The real estate industry is not just restricted to buying/selling properties for a profit. Various options are available, and each can generate subsequent profitability. Investing in self storage facilities is one such popular option.
Becoming wealthy by investing in the real estate industry has been prevalent for a long time. What’s unique is the rapid growth this market has undergone. With wise management, investing in these facilities is now a favorite niche for many.
Have you ever complained about your house being too small? In fact, there is an everlasting need for extra spaces in America. We are very good at filling vacant places, and many people are likely to need self-storage services. It is predicted that demand in this industry will continue to increase.
Generally speaking, investing in this sector is the right decision. But how profitable is it? How much can you make in return? How are these facilities financed? Let’s find the answers.
Are Self-Storage Facilities a Good Investment?
Investing in these facilities can will provide you with a steady passive income. This is a long-term investment with a lifetime of potential, but the benefits don’t stop there.
The Need For Self-Storage
Every potential business or investment needs to be analyzed before you get started. One of the first questions you need to ask yourself before you invest is about the specific service/product demand.
Houses in large cities are getting smaller, and people need ever more free space to store their belongings. Hence, the through-the-roof demand for these facilities. Furthermore, many people living in small apartments require a self-storage unit. As a result, there isn’t a hotter or more in-demand sector in the real estate industry.
Save Time and Money
Tenants in apartments can sometimes damage walls, carpets, doors, etc., before moving out, leaving their landlords with the cost. What about self-storage units?
No one would live in your units, and there would be no holes in the walls or carpets to tear, so the ongoing operating costs are meager. Once a self-storage unit is empty, it’s ready for the next tenant to put their stuff in, and you don’t have to pay for renovations every time a new customer comes in.
There are many other aspects that end up saving you money. Technology allows you to manage your investment remotely to a certain degree. This enables you to save time, and as the saying goes: Time is money.
Never Stop Making Money
The recession is a significant threat to many types of investments/businesses. We have seen how the 2008 Great Recession changed the entire market, and it might seem like there are no recession-resistant businesses that can overcome a market crash.
However, the self-storage sector is an exception. When people are in financial crises, demand for self-storage facilities actually increases. People need to store their goods/belongings due to losing their homes, jobs, etc. Therefore, this investment would be a conservative choice for weathering an economic downturn because it is considered recession-proof.
Downsizing and dislocation accompany difficult economic times, and divorce and death are inevitable features of life. Together, these factors make up the four “D”s that drive demand in the business.
Your Tenants Won’t Move Easily
Moving takes a lot of time and effort. If something happens in the market that causes you to hike prices, your clients will likely pay the extra fee to avoid moving again and again.
Of course, that doesn’t mean you can raise your fees for no reason, but sometimes you may have to. All in all, this is good news for owners: You won’t lose your customers as quickly.
Retirement is a milestone that can only be reached after many years of toil and hard work. It’s now possible to retire by building a great source of passive income. A self-storage business allows you to generate a profit without doing any of the work.
With passive income from a real estate investment, you can focus on doing what you love in your life.
How Profitable Are These Facilities?
Self-storage investments have proven to be profitable compared to other real estate options. They are inexpensive, straightforward, and can be passive (meaning they don’t require active management).
This sector is now a multi-billion dollar industry. But how profitable is it? Well, it depends on the facility and is contingent on size, location, utility, how equipped it is, etc.
To estimate the profit of this type of investment, it’s essential to understand the variety of services and, most importantly, cost. Before we address these aspects, let’s take a look at some numbers.
Valuation of the Market
The total valuation of self-storage was $87.65 billion in 2019. That isn’t the end of the growth; the market is expected to continue growing to $115.62 billion by 2025. This rapid growth presents an opportunity for a safe and profitable investment in real estate.
Apart from the tremendous growth in market value, construction spending on facilities had an increase of 584 percent from 2015 to 2020, according to the Census Bureau.
Based on Market Watch projections, the market is expected to snowball: “The market was valued at $37.33 billion in 2018 and is expected to reach $49.24 billion by 2024, at a CAGR of 134.79% during the forecast period (2019-2024).”
Consequently, the self-storage sector is likely to take the lead when it comes to real estate investments.
You need to understand the cost of the investment. No complicated and expensive equipment is necessary. For instance, you don’t need to hire many employees to handle all the management affairs, and electricity usage is limited to occasional times when tenants want to take out or put in something in their units.
The amenities you offer will determine your costs. For example, a climate-controlled unit where items are safe from temperature fluctuations is more expensive than a basic unit with no ventilation system. It all depends on the type of business you want to operate. But remember that the more services you provide, the more you can charge.
Craft a Business Plan
If you want to run a successful investment, you need a healthy business plan. For achieving that goal, a precondition is devising a strategy for developing your business.
Streamline the service you have analyzed many times. You should think out of the box and design a new product or, let’s say, a new service, thus generating a new income stream.
Even though self-storage services are becoming more frequent, most aren’t professionally run. For example, using technology in your management methods can surprise your customers and make you more money if you go that extra mile.
How Much Can You Make?
If you want to understand exactly how much money you can make, there are many factors to consider, and the final figure will vary depending on the location of your facility, the quality of your services, etc.
If you provide your customers with suitable units for boats and RVs, you will make a lot more. In addition to these services, you can benefit from diversifying your options. For example, some owners offer different boxes and packaging as premium services.
Maximize Your Passive Income
Since self-storage units involve little management concerns, you won’t end up having to take care of tenant needs as boxes are your actual tenants. This opens up the opportunity for you to maximize your passive income.
Suppose you have a lot of free time. In that case, you can take the opportunity to ask your customers’ opinions about your unit, collect all their feedback, then analyze the data and try to improve your business according to what you heard from them.
By adding more attractive features to your unit and optimizing your business, you can launch a more effective advertising campaign and attract more eager customers who are willing to pay higher rents.
How Do You Finance a Facility?
Financing a facility is the most challenging part of the job. The capital you can provide plays a crucial role in your return. Obviously, the bigger the initial investment, the higher your likely return. But how can this be financed?
First and foremost, self-storage loans are an excellent option for purchasing/improving your facility. Traditional bank loans, life company loans, and CMBS are the typical/popular financial aid options. If you’ve already invested in one, you can refinance and improve your units utilizing these loans.
There are some critical factors that lenders will consider. Lenders will analyze various aspects of your investment, your credit scores, and the market itself and then approve/reject your loan request accordingly.
A significant factor for lenders is the borrower’s credit score. It indicates whether loan default is likely. Banks take every precaution and measure to make sure about their borrowers, which is anything but surprising.
The property and the local market value are two other essential factors for any self-storage lender. They look for specific qualification requirements to put their money in the right hands. Of course, their benchmarks for choosing the right option differ from one case to another based on their analysis.
If you are a novice, you should provide some insurance for loan repayments. You may need to put something up as collateral for the loan.
What Do Lenders Look For?
What do lenders look for when you apply for self-storage financing? Your bank balance is essential. However, it’s advisable to ask your bank for details on the required qualifications.
There are many good options to invest in, each with its specific limitations and unique features. First, you need to decide on a strategy and then select the option making the most sense for you.
Building new units, buying existing ones, renovating, etc., all require financing. Here are some financing options; let’s find the one that fits your needs.
Loans for New Construction
A substantial sum is required to build a new unit; therefore, financing for new construction is also a challenge. Hence, you should select the right option that fits your needs.
There are many lenders who provide loans for new construction. Accurate data about the market is what convinces them to open their checkbooks. You must undertake a thorough study of the market particulars/statistics.
Do people in your area need self-storage facilities? Is the market in the area big enough? These are the crucial questions that will help you gauge the future of the investment, and lenders are interested in your answers.
You need a reliable study demonstrating there are opportunities for a scalable investment. For example, demand for self-storage properties located in certain areas is likely to increase. Military bases and college campuses are just two examples of places where self-storage facilities make sense and are in demand. SBA loans are a great option for building new facilities.
Loans for Acquisition
If your intention is to acquire an existing facility, then real estate investment trusts, or REITs, are good options for you. The condition of the property you are going to purchase is very important for obtaining a loan. Moreover, real estate investors look for the right time in the market to finance your acquisition.
In some cases, you need to purchase quickly; if so, some of your financing options won’t be ideal. For example, traditional bank loans and SBA loans will be difficult to procure and are likely to take a long time. Consider timing if you don’t want to miss a good opportunity.
Renovation Loans for Acquisition
Some facilities need renovation. Modernization and restoration are often due to customer demand. Sometimes your units are fully rented, you need extra space for upcoming clients, and the best way is to improve your facility through renovation.
The type of facility you own determines the size of the renovation loan. Financing renovation is a great method to scale your passive income.
How Do I Ruin My Investment?
Sometimes you need to ask this question: how can I ruin my investment/business? The answer is always challenging. Look at your attitude toward the investment. Think about the worst things that might happen for your facility. Now, you may have a better understanding of what can damage it.
It is vital to make a list of what not to do when you are about to step in as a professional investor. You need to draw red lines and protect your investment from potential bad decisions.
The very first thing you should consider is your imagination and vision of the market. Your limited point of view influences your actions and attitude toward decisions. Some of the wrong assumptions about the market are common among real estate investors. Here are a few:
“This Will Be a Piece of Cake”
Many people misunderstand the meaning of passive income. It gives you the chance of having a long-lasting and scalable revenue, but that doesn’t mean it’s an effortless investment. Running it requires time, effort, and energy, especially at the beginning of your journey. Consequently, it is anything but a piece of cake and needs hands-on management.
“Location Isn’t Key”
The crucial factor to consider before jumping in is location. Your clients are mostly people living in the area. Their needs are the determining factor on whether a self-storage facility makes sense in a neighborhood or not.
Choosing a location that doesn’t have potential can ruin your investment. Also, the particular needs of every demographic should definitely be taken into account. For example, If you are in a port city, you’re likely to attract more customers who require boat rental units. If you are in a big and crowded city, analyze the market and competition. There may or may not be room for you.
“Lower Risk Means No Risk”
When we say self-storage is a niche with low risk, it doesn’t mean you will never lose. Mismanagement, lack of sufficient attention/care, and reckless decisions will plunge your business into the danger zone.
The best way to avoid these troubles is to consult experts who can clarify the market for you. Also, there are countless online articles/reports on the industry. Read them to stay up-to-date on trends, news, etc.
Other Useful Tips
If you have decided to take everything into your own hands, some beneficial tips can help you earn more in your business, including:
Check the location carefully. You should look for a populated area where there are many small housing units, as residents of such buildings often face the problem of not having enough space for their belongings. Of course, in an area where people have above-average incomes, the chances of finding tenants also increase.
Check Out the Competition
To get the best deals, you should know the potential competitors in your area. Make a list of what they offer, their units’ features, and the rental rates. Try to attract customers by providing superior services. Your communication skills play an essential role in your success.
Choose the Type of Unit
If you have decided to invest in self-storage facilities, there are several options available to you. Common varieties of units include climate-controlled, non-climate-controlled, mobile, auto storage, and drive-up units. All of these units have their own advantages and disadvantages, and you should consider which one will best suit the customers you’re trying to cater to.
The real estate industry is replete with opportunities for those seeking safe passive income. Self-storage investing is now one of the optimal options when it comes to profitable real estate investments.
To run a facility, you need to analyze the market, finance the project, and select the most optimum option. Since this industry is rapidly growing, revenues can be superior to other possible real estate options. Moreover, the very low investment risk has made it an even more popular niche to enter.
Do you still have questions? You can check out the Investor Portal of our website for additional data and clarifications on investing. We have courses and articles available on self-storage ownership/management, and with our help, you can make your passive income dreams come true.