Don’t Forget the Little Guy!

With Christmas shopping “full on” in the stores and online right now, I can’t help but think back to when I was a kid and the presents under the tree.

The big box was almost guaranteed to be something cool, but the little boxes – especially the oddly-shaped ones – always seemed to have the really good stuff.

Self Storage investments are a lot like that, too. We all love owning and operating the big, Class A facilities, especially if we’re the ones responsible for having developed them ourselves or taken them from forgotten assets to prime cash cows. Let me tell you, though, the little self storage facility in a small town that can be bought for less than $100K?

That sucker is a gold mine if you only run it the right way!

Let’s look at some of the reasons smaller facilities, or those off the beaten path, can still create really nice cashflow for self-storage investors…

1. They’ve NEVER been run right. I’m not trying to bash on anyone, but the fact is this – many of these facilities were built by professionals and run by amateurs. Hard working folks that viewed a self-storage facility as a business rather than an asset. For investors who can find these facilities and buy them right, simply doing “the basics” with respect to management and financial records-keeping can create income nearly overnight.
2. No one ever took care of the customer. This is closely related to #1, but I’ve found that facilities in smaller communities all over the country tend to treat customers like a problem to be handled rather than with the respect they should be due. In many instances, I see the second generation of ownership running facilities “into the ground” and complaining about rent rolls, the cost of doing business, and not making strategic investments into the facility or their marketing budget.
3. The local competition is just as bad! In nearly every instance, we find bad operations are contagious. The bigger operations – the Public Storage Class A in the “new” part of town is doing well, but the facilities on the outskirts of town? A lot of shady financials and a lot of deferred maintenance. A couple hours of pressure washing and a coat of paint might be all it would take, especially if your systems are actually taking care of the customer.
4. Owners are ready to sell. Think about this – you’ve inherited a self-storage facility, you hate running it, the financials are a mess, and the only cashflow you see is a tax bill and the time impact the facility causes you. You’ve gone through countless managers due to integrity problems. In short, this facility is sucking the life from you. Now, along comes a guy or girl who wants to buy it? They’re excited about it? They’d like you to do owner-financing, but you’ll get paid out in a few years? Believe me, a LOT of sellers are in that market, especially when it comes to smaller facilities.
5. Financing can be a snap. Yes, this is related to #4, but even if you have to go the bank on a deal like this (and you shouldn’t!), banks like these little assets. Generally, you are buying them for the actual value of the asset (since the financials are often so mismanaged), so your LTV is generally super. Building on that idea, it’s often possible to rapidly increase NOI on these facilities very quickly, year-over-year. Ask your friendly banker how they’d feel about a real estate investment that could increase NOI annually by 10, 20, or 30%.

If you’re still on the sidelines with self storage investment, you owe it to yourself to think about these smaller facilities. Right now, no matter where you’re sitting and reading this, I’ll bet there are half a dozen within just a few miles of you. They’re worth checking out and integrating as a part of your own self storage real estate investment strategy.