Most Americans are conditioned to believe that the prettier the real estate asset, the more money it generates. This is normally true, in asset classes ranging from apartments to hotels to retail centers. However, it’s not always the case in the self-storage sector – and that’s a good thing for many investors. So why do ugly self-storage facilities often outperform that pretty ones?
Ugly properties are sometimes what the customers really want
Storage is all about placing items inside a secured room. There’s really nothing too pretty about that. And the exterior of that room or structure is meaningless. Once you’ve left your items, you could care less what the aesthetics are. It’s the classic case of “out of sight, out of mind”. On top of that, the classic self-storage plan of being able to back up to your unit and roll up the door has proven to be far superior to the high-rise storage facility’s having to roll your stuff up on elevator and down a long hallway. In an attempt to make storage facilities prettier, the function that most customers desire has been sacrificed.
Pretty properties cost a ton to build and buy
Pretty self-storage facilities also tend to cost a huge amount more to build than ugly ones. Spanish tile roofs cost a whole lot more than metal, as does high-rise construction and beautiful landscaped entry areas with circular driveways and fountains. Since most customers will not pay more for storing their goods, the only real difference between the fancy, pretty property and the ugly, older one is that amount of capital and debt that is sunk into it, which lowers the rate of return for the investor. It’s also worthy of note that far more of these pretty properties go into foreclosure than the ugly ones ever do.
Ugly properties have more potential
Here’s an extremely important point: ugly properties typically have much more upside potential. That’s because you typically buy ugly units from mom & pop sellers, who have not mastered the concept of internet marketing or have lost their passion for the business, while the pretty facilities are typically run by professionals who have already maximized everything they could. You will have real trouble finding a pretty property that has the same amount of options to improve performance as the typical ugly one has. And that’s not even including the fact that ugly properties often have the option of seller financing, while the pretty ones don’t (since they have huge mortgages already on them).
It’s all about the money
The bottom line is that a self-storage facility is just an income property and it’s goodness or badness is simply related to one factor: income. Since storage is storage, most consumers don’t want to spend more than a set amount per square foot, regardless of how nice the exterior is. Nobody ever brags about how nice their storage unit is at a cocktail party, or dives up thinking “how lucky I am to have my items stored in a place with a fountain in front”. So the bottom line is that fancy storage facilities simply add additional debt burden and lower your rate of return. Since income properties are ranked based on rate of return – and not outside appearance – the ugly storage facilities always win.
We all will pay more for a 5-star hotel than a 2-star. But we won’t pay any more to store our material goods in a fancy self-storage complex over a simple, ugly one. And that is a good thing for investors in this sector, because it means you are not priced out of the highest-earning part of the industry, and can buy facilities with huge upside at low prices. This is one time in which the ugly ducking wins out over the beautiful swan.