Thoughts on mini storage investment?

[Lukas Zupan]

Hey guys, this is my first question posted, so hopefully it's in the right place!

I am really new to the real estate game, (mere months) and so far have only partnered with local investors who flip and hold SFR's... Despite only working the residential side of things so far, I have been trying to educate myself on all matters commercial as well, and at least be familiar with terminology and the differences etc...

So to my questions really, I recently met with a gentleman who I talked with (a commercial builder and investor) who said he has designed and built several mini storage facilities (primarily outdoor space). We got started talking and he told me about a deal where from land acquisition to turnkey build costs the whole project would be wrapped up in 3.5 million. Now, from what I've learned leveraging single family property acquisition with a 15 year note, or even a 10 year note is like...really amazing. The cashflow as he illustrated for this type of investment for the specific factors on this facility would proceed to net 90k/mo. Now from all i've learned...Those numbers are...insane. Like, too good to be true insane.

Does anyone have experience with the mini storage market who can give some incite? I really don't know much about it at all except when people say "oh, its a cash cow" "oh, its recession-proof" etc... Are those kinds of returns even remotely feasible? Is there any credibility to these numbers? And also, any ideas on the best way to finance a deal like this. Would you have to go in with the lender as equity partners, or would someone be willing to simply gain 8-15% simple interest on their money...?

Thanks everyone,

Lukas

[Ed LeGrand]

Mini storage is doing well in the Bay Area because the demand is high and the product type is under-served. Baby boomers are downsizing and millennials are fine with short term living arrangements. How is the demand in OKC?

[Matt Leonard]

@Lukas Zupan I don't know the ins and outs of self storage deals.  If something seems too good to be true, it either is or needs more investigating.  If it were me, I'd want to see some pro-forma's or other numbers on paper that could be heavily scrutinized.  Also, how would the deal be set up?  Anything to keep this guy from taking your investment money and never building anything?

Remember Warren Buffets rules; 

1. Never lose the money! 

2. Never forget rule #1

[Rob Beardsley]

Hey, I would encourage you to check out some podcasts from the BEST EVER show about storage. I have listened to a few and like the business.

I think it is definitely worth while to learn more and potentially pursue especially if you already have a mentor actively doing this.

[Lukas Zupan]

@Matt Leonard Of course, you are correct about the too-good-to-be-true either being so, or needs more investigating. That is why I posed the question, maybe someone here has personally invested in the storage space or even specializes in it. As far as the gentle trying to swindle me out of the deal...truth is it would be a HUGE deal to me, but it's pennies to him. He is primarily a builder and works with projects worth tens of millions. But I'll be sure to cover me assets!

@Rob Beardsley is the show itself called "best ever". If not, where can i find these podcasts?

To everyone else! Know of any podcasts here on BP that make mention to the storage element? I have listened to a few so far, but I haven't screened the content of them all yet..hehe... 

I have speculated from every angle about this, but truly the biggest factor here is my ignorance. I'm doing various other research as well and talking to some local investors but if any of you have experience with this market, please feel free to set my thinking straight in any way you can!

Thanks y'all,

Lukas

[Ali Boone]

My family owns some storages and I'm shopping for some myself right now. To answer your question- storages can absolutely be that profitabl (total cash cows!), BUT, there are a lot of factors that go into it as to whether or not a particular facility will be one of those cows. Location is huge- traffic counts matter, etc. Saturation/demand is the other factor. I know a town out here that has so many storage facilities that none of them can get higher than about a 60% occupancy (bad). Or, if you have a town with few storages but either not a high population or if it's in an area where the people who are there don't need storages, then you're hosed to.

The major risk you are taking with that guy's proposal is that you are speculating. If the facility doesn't exist yet, you really don't know how or if it will perform. You'd have to dig into some major data points (that are way outside of my pay grade of knowledge, so can't help you on those) and try to come up with extremely concrete reasons why that facility should expect to perform. Otherwise, you could invest a ton of money into a non-performing, or under-performing, asset.

[George Fitz]

@Lukas Zupan are you sure it wasn't $90k / YEAR? Netting $90k/month on a $3.5 million investment is highly unlikely and too good to be true- that would be a 31% cap rate! I own self storage- $90k/month in even the largest properties in strong markets is also pretty rare. Ask him if he's laundering money! 

[Scarlett Mulligan]

I love the idea of self storage.   It seems to me this industry will continue to grow.  I was watching a couple millennials interact with three older generations (father, grandmother & great grandmother) last week.   I noticed the millennials & the father were completely disengaged & tuned into their phones ..... Big surprise there, huh?!  Ha!  

Anyway, I continued to reflect on this interaction & (in typical entrepreneurial brainstorming response) attempted to identify needs that may arise within this dynamic.  What kept coming up for me is that the human brain is hardwired for connection.  Our society's quality of connection is diminishing.  Because the survival instinct will always win out over the rational brain & our elders continue to pass on our younger generations will, as a method of "connecting" hold on to   more & more stuff going forward.  

@Terry Campbell where do you recommend looking for industry standards & 3rd party consultants?  I can not find your website information on your profile - can you share it? 

@George Fitz & @Ali Boone - do you have any recommendations on the best places to do research related to storage facilities?   

Thanks for a great topic, @Lukas Zupan...... best of luck!

[Lukas Zupan]

@Terry Campbell Thank you sir! Very helpful indeed. A lot of what you have mentioned matches up with what this man told me in regards to how and why the deal works... he implied that the details and variables he were above me and would be difficult to explain. At the time they indeed were, and may even still be. But hearing you say similar things lends credibility to his explanation as well. Because he has done this in the past he said he is very picky about the location, surrounding market ("rooftops") etc... This location he said, is somewhat an exception to his typical size limit, and would be situated on nearly 10 acres. Due to this, he allotted for 50,000sqft of indoor storage with room for expansion, and the rest is outdoor/RV. As to climate control, I havent asked about it, but have seen the humidity control as you mentioned for "business storage" options. And yes, we should absolutely talk separately about your site and your work in OKC. 

@Rob Beardsley I understand, and will do!

@Ali Boone The Saturation element you spoke of seems completely obvious, but I somehow totally missed and never thought 'bout that, good point! And indeed the unbuilt facility is certainly the risky business I'm worried about xD. I will certainly make sure to do adequate research with others involved to investigate the real possibilities. The fact that you, and Mr. Campbell both echoed some of his descriptions really helps me out, because I'm primarily just trying to gauge the possibility of this deal type as opposed applying it to this particular situation. Hearing you both say that these returns aren't impossible "under the right conditions" is very helpful. And I will be sure to educate myself on such factors.

@George Fitz Yes 90k/mo is the accurate and "conservative number" From his demeanor I know this guy knows his stuff, and all his calculations were ultra-conservative for this situation. He'd rather undercut predictions that overshoot, and even those numbers were an accurate gross 1.08 mill annually. A reason I mentioned above was that this would be an unusually large facility. Not a tiny half-acre self-storage plot, such as inner-city options.

Again, thank you all for your input, and if anyone else has any thoughts to add, please! The more people I'm hearing from, the more helpful this is!

Lukas

[Terry Campbell]

@scarlett mulligan, As far as 3rd party consultants, I prefer to give those on a one to one basis as I don't want to alienate any of them as I do a lot of referrals with most of them. It usually depends on the locations as to whom I recommend. 

[David Thompson]

Hi Lukas,

Here's a blog that may help gain more insights on the self storage industry and why it's attractive.  Agree with @Terry Campbell that it has a lot of pluses going for it.  You can go DIY but also note that syndication and participating as a passive investor in self storage deals may also be an avenue for investors especially if you want to diversify out of state or in different geographies and may not have the time, money or expertise to devote to it.

https://www.biggerpockets.com/blogs/9145/54155-sel...

[Adam Robinson]

Some thoughts on Storage as we own some and are putting some ground up 3 and 4 story infill deals together currently:

• There is consolidation going on with larger groups strategically buying off some of the "mom n pops" with that, these large owners have VERY professional management.

• Storage has become an Internet search and SEO game more and more, and the big REITs have armies of analysts that spend all their time managing the search marketing efforts.

• If you are going to invest in a deal, I strongly recommend you get a larger management company, large regional firm at minimum to manage the property and internet marketing efforts.

• Locations is very important, you should be very convenient near other retail uses, BUT you do NOT have to be MAIN and MAIN due to most customers initially finding their facility through mobile and internet searches.

• There are plenty of areas overbuilt, but also plenty of under supplied areas, the critical analysis is within that 3 mile radius.

• @Terry Campbell and @David Thompson make great points and I would recommend investing a small amount as a passive investor in a syndication that has a good track record. the learning experience you will get is priceless, since storage is quite different from SFR flipping etc, I would make sure you are well educated and putting 50k into a syndicated deal will educate you faster than anything.

• Banks won't finance a deal without a 3rd party feasibility study, and they usually calculate the Sqft / person in the area, to make sure its at a certain level.

• its a great asset class to own, you just don't have the headaches of some other asset classes.

[Lukas Zupan]

Thanks @Scarlett Mulligan and @David Thompson,

and yes, @Adam Robinson I can see how the optimization would be ever-increasingly critical. I appreciate the tips and will certainly look into investing with a syndication as an educational option.

Lukas

[Ali Boone]

@Scarlett Mulligan

I don't, unfortunately. I'm still trying to figure it all out myself. 

[Terry Campbell]

Adam, you are correct that they should do a 3rd party feasibility study, but sadly enough, there are still banks that will do a loan on a self storage without it just for the sake of making a loan. I don't understand it....thanks not good for the industry. We definatley won't do one without a study by an industry expect and I wold advise anyone, regardless of your experience, to get that third party study. 

[Lukas Zupan]

@Terry Campbell What are the kinds of people and/or companies that do studies like that? Is there a term for them, do you have any examples?

Lukas

[Terry Campbell]

Lukas.

They are referred to as Feasibility Experts. there are several out there, but only a handful that really focus and specialize in self storage. you can find them online or PM me for suggestions.

[James Wise]

Originally posted by @Lukas Zupan:

Hey guys, this is my first question posted, so hopefully it's in the right place!

I am really new to the real estate game, (mere months) and so far have only partnered with local investors who flip and hold SFR's... Despite only working the residential side of things so far, I have been trying to educate myself on all matters commercial as well, and at least be familiar with terminology and the differences etc...

So to my questions really, I recently met with a gentleman who I talked with (a commercial builder and investor) who said he has designed and built several mini storage facilities (primarily outdoor space). We got started talking and he told me about a deal where from land acquisition to turnkey build costs the whole project would be wrapped up in 3.5 million. Now, from what I've learned leveraging single family property acquisition with a 15 year note, or even a 10 year note is like...really amazing. The cashflow as he illustrated for this type of investment for the specific factors on this facility would proceed to net 90k/mo. Now from all i've learned...Those numbers are...insane. Like, too good to be true insane.

Does anyone have experience with the mini storage market who can give some incite? I really don't know much about it at all except when people say "oh, its a cash cow" "oh, its recession-proof" etc... Are those kinds of returns even remotely feasible? Is there any credibility to these numbers? And also, any ideas on the best way to finance a deal like this. Would you have to go in with the lender as equity partners, or would someone be willing to simply gain 8-15% simple interest on their money...?

Thanks everyone,

Lukas

 Self storage facilities rarely go up for sale. This is b/c they are home run investments.