Real estate offers a myriad of investment options, from single-family homes to data centers. The ideal asset for you depends on factors such as your investment size and strategy. Over the past several decades, investors have diversified their portfolios by capitalizing on emerging market opportunities such as self-storage.
Self-storage facilities serve as secure storage solutions for individuals and businesses, accommodating a variety of products, materials and more. Given the high demand for places to store household items and business equipment, self-storage facilities have become indispensable across the country.
To help you figure out your personal investment strategy, consider working with a financial advisor.
Self-Storage Investing Basics
Self-storage investing refers to investing in storage units that individuals and businesses use to keep their excess goods and assets. For example, a homeowner may need space for seasonal lawn equipment. For businesses, storage units can be used to house surplus inventory instead of throwing it away. In either case, they will pay a monthly fee to the storage facility to keep their belongings in a secure unit. As an investor, you can own and operate a storage facility or buy shares in a facility.
Self-storage is a solid investment for a number of reasons investors find it attractive. Firstly, the property has high earning potential. Storage units cost less than other forms of residential real estate and commercial buildings, which means more money in your pocket. For example, IBISWorld reports that the profit margin for storage units is 41%. In addition, storage revenue has grown by 2.1% over the past five years, making the industry over $29 billion.
Second, the demand for self-storage continues to grow as baby boomers downsize and businesses shrink their workspaces.
As a result, investing in self-storage is less risky due to higher profit margins and consistent demand. Customers need storage whether the economy is strong or the market is down. Therefore, the industry is a viable way to diversify your portfolio.
self storage market
Here’s how a self-storage business works: The owner of the storage property (you) charges customers a fee to use the space to store their items. These storage spaces are available for rent on a monthly basis and come in different sizes as per the needs of the customers.
The specific type of storage unit you will promote depends on your customer base. For example, if your ideal customers are sports enthusiasts, they may prefer padding, shelving and slat walls to store their equipment. On the other hand, a family moving across town may only need a vacant unit to temporarily store their belongings. Therefore, it is important to understand your target customers depending on the type of units you purchase or manufacture.
Furthermore, the terms of the lease contract are the backbone of the business, and you can adjust them monthly. This feature allows you to adjust prices from month to month, unlike traditional real estate contracts, which do not apply to the self-storage market. As a result, you can change with the market and meet the needs of your customers.
Fortunately, investors from all walks of life and financial backgrounds can invest in storage units. For example, let’s say you want to experiment with a modest investment in the self-storage industry. In that case, you can buy shares in self-storage facilities. So, you can actively invest in self-storage (through ownership of a facility) or take the path of less commitment and risk through passive investing (shares in a company).
Types of Self-Storage Facilities
Self-storage facilities can be classified based on their purpose and capacity. Each type of facility has its advantages and disadvantages.
Some items and materials are susceptible to damage from heat, cold or excessive moisture. For example, art, furniture and musical instruments benefit from climate control. To protect these items, climate controlled storage units are available.
As a result, a regulated environment and security are top priorities when storing fragile assets. Because climate-controlled storage units meet different market needs, they tend to be more expensive, and investors can charge more for their specialized services.
Drive-Up & Outdoor Storage
Outdoor or drive-up storage is the most widespread type. It consists of rows of units that look like garages. By pulling the door up, the customer has full access to their storage unit. These features are the most economical option available.
One of the benefits of outdoor storage facilities is that they require minimal maintenance and staff. Furthermore, they are user-friendly, making them popular among individuals in need of storage space. Lastly, these storage centers can enhance their security through cameras, electronic gates and security guards.
mixed use storage
The self-storage industry serves a diverse range of customers with varying needs. To meet these niche demands, many storage facilities combine different services, resulting in mixed-use storage facilities.
An important advantage of mixed-use storage facilities is their ability to meet a variety of needs. For example, a strategically located self-storage facility in an urban setting can help nearby residents with excess goods while serving local businesses. As a result, mixed-use storage facilities are flexible assets, offering solutions to a wide customer base.
Self-storage facilities also help customers with vehicles such as cars, boats or RVs. Vehicle storage is an ideal solution for those looking for a sheltered, closed parking lot.
Vehicle storage often offers additional services, such as temperature-controlled units, to ensure the preservation of classic cars. As a result, customers turn to these facilities annually to protect their vehicles, especially near high-demand locations such as airports and seaports.
How to Invest in Self-Storage
There are four primary ways to get involved in the self-storage enterprise:
1. Buy Shares in a Real Estate Investment Trust (REIT)
If you are not comfortable owning and operating an entire facility, you can invest in a real estate investment trust (REIT) instead. These companies spread investors’ money across a variety of sectors and may have a specific focus. Therefore, a REIT specializing in storage units can give you exposure to this profitable industry.
2. Invest in a Publicly Traded Storage Business
Similarly, you can buy shares of corporate storage companies in the stock market. If the company does well and the share price goes up, you can sell your shares for a profit.
3. Buy an existing facility
You can get more involved by purchasing a self-storage facility of your own. This option means running a business (or hiring workers to do so) and collecting monthly payments from your customers. As a result, you have higher earning potential than you would get investing in a REIT.
4. Develop Your Own Facility
If there aren’t any facilities for sale near you, building your own is another option. Remember, you will have to purchase a suitable plot of land and manage the construction of the facility. Although doing so takes additional time and money, it is a way to own a storage facility and enjoy the profits.
Drawbacks of Investing in Self Storage
Despite the benefits of investing in self-storage, it is essential to understand the potential challenges in this type of venture. Depending on your business model, financial circumstances, and location, you will face different constraints. Fortunately, you can adjust your approach as needed to overcome such obstacles.
First, clients can be demanding, requiring a calm demeanor and a focused strategy. For example, a client who has just lost his job and housing may come in desperate for help and lacking the resources to make the monthly payment. As the owner, you have to decide how to go about the situation and take the risk of losing money.
Furthermore, when competing against rivals that offer affordable storage space in prime locations such as city centers, it is best to research the local market. Then, you can evaluate your position in comparison to the competition and modify your approach to grow your business.
Is Investing in Self-Storage Right for You?
With all of the above information in mind, you can decide how self-storage will fit into your portfolio. If you are interested in real estate, self-storage is an excellent approach because it is less expensive than typical commercial real estate. Also, it requires less maintenance as compared to residential buildings and can provide a steady cash flow every month.
Remember, investing in self-storage requires a lump sum amount (usually in the tens or hundreds of thousands of dollars). You will buy partial or full ownership of a facility or build a facility from scratch. Therefore, you must save the required funds or borrow from a lender. Either way, these startup costs can be prohibitive for investors without the cash on hand.
Finally, you can take a less intensive approach by investing in REITs. If you like the self-storage business but don’t want to run a company, you can still enjoy the industry’s strong profit margins by investing in stocks in the self-storage business.
Investing in self-storage means buying or owning shares in a business that protects people’s assets. Because this industry has low overhead and charges monthly rent, investors can make substantial profits. To get a foothold in the business, you’ll need to choose the type of storage you want to invest in, analyze your local market, and find a need that isn’t being met by the competition. On the other hand, a self-storage REIT is a solid option for those who prefer a less hands-on approach.
Tips for Investing in Storage Units
- Self-storage units are excellent assets for a financial plan. However, it can be challenging to know how much cash to allocate to it compared to your other investments and priorities. Finding a financial advisor doesn’t have to be difficult. SmartAsset’s free tool matches you with up to three vetted financial advisors serving your area, and you can interview your advisor matches for free to decide which is right for you. Is. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
- Self-storage is just one way to approach real estate investing. To explore the topic in more depth, here are three more ways to add real estate to your portfolio.
Photo credits: © iStock.com/AJ_Watt, © iStock.com/onurdongel, © iStock.com/rzelich