When residential property costs increase, so does the demand for self-storage.
According to data from Trading Economics, the average family home price in the United States was $220,000 in June 2014. Ten years later, in June 2024, house prices reached a record high of $427,000.
When we compare this to the growing market cap of self-storage REITs, which increased from $63.31 billion in 2019 to $101.59 billion in 2023, the connection between rising home prices and the demand for self-storage is clear.
But does this mean self-storage investing is a good move? For many investors, the answer has proved to be a resounding yes.
Real estate investors now find great demand, consistent revenue, and reasonable operating costs in the self-storage sector. Self-storage facilities provide several approaches to expand your portfolio regardless of your level of experience with real estate.
This article offers a thorough analysis of the benefits, difficulties, and techniques for effectively including self-storage in your financial plan.
Why is Self Storage a Smart Investment for Real Estate Portfolios?
Self-storage facilities have emerged as a dependable choice for real estate investors looking for consistent income flow and long-term growth.
Their unique market position stems from their capacity to serve residential and business customers, which ensures demand in practically any economic scenario.
Self-storage units frequently exceed other real estate categories in terms of profitability and maintenance costs.
The self-storage market’s durability in the face of economic upheavals makes it particularly enticing. Economic growth drives individuals and corporations to seek greater storage for new purchases, expansions, or relocations.
During downturns, storage space remains in high demand as people downsize or temporarily store possessions due to life circumstances. These dynamics help maintain consistently high occupancy rates independent of market conditions.
For investors, this presents a tremendous chance of meeting rising demand.
Investing in self-storage can create consistent cash flow, diversify portfolios, and capitalize on tax breaks.
However, without sufficient preparation, investors run the risk of selecting the wrong location, overpaying for facilities, or failing to manage operations. To profit from this robust sector, investors must solve these problems strategically.
Self-Storage Investing: What You Need to Get Started
Preparation is vital to succeed in self-storage investing. The sector’s potential for stable income and portfolio diversity makes it compelling, but taking the necessary measures to prepare sets the groundwork for long-term success.
Proper planning lets you choose the best market, facility, and investment style to meet your financial objectives.
Here are some of the things you need to get started in self-storage investing:
1. Capital
- Cash reserves for down payments, operational costs, or outright purchases.
- Access to financing options like bank loans, SBA loans, or private investors.
(We discuss securing financing for your self-storage investment in the next section.)
2. A Suitable Property
- A lot for construction or an existing self-storage facility.
- Location with high visibility, good traffic, and proximity to residential or commercial areas.
3. Market Data
- Local demographic and economic data to assess demand.
- Information on competitors and their occupancy rates, pricing, and features.
4. Business Entity
- A legal structure, such as an LLC or corporation, to operate your business and protect personal assets.
5. Zoning Approval
- Documentation confirming the property is zoned for self-storage use.
6. Management Tools
- Self-storage management software for handling bookings, payments, and occupancy tracking.
- Marketing materials for local advertising and a website.
7. Security Features
- Security features, such as surveillance cameras, keypad entry systems, fencing, and lighting, bolster client trust and safety and the security of your investment property.
8. Operational Budget
- Funds for maintenance, utilities, taxes, insurance, and employee wages.
9. Insurance
- Coverage for the property and liability to protect against conceivable risks.
10. Networking Resources
- Industry connections or mentors for advice.
- Memberships in self-storage associations for industry outlooks and education.
Your Step-by-Step Guide to Self-Storage Investing
Backed with the necessary tools, information, and skills to get started, let’s move on to the steps to begin your self-storage investment journey on the right foot.
1. Perform Comprehensive Market Research
Determine where demand for storage units is increasing.
Consider factors such as:
- Population changes
- Economic activity
- Presence of rival facilities
Concentrate on areas where storage capacity is limited but essential, such as urban centers or areas experiencing population growth. Consider the consumer demographics and the types of storage units in demand.
2. Evaluate Financial Viability
Examine the financial performance of the property or project under consideration—assess prospective cash flow, operating costs, and return on investment (ROI).
Examine the historical occupancy rates for existing facilities and evaluate their potential for improvement.
For new developments, look into:
- Construction expenses
- Projected income
- Break-even times for new developments
3. Secure Financing
Investigate funding options to guarantee you have the funds to move forward. Traditional bank loans, SBA loans, and syndication opportunities are all feasible options.
To acquire favorable lending conditions, consider working with lenders knowledgeable about the self-storage business. Partnerships with other investors can also help mitigate individual risk.
4. Select the Appropriate Facility Type
Choose a facility type that matches your objectives and market needs.
For example, temperature-controlled units may operate effectively in affluent districts, although drive-up locations are frequently successful in suburban or rural settings.
Vehicle storage near marinas or airports provides distinctive opportunities in specific regions.
5. Implement Management and Operational Systems
Whether you manage the property yourself or hire a third-party operator, invest in technology to improve efficiency.
Online booking systems, automatic payment platforms, and high-quality security measures provide efficiency. Maintenance schedules and customer service policies must also be in place.
6. Monitor Performance and Adjust Strategies
After the facility is operating, monitor its performance using KPIs such as:
- Occupancy rates
- Revenue growth
- Customer feedback
Adjust rental rates to reflect market trends and provide value-added services such as packing supplies or tenant insurance.
Continuous improvement boosts your odds of long-term profitability.
The Risks of Investing in Self-Storage Properties
Within each of the above steps, many challenges could arise, but there are several best practices to implement that can help you mitigate them.
We will move on to those best practices shortly, but first, it’s important to understand the specific risks you face.
Market Saturation
The growth of the self-storage industry has created concerns about oversupply in certain regions. A crowded market can reduce occupancy and pressure rental rates, reducing profitability.
Management Requirements
While less labor-intensive than some other real estate investments, self-storage facilities still require consistent oversight and operational management.
Security Concerns
Security is vital to attracting and retaining tenants. Any lapse in safety measures can harm a facility’s reputation and reduce occupancy rates.
Tenant Turnover
The flexible nature of self-storage leases can result in high tenant turnover, requiring frequent efforts to maintain occupancy.
Zoning and Regulatory Issues
Compliance with zoning laws and operational regulations can create obstacles during development and ongoing facility management.
Economic Sensitivity
Though often considered recession-resistant, self-storage facilities are not entirely immune to economic changes. Fluctuations in demand and borrowing costs can impact revenues.
Fortunately, this sensitivity tends to be much less than in other sectors.
For example, during the Great Recession of 2007-2009, every commercial real estate segment experienced a net annual loss of between 25% and 67%—all except one: self-storage, which posted a gain of 5% in 2008.
Maintenance Costs
Regular maintenance is required to keep self-storage facilities functioning and appealing to tenants.
Initial Capital Investment
Starting in the self-storage market often involves significant upfront costs, whether purchasing an existing facility or developing a new one.
Competitive Pricing
Attracting tenants without compromising profitability hinges on developing the correct price approach.
Best Practices for Investing in Self-Storage
As promised, let’s now move on to best practices.
Manage Your Properties Carefully
Maintaining normal operations and guaranteeing tenant satisfaction depend on efficient administration.
Modern property management systems allow automated bookings, payment collection, and reporting. These features lower administrative load and improve accuracy.
Effective Marketing
Attracting tenants necessitates a tailored marketing strategy emphasizing the facility’s amenities and accessibility.
Digital marketing efforts, such as running Google Ads, launching social media campaigns, and conducting search engine optimization, can boost visibility and generate more leads.
Diversify Revenue Streams
Including ancillary services in your offers increases revenue while delivering additional value to tenants.
Options like truck rentals, packing supplies, and temperature-controlled units meet tenant needs and enhance the facility’s appeal.
Prioritize Security and Maintenance
A secure, well-maintained facility safeguards renters’ items and protects the property’s reputation. Install high-quality security systems to discourage theft and damage.
Routine maintenance of units, driveways, and communal spaces keeps the property appealing and functioning, encouraging tenant retention.
Bonus Best Practice: Conduct a Cost Segregation Study
Incorporating a cost segregation study into your self-storage investment strategy is an additional best practice that can yield tax benefits and boost cash flow.
Do this study early on in ownership to maximize the benefits of accelerated depreciation and bonus depreciation opportunities.
Self-storage facilities sometimes incorporate components eligible for reduced depreciation periods, such as fences, security systems, paving, and specialist HVAC systems.
A rigorous cost segregation analysis reveals these assets, allowing investors to claim larger deductions in the early years of ownership. This increases cash flow, which can be reinvested in property improvements or utilized to diversify your portfolio.
Book a call with Remote Cost Seg today to find out if you qualify for a cost segregation study in three minutes or less.
Do you want to keep reading about real estate investing strategies?
These three articles are a great place to start:
- How To Find The Best HELOC Lenders
- How Real Estate Investors Use A Cost Segregation Study
- The Short-Term Rental Tax Loophole: A Complete Guide
