that 6 months ago were at 90% occupancy. If you are buying a 5 cap storage facility you can be in trouble in the next slow season.

As for taxes, you do not get as much depreciation out of storage facilities. There are less items that the government allows to depreciate, so the tax benefits are not as good.

Let's be clear, in no way shape or form am I saying don't invest in storage. I own over 100 million dollars of it and have the largest self-storage podcast in the world. So I am a huge believer that storage is the best asset class to be in. But... all things being equal, self-storage is not as secure and predictable as multi-family. If it was, I wouldn't be in it and I couldn't get the returns that I do!

Scott Meyers · Answer

WOW!  We've got some of the heavy-hitters in Self Storage on this thread!  @Derek Hutson, you're seeing a lot of great information shared by folks who truly "get" self storage.  Like Michael Wagner, I am also only involved in Self Storage and have been for over 20 years.  The simple facts I like about it:

-No tenants, no toilets, and no trash.

-Most facilities offer a great deal of "value add" which will drive NOI year over year.

-The majority of the facilites in the market are owned by sole operators, allowing investors with a solid system the chance to implement that system and reap very nice rewards.

-Occupancy DOES have an impact on rent rolls, but the reality for most SF and MF landlords is you aren't 100% occupied on an annual basis, either.  An unoccupied storage unit costs me virtually nothing (in the grand scheme of things) versus an unoccupied SF house or apartment.

I love self storage for a lot of reasons, but then, I like car racing, too.  Different investors will respond to different types of assets, so while I'm a true Self Storage evangelist, I totally "get" that some folks love NNN leases and others like fix and flips.  If you're on the fence, though, I'd really recommend you keep digging in and learning more.

George Fitz · Answer

Thanks for the different take @AJ Osborne. It's interesting to hear the perspective of someone who invests at your scale (and I love how BP brings us all together to have these conversations and hear one another's stories). I primarily invest in tertiary and rural markets and I'm definitely not buying a 5 cap. I will stick to my guns though and say that I have found self storage less risky than MFH and SFH, for the reasons I stated previously. But my portfolio is a tiny fraction of 100 million dollars so I can appreciate how things look different to you.

To circle back to the original post, I think @Michael Wagner point about markets is pretty spot-on. I don't personally invest in larger markets but I hear from others how viscously competitive (and now overbuilt) they can be. I would encourage anyone interested in getting into storage to look closely at smaller markets where there can be less competition and more mom and pops, which are often under-managed. That strategy has worked for me.

Eric Mayer · Answer

Don’t forget about the tax benefits you get from providing a commodity like housing. You won’t get the same “tax free” income with storage.

Steven Lowe · Answer

I'm learning a lot about Self Storage and am excited about the possibilities of investing in it, developing new facilities and adaptive reuse in certain markets.  I've been told by those who are active in the industry that trade areas, especially in urban areas, are relatively small--a 1 mile radius.  Go to the suburbs and that area increases to about 3 miles.  Rural areas can be 5-10 miles.  By trade area I mean potential customers for that facility will mostly populate from it.  If there's a decent facility 1 mile down the road consumers are more likely to go there in lieu of say driving 5-10 miles further.  I believe it was Michael who said earlier in the thread that there are literally thousands of underserved markets, some of them right under the nose of very big markets.  You just have to go looking for them.

Steven Lowe · Answer

Self Storage to me is a hybrid of hospitality and retail, with some multifamily thrown in for flavor.

Eric Mayer · Answer

@George Fitz Thank you for the clarification. Storage is sounding better and better!

Storage units... the new frontier?

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