As Americans, we love stuff.
In fact, the U.S. Department of Energy reported that 25% of people with two-car garages don’t have room to park, and 32% of people only have room for one car.
The solution to this space shortage — more storage units!
Over the past four decades, the storage unit industry has skyrocketed to become the fastest-growing segment of the U.S. commercial real estate market.
And now you too can profit from the best-kept secret of savvy real estate investors.
In this guide, we cover everything you need to know to start investing in storage units. You will learn the benefits and risks, how properties are valued, the different types of storage units, and most importantly, how you can get your foot in the door of this lucrative investment.
The Self-Storage Market: Brief Overview
There are 50,000+ storage facilities in the United States. That is more than the number of Starbucks, McDonald’s, Wendy’s, and Pizza Hut franchises — combined!
Studies show that about 20% of Americans rent a storage unit with an average stay of 14 months. This significant usage rate and long-term commitment underscore a deep, ongoing need for storage solutions across the country.
And demand shows no signs of slowing down. Self-storage revenues are expected to grow from $39.5 billion in 2021 to nearly $50 billion by 2025.
But, contrary to what you might expect, this market is not dominated by big corporate players. About 73% of locations are small mom-and-pop operations.
This highly fragmented market is a welcome sight for newcomers. In most cases, the incumbents are less savvy, less well-capitalized, and less innovative than major corporations.
Types Of Storage Units
Storage units come in a wide array of options, each designed to meet specific needs and preferences. Here are a few of the most widely used types you’ll find:
- Drive-Up or Outdoor Storage: These garage-styled units are often what come to mind when you think about self-storage. They offer direct access from the outside and are perfect for items that don’t need climate control, like furniture, tools, and outdoor equipment.
- Indoor Storage: These units are located inside a building and offer an extra layer of security and protection from the elements. They’re a great choice for things you don’t need to access regularly but want to keep safe and sound.
- Climate-Controlled Storage: These units maintain a constant temperature and humidity level. They are perfect for storing items like artwork, wine collections, or important documents. Although they cost a bit more, they are ideal for protecting valuable or delicate belongings.
- Vehicle Storage: These are made for cars, motorcycles, and other small vehicles. Whether it’s a classic car or the family ATV, these units provide a secure home for your wheels when not in use.
- RV or Boat Storage: Larger than most vehicle storage, these units cater to big outdoor toys like RVs and boats.
- Business Document Storage: Made for commercial use, these units are perfect for businesses that need to store documents, inventory, or equipment. They provide a more cost-effective solution than leasing additional office space.
- Mixed Use: These facilities offer a little bit of everything to cater to a wide range of self-storage needs. They typically combine climate-controlled units, vehicle storage spaces, and outdoor units in one property. This way you can meet all of your tenant’s storage needs under one roof.
Why Invest In Storage Units?
The number one reason to invest in storage units is obvious — a high ROI! Storage units offer some of the highest returns in the real estate sector, or really, any sector.
The average profit margin across the industry is a whopping 41%. That’s nearly double the profit margin of any other industry.
But the high return on investment isn’t all storage units have to offer. Here are five more compelling reasons to consider investing in storage units:
- Growing Demand: Life events such as divorces, job losses, and downsizing are the driving forces of storage unit demand. And that demand doesn’t appear to be slowing.
Growing trends in urbanization and multigenerational living continue to limit available space at home. In the past five years alone, a staggering 260 million square feet of new storage space has been added, accounting for nearly 15% of the total market supply. - Low Maintenance: By design, storage units have a simple construction and experience less wear and tear than other real estate investments. This significantly reduces the amount of time and money you need to spend on property upkeep.
- Automation Potential: Much of the operations in a storage unit business can be automated – from bookings and payments to customer service and security.
Automation not only cuts down on your workload but reduces operational costs. This can boost your NOI (net operating income) and, consequently, your property value. - Capital Appreciation: Upgrading facilities, optimizing unit mix to meet market demand, and enhancing security features can significantly increase a property’s value. In addition, as the area around a storage facility develops and becomes more desirable, the value of the storage units often rises in tandem.
Storytime: A good friend of mine was able to do just this. He purchased a “value-add” storage unit facility in need of a serious make-over. He invested in updating the overall appearance as well as modernizing the security and tenant access systems. This allowed him to increase rents by 25% across the board. In less than a year, the value of his facility had doubled.
- Recession Resistant: When people downsize homes and businesses streamline operations to cut costs, they often turn to storage units as a temporary solution. This keeps demand (and prices) stable even during economic slowdowns.
Risks Of Self-Storage Investing
While investing in storage units offers numerous benefits, it’s important to be aware of the risks involved. Key challenges include:
- Poor Location: No matter how bright and shiny a new storage facility may be, if it is in an undesirable or out-of-the-way location, it may struggle to attract and retain tenants.
- Tenant Default: If you have ever watched Storage Wars, then you know that tenant non-payment does happen. Effective tenant screening and proactive management strategies, such as implementing automatic bill pay, can minimize this risk.
- Damage: Whether by tenants or natural disasters, extensive repairs can put a serious dent in your cash flow.
- Minimalist Movement: An increasing number of people are embracing a simpler, less cluttered lifestyle. This shift toward minimalism could reduce the overall demand for storage space in time.
- Demand Capture: Creating new demand for storage units is hard. Instead, the focus is often on demand capture — grabbing market share from your competitors.
- Oversupply: With limited barriers to entry, you could face increased competition from new construction. Overbuilding could lead to lower occupancy and rental rates.
Storytime: This is the challenge my friend now faces. As the area has grown, two competing facilities have popped up. Fortunately, he has been able to maintain his occupancy without cutting rates by focusing on increased customer service. He is constantly on the lookout for new ways to provide a better customer experience, like reduced-rate truck rentals and low-cost moving supplies.
How Are Storage Units Valued
Storage facilities are valued using three main methods: the Income Approach, the Replacement or Cost Approach, and the Sales Comparables Approach. Each offers a different take on how to value a particular property.
The Income Approach
The Income Approach is most investors’ preferred method because it focuses on profitability. This approach values the building according to how much net income it generates, which is usually why investors are interested in the first place.
The formula used is NOI ÷ Cap Rate = Value.
1. The first step in the Income Approach is to gather historical financial data about the facility. This includes:
- 12 Months of Income and Expense Records: Separate and organize transactions by month. Creating this detailed view will help you understand seasonal variations and operational efficiency.
- Previous Years’ Financial Statements: Ideally, review two to three years of financial performance. Analyzing these statements gives insight into the facility’s financial performance over time, highlighting trends and growth potential.
- Occupancy Rates: Current and historical occupancy rates are critical as they directly impact the facility’s ability to generate revenue.
2. With these financials, you can now calculate Net Operating Income (NOI). This is the total revenue minus all operating expenses for the most recent twelve-month period.
Note: NOI does not deduct financing costs or taxes. These expenses vary from investor to investor and from deal to deal.
3. Finally, divide NOI by the cap rate.
The cap rate is a subjective measure that both the buyer and seller must ultimately agree on. It represents a negotiation about the investment’s risk and return potential.
The buyer wants a higher cap rate. This results in a lower price and a better return on their investment. The seller, on the other hand, wants a lower cap rate and a higher price.
To reach a compromise, investors may compare the cap rates used for similar, recently sold properties in the area. This can help determine a “market” rate. For reference, a cap rate between 5% and 10% is considered good for a commercial real estate investor.
Several key factors play a role in determining the cap rate:
- The facility’s location, condition, and age
- Prevailing market conditions
- Unit mix
- Competition
For instance, a newer property in a prime location with less competition and a desirable unit mix will command a lower cap rate than an older, outdated property facing increased competition.
Example Calculation #1
1. Let’s say a storage facility has an NOI of $120,000.
2. By looking at other recent comparable sales in the area and taking into account differences between the properties, we determine that a cap rate of 8% appears justified.
3. By dividing 120,000 by .08, we get an estimated value of $1.5 million.
Not only does the Income Approach give you the property’s current value, but it also highlights how potential rent increases or cost reductions can affect the property’s future value.
Example Calculation #2
Take the same example as above. Let’s say you can increase rents and reduce operating costs by updating the units and implementing automation technology.
These changes create a 20% NOI boost, from $120,000 to $144,000. Now, at the same 8% cap rate, your valuation is $1.8 million.
That means your simple operational changes would create $300,000 of value!
The Income Approach is best used for existing properties where you can review a financial history. It may also be helpful for properties without a track record (new or proposed projects), but assumptions will be needed to estimate NOI.
For new properties, the following two approaches may be more relevant.
Replacement Or Cost Approach
The Replacement Approach determines the property’s value based on the cost of constructing a similar property from scratch. This calculation considers the current cost of land, labor, materials, and site improvements, minus depreciation.
Example Calculation #3
If the cost to build a storage facility is $50 per square foot and the storage area is 15,000 square feet, the total construction bill will be $750,000.
Next, we must account for the cost of the land and any site improvements. Site improvements might include parking and roadways, the entrance, utilities, and landscaping. Let’s say the land costs $150,000, and site improvements add another $100,000.
At this point, the replacement cost is up to $750,000 + $150,000 + $100,000 for a total of $1 million.
Finally, we need to calculate depreciation. Depreciation accounts for the property’s loss in value over time due to wear and tear, aging, and market conditions.
If the storage facility has an estimated lifespan of 30 years and is currently 10 years old, it may have experienced approximately 33% depreciation. This would apply to the buildings and site improvements (note that land does not depreciate).
So, if the initial combined cost of the buildings and site improvements is $850,000 ($750,000 for construction + $100,000 for site improvements), and the depreciation is estimated at 33%, the current value for these would be around $569,500 (which is 67% of $850,000).
Adding back the land cost, the total value after accounting for depreciation would be approximately $719,500 ($569,500 + $150,000).
This approach provides a clear picture of what it would cost to replace an existing facility, taking into consideration the current condition of the property. Investors can use this approach to identify properties that may be undervalued (or overvalued) due to outdated facilities or market demand.
Comparable Sales Approach
The Comparable Sales Approach compares the sales prices of similar storage facilities in the area. This approach is similar to how residential properties are valued and provides a market-driven perspective on a property’s worth.
Factors such as location, size, facility age, amenities, occupancy rates, and overall condition of the subject property are compared against recently sold properties.
For example, if a nearby storage facility with similar characteristics sold for $800,000, and another comparable property sold for $820,000, these figures provide a baseline for valuing the subject property.
Of course, adjustments may be necessary to account for differences between properties. If one has a newer roof or a more advanced security system, its value may be increased. Whereas, lower occupancy rates or older construction might decrease its value compared to recent sales.
This approach is particularly valuable in active markets that have numerous transactions to draw comparables from. It offers a real-world view of what buyers are willing to pay for similar properties.
While many investors get caught up in their preferred approach, keep in mind that each calculation is just one piece of the puzzle. By combining all three, you can hone in on the right price and get a deal done!
Factors That Affect Value
Regardless of the valuation approach you use, the following factors can significantly influence both the current and potential value of a self-storage investment.
- Current vs. Potential Income: Current income provides a snapshot of a storage facility’s existing profitability. Potential income, on the other hand, reflects its future earning capacity with improvements or optimized management.
This distinction is crucial when evaluating a property’s price. Investing in storage units with room for income growth often presents a better investment opportunity than one with limited growth potential. - Location: A prime location – one that’s visible, convenient, and in a high-traffic area – can significantly drive up a storage facility’s value. Proximity to apartment complexes, residential developments, or business centers can boost tenant demand and rental income.
- Property Condition: A well-maintained, modern facility typically commands a higher price than older units in need of TLC. However, facilities in need of a facelift can present a “quick win” and an attractive opportunity for investors.
- Competition and Market Saturation: A facility in a market with limited competition is more valuable than one in an oversaturated market. The presence of many competitors can limit potential income and negatively impact occupancy rates.
- Occupancy Rates: High historical occupancy rates may indicate a particularly desirable property. However, low rates could point to underlying issues like poor location or mismanagement. For an investor willing to make improvements, such conditions may present a valuable opportunity.
- Size and Unit Mix: A facility with a diverse range of unit sizes and types can cater to a broader clientele, potentially increasing its appeal, profitability, and value.
- Legal and Regulatory Factors: Changes in zoning laws, property taxes, and environmental regulations can also affect a facility’s value. Investors should consider these, as they can impact operational costs and potential expansion opportunities down the road.
Pro Tip: Most valuation methods ignore the impact of taxes and debt service costs (since these are on a case-by-case basis). A complete analysis should take both of these costs into account for a thorough and realistic evaluation of an investment’s potential.
How To Finance A Storage Unit Investment
The right financing can turn a ho-hum investment into a rock star! Here’s a look at some popular financing options, along with their benefits and risks:
Conventional Loans: Traditional bank loans are a popular choice. They offer competitive interest rates and terms, but typically require a significant down payment (25%+) and have stringent credit and income requirements.
The main benefit of a conventional loan is the lower cost over time. However, they often require a personal guarantee, which could put other assets at risk in the event of default.
SBA Loans: The Small Business Administration (SBA) offers two loan programs for financing storage unit investments:
- SBA 7(a) Loans: These loans are geared towards buying an existing facility. They offer favorable terms, like flexible qualifying requirements, lower down payments (10%), and longer amortization periods, SBA 7(a) loans are a great option for investors who don’t qualify for a conventional loan. However, they do come with higher fees and they still require a personal guarantee.
- SBA 504 Program: These loans allow a storage unit operator to buy, construct, or renovate a storage unit facility for a 10% down payment (or 15% if the facility is less than 2 years old). However, they have strict eligibility criteria and can involve a lengthy approval process.
Seller Financing: Sometimes when investing in storage units, the seller will agree to finance the purchase. This often eliminates qualifying requirements and provides more flexible repayment terms.
How To Get Started With Self-Storage Investments
There are several paths you can take to get started investing in storage units. From the simplicity of REITs to the hands-on approach of building a facility from scratch, each option comes with its own unique considerations.
REITs
The easiest way to get started is by buying shares in a Real Estate Investment Trust (REIT) that specializes in storage units. This allows you to participate in the upside of the storage market without having to acquire or manage an actual property.
REIT shares are bought and sold just like stocks. Plus, they allow you to diversify across multiple properties with a single investment.
A few popular storage REITs include:
- Public Storage (NYSE: PSA)
- Extra Space Storage (NYSE: EXR)
- National Storage Affiliates (NYSE: NSA)
Self-Storage Syndicates
These real estate syndicates are groups of investors that pool their resources together to invest in larger self-storage projects (or multiple projects) than they could individually.
This collective approach allows investors to take advantage of economies of scale — and generate larger returns through larger, more profitable projects.
Self-storage syndicates also provide access to professional management, ensuring the facilities are run efficiently and effectively. This is particularly important in the self-storage industry, where operational expertise can significantly impact profitability and value.
On the flip side, joining a syndicate means accepting less direct control over individual investment decisions. However, this trade-off can be worthwhile, especially for those new to self-storage investing.
Buy An Existing Facility
If you want to take a more “hands-on” approach to self-storage and you have access to capital, this option allows you to walk into a turnkey operation.
The primary benefit here is that you will have cash flow from day one. Also, your target property will have a track record of financial performance you can use when evaluating your options.
The biggest risk you face. however, is the personal guarantee required to finance your purchase.
If you discover a hidden maintenance issue or an operational shortfall, you are on the hook financially. These unexpected surprises could eat up a large portion of your anticipated profits or even affect your ability to make loan payments. This could put your entire investment, and even other assets, in jeopardy.
Of course, if you bought a property with plans to improve operations, there is always execution risk as well. The job may require more time and money than you had originally budgeted. Or, it may not be achievable at all.
Just because your spreadsheet looks good doesn’t mean market conditions will cooperate or unforeseen challenges won’t arise.
Build Your Own
This approach is ideal for investors looking to fully customize their projects.
It offers the freedom to design and construct a facility that caters to specific market needs and that integrates modern features from the start. Its primary advantage is the comprehensive control it affords over all aspects, including location, unit design, and amenities.
This option also provides the greatest potential for immediate capital appreciation as you lease up the project. But building a new facility is not without challenges. You have to navigate local zoning laws, manage construction delays, and lease up units from the ground floor.
Time becomes a critical factor as well. Typically, you can expect to spend one to two years from start to finish. And during development, you face the risk of market changes that could impact the project’s success.
Boost Your Storage Unit ROI
If you decide to buy or build a storage facility, your profit is directly proportional to the property’s net operating income. Here are a few levers you can pull to quickly boost its bottom line:
1. Marketing
Smart marketing doesn’t have to be complicated.
Start by encouraging your current tenants to refer friends and family. Offer them free or discounted rent for doing so.
Run Google Ads locally for search terms like “storage unit”, “self-storage”, or “storage near me”. A budget of just a few hundred dollars per month can significantly increase your facility’s visibility and drive more traffic to your website.
Don’t forget to ask satisfied customers to leave positive reviews on Google, Yelp, or other review sites. Online reviews are often one of the first things potential customers look at when choosing a storage facility, so a collection of positive reviews can greatly enhance your reputation and attract more business.
Try hosting community events like an outdoor market or art walk to boost your facility’s name recognition and awareness in the local community.
Consider forging partnerships with local real estate agents and home remodelers who frequently work with clients who need storage solutions.
Finally, don’t underestimate the power of good signage. Clear, visible signs highlighting your services can make all the difference in attracting a steady stream of walk-in clients.
2. Automation
Technology can revolutionize your storage facility by automating many day-to-day operations, significantly reducing time spent on routine tasks while boosting your profitability.
Software programs like Easy Storage Solutions and Innago are specifically designed for the self-storage industry. They can automate many of the day-to-day functions, such as:
- Online Reservations and Bookings: Unit reservations are available 24/7. This allows customers to easily rent units at their convenience.
- Customer Profiles: Keeping track of customer preferences and rental history can help you provide personalized service and offer value-added paid services.
- Billing: By automating billing, you reduce administrative work, minimize errors, and ensure timely payments. This provides a more predictable and reliable revenue stream.
Additional automation tools can manage move-ins and move-outs to offer a smoother transition for both you and your clients. When tenants fail to make their payments, automated unit lock-out systems can enforce payment policies fairly and consistently. This can minimize the need for uncomfortable personal confrontations.
3. Renovations
Step back and look at your storage facility through the eyes of a potential customer. This is a simple yet powerful way to identify areas for improvement and opportunities to stand out from the competition.
Additionally, conducting customer surveys and gathering wishlists can give you valuable insights into the additional services you could offer.
Also, pay close attention to the condition of the doors, grounds, security cameras, and the entrance. These small details go a long way in making a good first impression and giving your tenants peace of mind.
It is also important to see how your storage units stack up relative to the competition. Review your unit mix in terms of size and types available – and don’t forget about climate control units.
As you go through this process, consider the following:
- Are you offering what’s in demand?
- Are there amenities you could add to gain an edge on the competition?
Whether it’s additional services or better security, understanding and responding to market trends and customer preferences can significantly elevate your facility’s appeal and profitability.
4. Add On Services
Expanding your storage facility’s offerings with additional services can significantly boost your bottom line without much additional effort.
For example, when my friend purchased his first storage facility, he noticed that there had been almost no retail sales the previous year. So he began showcasing moving supplies – such as locks, boxes, packing supplies, and bubble wrap – in a prominent space within the office. This strategic move singlehandedly increased his first year’s sales by an impressive 10%.
Another valuable service you can offer is convenient truck rentals. Rather than having to go to a separate location, allow customers to pick up and return trucks right at your facility.
Don’t forget about local businesses! Oftentimes they lack the office space to store the mountain of paperwork they generate. By offering specialized document storage solutions, you can reach this overlooked yet lucrative niche.
Finally, place vending machines in your high-traffic locations. Nothing takes the edge off a hard day of moving like a Snickers bar and an ice-cold Coca-Cola. Just think, a couple of bucks per tenant per move starts to add up to some real income.
Final Thoughts
The demand for storage units continues to reach record levels as Americans continue to do what we do best – buy more stuff.
Investing in storage units gives you a great way to tap into this profitable trend while diversifying your real estate portfolio.
So if this investment opportunity has been flying under your radar, now’s the time to take another look. From passive REITs to constructing your own property, storage units could be just the ROI boost you have been looking for.
