Why Self Storage Investments Beat Most Other Real Estate

TL;DR

Self storage is a profitable and resilient investment opportunity.

Transcript

hey i'm paul moore i'm the co-founder of wellings capital and i'm the author of the new bigger pockets book storing up profits capitalize on america's obsession with stuff by investing in self-storage you know the new york times recently did an article saying that self storage had exploded in profitability and investors are flocking to the space so... Read More

Key Insights

• Self storage is a fragmented industry with over 50,000 facilities in the U.S., mostly owned by independent operators, creating opportunities for professional operators to increase income and value.
• Self storage is recession-resistant, thriving in both good and bad economic times due to its role in storing people's belongings during life transitions.
• The industry benefits from 'sticky tenants' who are unlikely to move due to minor rent increases, providing stable income for facility owners.
• Month-to-month leases in self storage allow owners to adjust rates with inflation, capturing more value compared to long-term leases in other real estate sectors.
• Misconceptions about self storage being easy to manage create opportunities for skilled operators to significantly enhance facility performance and investor wealth.
• Low-cost value-add opportunities in self storage include truck leasing, billboards, ATMs, and tenant insurance, adding significant value to facilities.
• Self storage faces risks from competition, but facilities in high-value land areas or less competitive markets can mitigate these risks.
• Tax benefits and the potential for selling portfolios to institutional buyers make self storage an attractive investment for wealth growth.

Questions & Answers

Q: What makes self storage a fragmented industry?

Self storage is considered a fragmented industry because there are over 50,000 facilities in the U.S., with about three-quarters owned by independent operators. Many of these are mom-and-pop operations, lacking the resources or desire to maximize income and value. This fragmentation presents opportunities for professional operators to acquire and improve these facilities, increasing their profitability and value significantly.

Q: How does self storage perform during economic downturns?

Self storage is recession-resistant, performing well during economic downturns. In challenging times, people often downsize, relocate, or face life changes like divorce or death, increasing the demand for storage space. Self storage facilities provide a temporary solution for storing belongings during these transitions, ensuring steady demand and income for facility owners, even when the broader economy is struggling.

Q: Why are self storage tenants considered 'sticky'?

Self storage tenants are considered 'sticky' because they tend to stay in their rented units even when rents increase slightly. Unlike apartment tenants, who might move to save on rent, self storage tenants are less likely to rent a truck and spend time moving their belongings to save a small amount monthly. The hassle of moving and the convenience of auto-billed payments contribute to their stickiness, providing stable income for facility owners.

Q: What are some value-add opportunities in self storage?

Value-add opportunities in self storage include offering truck leasing services, renting space for billboards, ATMs, or cell towers, and providing tenant insurance. These services generate additional revenue streams, significantly increasing the facility's value. Other opportunities include selling packing supplies and adding climate-controlled or mobile storage units, further enhancing the facility's appeal and profitability.

Q: How do month-to-month leases benefit self storage owners?

Month-to-month leases benefit self storage owners by allowing them to adjust rental rates in response to market conditions and inflation. Unlike long-term leases in other real estate sectors, these flexible leases enable owners to capture increased value by raising rents as needed. This adaptability helps facility owners maintain profitability and protect their investments against economic fluctuations, ensuring a steady income stream.

Q: What risks do self storage facilities face from competition?

Self storage facilities face risks from competition, particularly when new facilities are developed nearby. This can lead to oversupply, driving down rental rates and occupancy. However, facilities located in areas with high land values or in tertiary markets with little chance of new entrants can mitigate these risks. Strategic location selection and operational excellence are key to maintaining a competitive edge in the market.

Q: Why are institutional buyers interested in self storage portfolios?

Institutional buyers are interested in self storage portfolios because they offer stable, predictable income streams and the potential for value appreciation. By acquiring portfolios with similar management and marketing systems, institutional investors like REITs and hedge funds can achieve economies of scale and enhanced returns. This interest creates opportunities for operators to package and sell portfolios at premium prices, benefiting from compressed cap rates and increased investor equity.

Q: What are the tax benefits associated with self storage investments?

Self storage investments offer several tax benefits, making them attractive to investors. These benefits include depreciation deductions, which reduce taxable income, and the potential for 1031 exchanges, allowing investors to defer capital gains taxes when reinvesting proceeds from a sale into a similar property. Additionally, self storage facilities can benefit from cost segregation studies, accelerating depreciation on certain assets and further reducing tax liabilities. These advantages contribute to the overall appeal of self storage as a profitable and tax-efficient investment.

Summary & Key Takeaways

• Self storage is a lucrative investment opportunity due to its fragmented market, allowing skilled operators to enhance value. With over 50,000 facilities in the U.S., many are owned by independent operators, providing room for professional management to increase income and property value.

• The industry is recession-resistant, performing well in various economic conditions. Self storage benefits from 'sticky tenants' who are unlikely to move due to small rent increases, ensuring stable income. Month-to-month leases enable owners to adjust rates with inflation, capturing more value.

• Low-cost value-add opportunities, such as truck leasing and tenant insurance, significantly increase facility value. Competition risks exist, but investing in high-value land areas or less competitive markets can mitigate them. Tax benefits and institutional buyer interest further enhance investment appeal.