Is Self-Storage the Right Investment for Me?
Commercial Real Estate
Last week, our first online REIT, MogulREIT I, announced that it invested in a loan related to a self-storage conversion project in California. This was not the first time that RealtyMogul.com has shown interest, one way or another, in a self-storage project. In fact, late last year, we had our first self-storage transaction come full-cycle.
Self-storage’s increasing popularity makes investing in self-storage a potentially attractive option for new investors. But is self-storage actually the right investment for you?
According to the Self-Storage Association, the self-storage industry has become the fastest growing commercial real estate segment over the last 40 years in the United States, with $27.2 billion in annual national revenues since 2014. They also report that 9.5% of American households currently rent a self-storage unit. Meanwhile, U.S. News reports that self-storage REITs dominate the stock market, with Public Storage, CubeSmart, Sovran Self Storage and Extra Space Storage all outperforming the S&P 500 in the first half of 2016.
Trying to figure out whether you’re ready to dive into self-storage investing depends on a wide variety of factors, including your investment strategy and risk appetite, as well as whether you’re looking for stable cash flow or potential high returns. Continue reading to learn more.
In 2014, Bloomberg reported that low overhead costs tempt entrepreneurs looking to invest in self-storage. Self-storage units, for instance, generally do not require re-painting the walls and freshening up the carpet when tenants move out. New technology, such as keyless and biometric entry, in addition to programs that allow units to be booked and paid for online, all stand to lower property operating costs and improve the user experience of tenants.
Like other commercial real estate sectors, self-storage property owners also benefit from legal protection against non-paying clients. In most states, owners can legally evict non-paying tenants. An eviction can typically take 30 to 60 days, and after following appropriate steps, self-storage facilities can auction off the evicted tenant's belongings and use the money for past-due rent. This may give self-storage investors peace of mind in terms of recouping costs that arise from tenant issues.
According to an IBIS World Research report, there are currently an estimated 52,952 self-storage units in the U.S., with the expectation that the number will grow to 60,152 or approximately 13.6 percent by 2020. The study cites a steady population growth, increase in residential rental markets, and rising disposable income as catalysts to a growing self-storage industry.
That said, the location of your self-storage unit will largely determine the type of tenants and volume of traffic you will receive. Tenants typically prefer facilities in well-trafficked areas that are easy to access, and that are clean and well-lit. Average occupancy rates in the self-storage sector are typically high relative to other asset classes, depending on the location of the property.
Self-storage has typically held its value well during economic downturns. According to an article by SmartBrief, self-storage was the only real estate investment trust (REIT) sector to post a positive return during the 2008 economic downturn, with a total return of 5 percent. Further, the National Association of Real Estate Investment Trusts reported that self-storage REITs posted the highest total returns for the first five months of 2015 at 8.2 percent.
People need to store their belongings, regardless of how the economy is doing. During lean times, people may downsize and look to storage for their personal belongings. When the economy recovers and disposable income grows, more people purchase goods that need to be stored, driving demand during both the good times and the bad.
If you do not want to go the traditional route to raise funding or self-fund your self-storage investment, there are other options. Investing in self-storage REITS is one way to get started without running a self-storage facility yourself. Alternative strategies include crowdsourcing your real estate investment and letting an experienced self-storage operator manage the property while still benefiting from the potential profits.
Whatever method you choose, doing your due diligence is always the first step when determining if an investment fits your long-term portfolio goals. As with all investments, investing in the self-storage sector involves risk of loss and past performance is not indicative of future results.
For more information, please review the Offering Circular prior to investing.