Investing in real estate has the potential to bring investors growth and excellent return on investment (ROI). There are many different real estate investment sectors, and the self-storage sector has gained attention over the years. Self-storage is in high demand even during times of financial hardship, making self-storage a relatively recession-proof investment.
Self-storage investment opportunities include buying stabilized self-storage assets, adding value to underperforming facilities, developing storage facilities from the ground up and more. Depending on your investment goals, you can grow your portfolio with new storage facilities or purchase an underperforming facility and add value to it.
To help you expand your portfolio in this real estate investment category, explore our guide to growing your storage facility portfolio.
The Ins and Outs of Self-Storage Units
Due to growing demand and stable returns, investors have become more interested in self-storage real estate investment trusts (REITs) over the years. Self-storage stocks even performed well during the COVID-19 pandemic, prompting investors around the world to invest in them and drive asset prices up. Storage facility occupancy and rental rates have increased their value over the years, so if you’re interested in investing in value, add self-storage to your portfolio.
Approximately 49,233 storage units exist in the United States, and they make up about 1.9 billion square feet of storage space. Storage space ownership within the industry is divided among different groups. Six public companies own approximately 31.2% of the United States’ rentable self-storage square feet. The top 94 operators own 16.5% of the country’s self-storage space, and small operators own the remaining 52.3% of self-storage space.
Self-storage facilities allow businesses and people to store their belongings. Many people store belongings in self-storage units during life transitions while they decide which items they want to keep and which items they don’t need anymore. Since storage units are affordable for most households, many people rent them even if they never fill their storage unit to full capacity.
The self-storage industry continuously outperforms other real estate classes. In 2021, approximately 10.6% of households rented a self-storage unit. Self-storage facilities are in high demand due to the following situations:
- Downsizing: Some people turn to storage units to store their important belongings when they live in a small home or apartment. People may also downsize to make space in their homes when they need a home office for remote work, so they need a storage unit.
- Divorce: Storage units provide storage space for people who live with a friend or family member while they finalize a divorce and move out of their home.
- Death: When a loved one dies, family members or friends might rent a storage unit to stow their loved one’s belongings as they work through the situation.
- Moving: Many people store important belongings and furniture in storage units as they move into new homes.
- Business: Plenty of businesses use self-storage space to store their equipment and supplies. E-commerce companies and retailers often store additional inventory and promotional displays in self-storage units. Landscapers might store tools in storage units, and contractors often use storage units for their equipment.
While someone may rent a storage unit for a variety of reasons, it’s important to understand why your target audience might be renting them. This way, you how how to grab their attention and show them why your storage facility is the solution.
What Are the Benefits of Growing Your Self-Storage Portfolio?
The demand for storage units is expected to increase as the baby boomer generation begins downsizing and younger generations continue to live in small homes and apartments. Consider the following reasons to grow your self-storage portfolio:
1. Tax Benefits
Self-storage real estate investors can enjoy tax benefits, such as interest expense, deductions for property tax and depreciation. As a noncash deduction, investors can use depreciation to reduce taxable net income. This is very beneficial for investors who hold their self-storage investment in a taxable portfolio. If a self-storage property is on an accelerated depreciation schedule, investors can benefit from even greater tax savings.
2. More Revenue
A larger portfolio increases the potential for increased revenue. Adding self-storage facilities to your portfolio has the potential to increase your revenue because storage facilities can experience high ROI.
If you’re wondering how to increase self-storage revenue, expanding your self-storage portfolio with well-managed facilities is a great way to do so. Storage facilities periodically increase their rent, and they’re able to do this while maintaining high occupancy rates. This is because people will always need space to store their belongings, and the rent for storage units typically accounts for a small percentage of tenants’ net income.
Storage rental rates typically increase significantly more than the cost of operating a storage facility, which means they can increase net operating income (NOI) and generate more revenue. Self-storage facilities can also create opportunities for incremental revenue increases to boost ROI even further. Storage facilities can offer their tenants supplemental products, such as dust covers, packing tape and boxes. These are high-margin items that tenants are likely to purchase from a self-storage office.
Self-storage facilities also cost less to build, and they’re typically easier to operate, maintain and manage than other commercial real estate properties.
3. Increased Self-Storage Market Share
The self-storage REIT category is expected to occupy an increased market share due to several factors. Self-storage facility owners have the opportunity to attract more millennials and other younger generations with technology. Self-storage facilities can attract more tenants by offering the following technological features:
- Mobile apps
- Responsive websites
- Online payment and booking options
- Virtual facility tours
- Automated access
- Self-service kiosks
The self-storage sector has become a competitive landscape as more storage facilities are trying to stand out to attract more tenants. Many storage facilities are focusing on advertising and offering the following perks:
- Competitive pricing
- Parking facilities
- Promotional activities
- Climate control
- 24/7 access
Additionally, many apartment dwellers move into smaller spaces or move in with friends or family to save money during times of economic hardship. While landlords often lose tenants when rent increases, storage facilities gain more tenants. This is because it’s typically cheaper to rent a storage unit while living in a small space than it is to continue renting a large residential space.
4. Attract External Cash Flow
Owning or investing in self-storage facilities attracts external cash flow. With a healthy property portfolio, steady revenue can attract external cash flow from institutional investors via the following:
- Hedge fund managers
- Mutual funds
- Private equity funds
- REIT opportunities that can increase revenue
Self-storage properties attract investment. Institutional investors are attracted to the self-storage sector because of its high performance. Self-storage REITs often receive a significant amount of money from stock investors, and the REITs use this capital to purchase properties. Institutional investors often invest in the self-storage sector to diversify their portfolios.
What Is a Good Self-Storage Portfolio?
If you’re wondering how to create self-storage asset portfolios for institutional investors, it’s important to remember that a facility’s performance depends on several factors — not all self-storage facilities are the same. While some facilities will thrive even during a recession, others are at risk of failing due to poor management, location or marketing strategies.
To build a good self-storage portfolio, you must choose properties that will perform well and increase ROI. A strong self-storage portfolio consists of self-storage assets that are well-managed, in a good location and have effective marketing strategies. A good self-storage portfolio will generate income, increase ROI and attract institutional investors.
What Are the Best Ways to Build Your Self-Storage Portfolio?
If you’re wondering how to build a self-storage portfolio, some of the best storage facility investment strategies for increasing self-storage portfolio assets include the following:
1. Buy Stabilized Self-Storage Assets
Purchasing a stabilized self-storage asset involves buying a self-storage facility that’s already operational. Stabilized self-storage facilities have already increased income to a profitable level and have stable occupancy. They’re well-operated and often at full occupancy. Purchasing stabilized self-storage facilities can help you increase your self-storage portfolio assets.
Many institutional investors acquire stabilized self-storage assets because these properties require little to no hassle. If you purchase a stabilized self-storage asset, you can grow your self-storage portfolio without needing to organize construction or renovations.
2. Acquire Underperforming Self-Storage Properties
Some self-storage facilities underperform due to poor management or ineffective marketing strategies. Facility owners and investors sometimes enter the self-storage business with inaccurate assumptions that storage facilities manage themselves or historical performance indicates future performance.
In some scenarios, the construction costs of a self-storage facility change between the project’s start and when bank funding comes through. This can cause a property owner to lose money. In other scenarios, a storage facility’s project timeline could take longer than expected and have to compete more with other new storage facilities. This can cause a facility to perform worse than an owner originally anticipated and prevent them from being able to pay back their construction loan and other costs.
Some storage facilities underperform due to a lack of management and marketing efforts. Many storage facilities are owned by small business owners, and some smaller operators are excellent at running their business effectively while others aren’t as adept. They may neglect the facility, fail to match rental rates to the current market or let marketing efforts fall to the side.
Savvy investors can purchase underperforming self-storage facilities at a discounted price. When they do so, they can benefit from the fact that the challenging part of facility development is complete. The facility may even have some tenants already, so the investor will just need to implement marketing and management strategies to increase occupancy and generate cash flow.
Investors can purchase a self-storage facility and improve its operations enough to generate income and increase ROI. They can raise rental rates to match the current market, advertise the facility, organize facility records and perform necessary maintenance.
3. Invest in Value-Add Self-Storage Properties
One self-storage investment strategy is to invest in self-storage properties with opportunities to improve and add value.
You can attract more tenants and investors by installing security cameras to give tenants extra peace of mind. You can also make the booking and payment process easier with a responsive website and mobile app. Self-storage apps allow tenants to book units and make payments quickly and easily. Provide a virtual tour of your storage facility on your website to attract potential tenants, too.
You can also install kiosks to allow tenants automated access. With a self-service kiosk, tenants can access their units without searching for a physical key or locating a property manager to give them access. Offer competitive pricing to gain more tenants, and offer units with humidity control as an additional perk for tenants who might have belongings sensitive to temperature and humidity. With climate-controlled units, you can increase rental rates.
Marketing is another great way to add value to an existing storage unit facility. With marketing strategies, you can attract more tenants and potentially raise your rates, as well. Maximizing storage facility value is an impactful way to attract tenants and investors, which can increase your overall capital gains and ROI.
4. Consider Repurposing Properties for Self-Storage
Retrofit self-storage facilities to take advantage of abandoned properties. Retrofitting and repurposing properties for self-storage involves purchasing property and transforming it into a self-storage facility. One way to do this is to purchase a large property and sell part of it to regain some of your funds.
You can use pre-existing buildings, such as abandoned warehouses, factories and large retail stores, to build indoor climate-controlled storage units. Many buildings have multiple floors that can be utilized for additional storage units.
While retrofitting and repurposing pre-existing properties doesn’t typically carry as much risk as developing facilities from the ground up, it still comes with some. You could potentially experience construction and repair issues during the renovation process or zoning law setbacks. You could also experience some setbacks while attracting new tenants once your facility is operational.
However, this storage facility investment strategy has great potential for high ROI.
5. Develop Ground-Up Storage Facilities
Ground-up self-storage development involves purchasing a piece of land, acquiring building permits, scheduling construction and building a new storage facility. If you have a background in construction, you can participate in merchant building self-storage by building a self-storage facility and then selling it to an operator or becoming the operator. This strategy has the highest risk potential but also the highest ROI potential.
If you don’t want to manage the construction and other factors that go into developing storage facilities from the ground up, you can also choose to invest with an operator. You can bring equity to an operator who needs capital while they handle the development work. Then, you can participate by purchasing a stabilized asset or buying into a ground-up storage facility.
Before construction begins on your ground-up storage property, it’s important to design the storage unit layout to maximize your rentable square footage. The more storage spaces you can supply, the greater your earning potential will be. Tailor your facility layout to your target customers’ needs so you can gain a competitive advantage against nearby facilities. To meet various customer needs, you’ll need to make sure you have the right variety of storage unit sizes.
6. Expand Regional Market Share
Expand regional self-storage market share by increasing your marketing efforts. You can use self-storage marketing saturation to help your self-storage properties reach full capacity. The grassroots marketing strategy involves targeting content to a specific audience, and you can use it to target potential tenants near your storage facilities.
By marketing to people in a facility’s surrounding area, you can focus all of your marketing efforts on the individuals who are more likely to rent units within your facility. You can market to your target audience with a successful campaign using the following characteristics:
- Clear communication: Use clear communication to reach your target audience.
- Consistency: Remain consistent in your marketing to show potential tenants that your business is reliable.
- Cost: Track which of your marketing methods are most effective and provide the highest return to ensure you only use the most cost-effective strategies.
Finding the Right Property
Before adding a self-storage property to your portfolio, it’s important to choose a property with the highest ROI potential. Choosing the right property will depend on the following factors:
- Population density
- Number of storage facilities within the location
To achieve higher ROI on your self-storage investment, you’ll want to purchase property on a main road and make sure it’s easily visible from the road. High-traffic areas will help you attract more tenants and compete with other facilities. If your storage facility is hidden by hills or other buildings, fewer people will see it.
Purchase property for your self-storage facility in an area where many people reside. While operating self-storage units in a rural community can be beneficial if you’re the only option, you’ll likely experience less risk when you invest in land in a more populous location. Be sure to double-check how many people live in the area you’re interested in before moving forward.
Before purchasing a property, consider the number of self-storage facilities within the property’s location. If you’re in an urban area, you can calculate this number based on a smaller radius since urban areas have a denser population. For suburban and rural locations, you’ll need to consider a wider radius when you look into the number of nearby storage facilities.
Should You Invest in Multiple Self-Storage Properties?
Creating a portfolio of multiple self-storage assets can help you build wealth. You can use any of the previously mentioned self-storage investing strategies to collect multiple assets and eventually sell them to institutional investors, such as hedge funds, REITs, life insurance companies and family offices. Institutional investors will often pay a premium for stabilized portfolios of similar assets.
Build Your Self-Storage Portfolio With Investment Real Estate LLC
Creating a self-storage asset portfolio is a beneficial investing strategy that can bring growth and build wealth. Expand your self-storage portfolio using any of the previously mentioned strategies to increase your ROI — and get started with Investment Real Estate LLC (IRE).
The IRE team specializes in the self-storage industry, and we have a wide variety of self-storage properties for buyers to add to their portfolios. At IRE, our team of knowledgeable professionals will provide guidance and advice to help you find self-storage properties to invest in. From single properties to multi-million dollar portfolios, we handle transactions for buyers and sellers according to their investment goals.
Our team is experienced in self-storage construction, development and property management, and we offer various feasibility and brokerage services. Contact us to learn more about how we can help you grow your self-storage portfolio.