The concept of “income properties” revolves around that one sole focus: making income. There is no reason you would ever want to own a self-storage facility other than to make money. And making money is pretty simple too – you have to produce enough revenue to cover costs and your mortgage and still have cash flow to put in your pocket. Yet many of the largest self-storage companies fail miserably in this concept.
Where the big storage companies fail
There are only two ways to make money with a storage facility: 1) buy it at a good price and 2) increase the occupancy or rents. Large companies don’t seem to be good at either these days. While most of the REITs and bigger players in this sector knew how to make money in the 1970s and 1980s, as they became larger they focused more on management fees and pretty properties than ones that actually have strong operating numbers. Just take, for example, this year’s stats on the largest player’s rent increases that was recently published:
You certainly are not going to make any money with rent increases ranging from -8% to +1.8%.
What you need to do by comparison
If you are not trying to rest on your laurels but actually make money, then the action plan is simple and completely different from that utilized by the big companies:
- 1) Create a “territory”. Big companies seek out properties nationwide, but that’s highly inefficient. Instead, you should choose markets that are within a 5-hour radius of your home, which allows you to travel there and back in one day, at the drop of a hat if you need to. In most parts of America that 5-hour radius includes a huge amount of potential markets.
- 2) Focus on “suburban” and “exurban” opportunities in that “territory”. While the bigger companies have put all their eggs in the “urban” markets, that’s proven to be a terrible ides now that Americans are fleeing cities due to urban unrest and general distaste with the quality of life they provide. These large operators are stuck with their early decisions – but you’re not.
- 3) Know what you’re doing. You cannot be an effective purchaser of storage properties unless you can tell what is a good deal from what is not. So be a student of the topic and learn everything you can. Many large storage owners are filled with investing bankers who know nothing about the actual business but only how to read a spreadsheet.
- 4) Seek out properties with massive room for improvement. The trick to making money is to buy a property that is not operating on all 8-cylinders and then fixing it. This means buying storage facilities that are broken and then fixing them. Larger operators instead prefer the less profitable strategy of buying properties that need no work – and they do this out of laziness and not with an eye towards profitability. Why should they care? They’re using other people’s money.
- 5) Make lots of offers. Once you know what you’re doing, feel free to make offers on any property that meets your criteria, regardless of the asking price. And make lots of them. The more smart offers you make the greater the likelihood that one will be accepted. Large companies make few offers because to make an offer takes more effort than it does to make none.
- 6) Mitigate risk with terrific due diligence. Ben Franklin once said that “diligence is the mother or good luck”. He was as correct in 1776 as he is today. When you do great due diligence you effectively reduce the chance of missing an important issue or having a Plan B for every contingency.
Be like the big companies were before they became “big”
B. Wayne Hughes founded Public Storage (the largest owner of storage spaces in the U.S.) in August 1972 with $50,000. If you read stores of Public Storage in those early days, you will see it sounds like the bullet points above. However, as companies grow and founders become older, the direction often changes. But that does not mean there is not good material to emulate from the early “action” days when the business was built. And Hughes’ early deals were by far more profitable than recent ones.
There’s money to be made in self-storage, but not if you follow the route of the larger operators. Strike your own path based on the key drivers to success and profitability, and you can easily outperform the darlings of Wall Street that capture the headlines not because of performance, but simply size.