Is Mini-Storage an RE Investment or Just a Business?

Question

I love the concept of a mini-storage facility. It's pretty easy to run, the units are on auto-pay, if someone doesn't pay you simply lock them out until they do, or you auction off their stuff.

But it seems more like owning a business than investing in real estate. Yes, you own the actual property, but is that a real estate investment?

Terry Campbell · Answer

Tom has some good points.

Self storage originally was used years ago as a land bank until there was a better and higher use. Fast forward to today and it is a business that creates huge value based on its NOI , not necessarily the value of the property, although many times they go hand-in-hand.  Self storage operators use revenue management techniques that maximize the NOI and value, that has of the last couple of years, compressed rates to sub five in some markets.  Make no mistake. It is a business, but it needs a good location (real estate) to be a successful as possible.

I have watched the industry change over the last 23 years to be much more sophisticated. I have been a partner in a large facility that is now owned by a large real estate investment trust. I am involved in one now that we are building on some very valuable real estate, but that is because that is where the market is. It will be ran like a business and will create huge value based on that income not necessarily because of the value of the real estate,  but you can see by this example that the real estate does play hand-in-hand as to why will be valuable.

Someone in this thread mentioned SBA loans. This asset class was not able to be financed with SBA loans until late 2010, so that would indicate that the federal government started recognizing it as a business and not just a passive real estate play.  I am passionate about this industry and sharing knowledge as well as helping people get into this industry. There are also other folks on this site that do that same and I work with them as well.  Obviously, I can't put a link to my website on here (although someone at another bank is getting a mention in this thread) .

Ken Jernigan · Answer

@Joseph M. I'd be careful about throwing around the 10% equity for SBA loans. That's the minimum required under the SBA 504 loan program and only for businesses with two years operating and general use properties. Fortunately, the SBA has yet to classify self storage as limited use, but you still need 2 years operations to qualify for that downstroke. To get the 25 year term, you have to use the other SBA program--7(a). SBA requires 7(a) loans to be fully collateralized, so to get to the 90% advance rate, your property would have to appraise for 111% of cost. Add transaction closing costs and SBA guarantee fee and you're closer to 120% of contract price. As this is unlikely, SBA lenders will ask for side collateral to get to the one to one collateralization. Be prepared to give up liens on any other assets you own including your personal residence. As with all money matters, the devil's in the details.

My own view of SBA--and I was an SBA lender for over 10 years--is that it should be used as a halfway house to get your projects started. Once you've added value and developed consistent cash flow, you can seek cash out financing freeing up equity for future projects. With 2-3 years of operating history and good cash flow, you should be able to get a conventional loan much cheaper that SBA.

Scott Meyers · Answer

Hi Gang!  All are valid points, and at the end of the day - if you are looking into a Real Estate Investment business without the hassles of tenants, toilets and trash, then Self-Storage is hands down the most profitable sector of all Commercial Real Estate Sectors.

Mike Dymski nailed it - they're valued based upon a Cap rate, with higher valuations than multi-family, mobile homes, assisted living, etc.

In Addition, all the major Commercial Real estate brokers have a separate division that is dedicated to Self-Storage, much like apartments.  But when you compare apples to apples, Self-Storage quickly rises to the top as the darling of commercial Real Estate.

Same goes with Lenders - We have been involved in over 30 Self-Storage Deals, and The majority have been financed with Traditional Lenders as a Real Estate Play.  We have a handful that we have financed with SBA Backing via Live Oak Bank with Terry Campbell (above) - but at the end of the day, it's still a loan backed by the real estate AND the income stream - Just like an office building, apartment building, Assisted Living Facility, etc.

You can also invest in Self-Storage in a REIT (Real Estate Investment Trust) so, umm, I guess by the name alone it's considered Real Estate...

It's a particular asset class in commercial real estate.

Ok, so, why are we debating this in the first place?

Tom Mole · Answer

Well....OK....I see what you mean Mindy, but the same argument could be made on any commercial property investment. Wouldn't you agree. I mean, if I'm looking to invest in a rental house, I determine the price I'm willing to pay based on comparable sales of rental housing, not on the income potential. However, if I'm investing in an apartment building, I based the acquisition price on the net operating income, not the value of the land and improvement.

Yes, I agree there is a lot of overlap during due diligence between the value of the real estate and the value of the business operating on and in that real estate whether the property is residential or commercial. Optimally we would want a terrific value on both sides of the equation.

Fundamentally, I believe the question is whether investing in self-storage is really investing in real estate. After all BiggerPockets is all about real estate investing. I would say that investing in self storage is equivalent to investing in apartments, but with tenants that are much better behaved. A similar argument could be made with assisted care facilities or strip malls, etc. Wouldn't you agree that the common thread is the role of the landlord. As long as you can claim to wear the hat of a landlord for at least part of the time while you invest, then you are investing in real estate.

Bottom line: when you invest in self storage property and end up in the self storage business then you are investing in real estate. If you're just operating a self storage business as a tenant with no interest in the real estate, then you're NOT investing in real estate.

Cheers!!

Cody Campbell · Answer

@Abbas H.

Try @Scott Meyers he has several programs and information guides to learn more. He is in an earlier post on this thread.

Giovanni Isaksen · Answer

Great question about self-storage (ss) being a business or a real estate play. I think the same thing applies to any real estate though. Whether it commercial office space, apartments or single family the question really comes down to whether you are in the landlording/operating business or the property owning business. If you're the landlord, that's a whole different business than if you're an owner.

Yes the property manger is a large expense item for many facilities but it's just that, an expense item. If you are in the owning business then a deal isn't a deal unless it pencils with professional property management, no matter what sector it's in.

The great thing is that technology has come to the ss industry with kiosk systems which integrate with the management platforms and security systems. Now you really only need someone to walk the property to make sure it's clean and undamaged; leasing, collecting rents, locking out delinquent tenants, even selling locks can be handled by automated systems. Many platforms also provide live chat/phone banks to answer questions as well as providing SMO online advertising and marketing along with lease management systems that optimize rents.

With those systems in place you can truly be in the self-storage owning business.

Interesting also that several people have mentioned the land banking strategy for ss. Back in the '80s my mom was on the board of a privately held real estate company and pitched the idea of acquiring two ss facilities located in Bellevue, a suburb of Seattle. The land bank idea was part of her pitch back then too. She couldn't sell the board on the idea and since then Bellevue has grown into its own urban center with 2MM sf of Microsoft office space among many others but those two single-story, unheated ss facilities are still there... because they cashflow like mad. Eventually Public Storage acquired them... who also used to pitch the land bank idea for their limited partnership deals back in the day before they went public.

Abbas H. · Answer

I'm very interested in self storage @Terry Campbell and @Cody Campbell any educational material where you would recommend a newbie learn more.

Mike Dymski · Answer

At 5-7 caps, it's valued like real estate.  15-20x multiples of earnings are a lot higher than many business valuations.

I am vetting passive syndication opportunities in self-storage.

Omar Khan · Answer

I've learnt a lot as some solid points have been raised here. Would love the conversation to evolve.

Thanks guys!

Is Mini-Storage an RE Investment or Just a Business?

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