In a bustling real estate and stock market, investors may be looking for new and innovative opportunities beyond high-priced apartment buildings and building land.
Self-storage facilities have the advantage of being “quite resistant to both booms and economic downturns” and of capitalizing on society’s need to accumulate things, explains Paul Letourneau, assembly manager. business loans at Alliant Credit Union in Chicago.
Although self-storage is experiencing rising prices and demand, markets continue to grow and cap rates (a method of factoring return on investment) remain attractive.
âThe flexibility of self-storage facilities makes them incredibly resistant to all economic cycles because people always seem to find a use in them,â Letourneau explains.
During a boom cycle, you might see customers using self-storage facilities in more innovative ways, such as short-term product storage for small businesses or incubation space, while in times of crisis. downturn, people will downsize in smaller homes and move sentimental items and excesses. furniture in self-storage facilities, adds LÃ©tourneau.
And now there is also an opportunity in a millennial mindset shift that prefers not to commit to one specific place, says Patrick B. Healey, Founder and Chairman of Caliber Financial Partners.
This is partly why self-storage is evolving with the type of multi-family ownership. Self-storage is also useful for certain sectors of activity, such as the pharmaceutical industry, whose representatives must store the drugs they distribute to doctors and hospitals, or possibly to other businesses at home or remotely. that need storage space, says Healey.
Look beyond larger metropolitan areas to find cities with unmet self-storage needs, such as Tampa, Florida; Chattanooga, Tennessee; Birmingham and Huntsville, Alabama and Des Moines, says Letourneau.
Ryan Smith, director of Elevation Capital Group in Orlando, Florida, suggests several ways to invest in self-storage facilities: buying into a real estate investment trust, called REIT, which focuses on the category of assets, or purchasing one individually (or with partners) in your area.
To further decide whether owning an individual facility or a REIT is best for you, you’ll need to decide whether your goal is income, capital appreciation, or both, Smith says.
If you own a self-storage facility yourself, there are many missteps that you can take without the right experience or knowledge. Management can be time consuming, and your lack of access to quality finance offers and options can be limiting.
To find something off-market with less competition, you may need to list the facilities around you and start calling them to generate leads from owners interested in selling, Smith says.
There are also no quick liquidity options if an individual self-storage facility you’ve purchased isn’t working. However, you would have more control over the property and possibly take less risk than other actively managed real estate assets such as industrial buildings, apartments and businesses.
Unless you have “scalability,” self-service storage is difficult, says Healey. You really need to be careful with the saturation of the self-storage market in your target buying area, as this can hamper your ability to raise rents or maintain high occupancy rates.
But on the upside, “the ability to raise rents to a much higher level than other types of properties like office or retail is a very attractive feature, especially in an interest rate environment. up, âHealey said.
Self-storage is a type of real estate with low capital expenditure, which makes the expenditure low enough to maintain cash flow during a slack period. Insurance costs are also low, he says.
If you decide to go for it, you also need to know your local market, says Letourneau. In urban environments, for example, customers want a multi-story, air-conditioned space with high-tech surveillance and security systems. The needs of suburban customers differ and have markets where storage for RVs and vehicles is in high demand.
âFor your first self-storage setup, buy in your market to stay heavily involved in monitoring,â Letourneau says, and use a buy-and-sell broker that specializes in self-storage.
Speak to local self-storage owners and operators or your local commercial real estate contacts for a broker reference, and do your homework on who you select as they will likely help guide you through the process and can assist you. to find funding, adds Letourneau.
Finally, make sure your own finances are in order and that you have sufficient cash flow for a down payment and permanent cash reserves if needed, he says.
Meanwhile, operating the storage units is harder than it looks, Healey says.
âA lot of high-performance storage units are managed by professionals. They have very sophisticated technological systems that allow them to dynamically price units to provide incentives and increase rents when appropriate, âhe says.
The difficulties and nuances of the industry make owning self-storage REITs a better option for many, as they allow investors to capitalize on the industry’s unique competitive advantage without having to step into the field. That doesn’t mean you don’t have market risk, says Smith, but you also have market liquidity, an experienced management team, and an income stream.
Public Storage (ticker: PSA) is currently trading at around $ 255 per share, up from around $ 214 a year ago, and a dividend yield of around 3.3%. Extra Space (EXR) is trading at around $ 118 per share, down from around $ 93 a year ago, and pays a dividend of around 3%.
Also consider Life Storage (LSI), National Storage Affiliates (NSA) and CubeSmart (CUBE) for other diversification opportunities in the self-storage industry.