Are you looking for a way to invest your money? Maybe create an asset that doesn’t require much time? If so, then you should take a look at self-storage investing. What does a self-storage investor do you ask? First, let’s look at what self-storage units are. These are rooms, lockers, or containers rented to tenants. They are usually rented month to month, and can be rented by both individuals and companies.
Self-storage investors make money by buying these units and then either renting them out to individuals, or renting them to another company (who will then rent each unit individually). As with all investments, investing in storage units comes with its own pros and cons. It’s very important for anyone looking to get involved with self-storage investing to understand both before getting involved.
Pros and Cons of Self Storage
The first major pro for investing in storage units is that you have the potential to earn very high rates of returns. These higher than average rates of returns are one of the main reasons for investors to choose this type of investment.
The second pro for self-storage investing is you can purchase buildings at a higher cap rate (capitalization rate) than other properties (such as apartment buildings). Cap rate shows the potential rate of return of the initial investment and is calculated by dividing the net operating income by the current market value. For example, if a unit has a net operating income of $100,000 and recently sold for $1,000,000.
Another pro to self-storage investors is that they don’t have to worry about tenants. One of the most difficult aspects of investing in real estate is that you need to manage the people you rent to. You have to make sure they pay on time and that they don’t damage the property that you own. All of this takes time, and can cost a ton of money, which eats into your profit. However, learning how to invest in storage units eliminates these issues.
Self-storage investing is also one of the best ways to earn passive income. That’s right; the word all investors love to hear. Passive income is the ability to earn income without having to do anything. For the most part, self-storage investing doesn’t require you to be successful. Tenants will move their items in and out without your involvement. All you have to do is maintain the property and pay the expenses.
The final pro to investing in storage units is that you tend to have lower operating expenses. Think about it; people aren’t living in your unit, so it cuts down on what you have to pay for utilities (such as water, electricity, hvac). Of course, you want your storage units to look as good as possible, but you don’t need to put as much into the property as you would for a house.
Of course, with all positives there are also negatives as well. One of the major cons to this type of investment is that the location of the property really does make a huge difference to your success. If your units are in a nice part of town it will attract a different type of tenant than if it were in a worse area. Good locations will be able to benefit from better tenants, less repairs, less upkeep, and in most cases, they will always be paid on time. One must also be mindful however, that the nicer the area, the higher the purchase price.
Another con to storage investing is that you will be facing a lot of fierce competition. There are more and more self-storage units popping up, and this influx of activity in the market leads to more options for tenants. If you want to remain competitive you might have to lower your prices to grab more tenants.
Now that you’ve identified the pros and cons, and how to invest in storage units, you can determine if this investment strategy is right for you. If the answer is yes, now you need to find a way to either purchase an existing unit, or build one yourself.
Where to Start
One great way to purchase an existing unit is to find an owner looking to retire. You can usually purchase the property for a good discount, and inherit all their existing tenants. By choosing this method of procurement, you can cut out some of the learning curve and jump into a turn key business.
Another way to jump into this type of investing is to find an under-performing storage unit and purchase it. In this case, all the components for a successful business are already present, it just needs to be made more efficient.
If you decide to build your units from nothing there can be a multitude of advantages.
One of the big advantages is that you have the ability to make the building look exactly how you want it. This allows you to make it as efficiently as possible. which will ultimately make your investment more successful.
Another advantage to building your units is that everything will be brand new. Newer facilities obviously have the ability to command a higher price. In addition to this, they traditionally retain their tenants better than older buildings.
In summary, self-storage buildings can be a great investment vehicle. It has the potential to create a great rate of return, passive income, and all without putting a ton of money into it. However, like all investments, when you purchase a self-storage unit you are putting your money at risk. You need to do your research prior to purchase and make sure you understand both the dangers and the potential. I’m very excited to see where this industry is going in the future, and you should be too.