Millions of Americans have storage units. But most of them never think about this type of real estate as investments. Nevertheless, there is a very successful niche in investing in the American desire for materialism and storing their possessions. In this episode we’re going to review the key factors that make self-storage investing an attractive sector for your investment dollars.
Episode 1: Why Buy A Storage Facility? Transcript
I know you rent one, but have you ever thought of buying one? This is Frank Rolfe for the Self-Storage Investing Mastery podcast. Why would anyone invest in self-storage? Well, that's a good question. Let's start off with a few of the key points. Number one, high yield. Storage investing, because it's still kind of odd and still kind of new and still not fully embraced by everyone in America, as far as a mainstream way to invest, they still command higher CAP rates than many other sectors of real estate. So typically, a self-storage facility CAP rate will be a point, or maybe two points higher than local apartments and standard investment fair.
Now, what is a CAP rate? CAP rate is the net income over the purchase price of the storage facility. So you divide the top by the bottom. And when you're buying something, the higher the CAP rate, as a buyer, the better. The lower the CAP rate, as a seller, the better. So since storage facilities have a higher CAP rate than many other sectors of real estate, that's an important point. And that's probably the first reason anyone would invest in storage over other sectors is simply it has a higher yield.
Number two, it's got a strong demand. In fact, we didn't know how strong the demand was until about 2007, 2008, because it was always assumed that storage was the bastion of wealthier people who had a lot of materialistic goods they purchased and needed to store them somewhere. A lot of items, a load of Christmas trees and ornaments, but even sometimes sports cars and other items that they would rent storage space for to store. However, we learned more in the Great Recession. What we learned in the Great Recession was that people needed storage even in bad times. In fact, they needed storage more in the bad times than the good times because when their housing was unstabilized, when they were having to move across America to try and apply for a job, they wanted to make sure everything they owned was safe. So they would basically take the entire contents of their home and put it in a self-storage unit until they had a new, safe base to take it out of.
Additionally, as the price of housing has gone up, many people look at self-storage as a much more rational way to store their goods than using their valuable floor space in their home since the housing cost is significantly higher, sometimes as much as a hundred times higher than the cost of storage. So demand for storage has now proven to be strong in both good and bad economic times.
Now, another reason people often like self-storage is it has very low repair and maintenance and capital expenditure needs. Let's look at that for a moment. When you have a self-storage facility, what are you truly providing the customer? Typically, a concrete slab floor, but not always. Metal walls on three sides, and a roll-up metal door. And not always, a light. But generally not even a light. So you have nothing in that unit you have to repair. You don't have any bathroom equipment, no toilets, no tubs, no hot and cold water, no heat and air. None of the items that drive many landlords insane are required in self-storage.
And that also impacts the capital expenditure needs in the future. When you're in an apartment complex, you have to budget for such big-ticket items as replacing the roof, and replacing the heat and the air conditioning, and sometimes the plumbing, and definitely painting it, maybe changing out or improving the balconies. You don't have any of those issues with storage because it's just a very simple structure. So basically, as long as you keep that storage facility painted and just cursory maintenance, you don't ever have to write any big checks to bring it back to life, because it never really dies.
Look at all the storage units around you. Look at some of the ones that I rent. They're in old buildings from the fifties and the sixties. So they're half a century old and there just isn't a whole lot going on now any different than it was back then. So effectively, you've got a situation where you have a form of real estate that doesn't need a whole lot of work. And that's great for many people because many people get really burned out on apartments and other sectors because they do require such constant maintenance. So it's very refreshing not to have to do that. So that's an important item, again, why you would do self-storage.
Another issue with self-storage is frequently it has strong future land value. Now, what do I mean by that? Well, of course, in the beginning of time, when all real estate began, it was all focused on the land. If you look at America's first real estate millionaire, John Jacob Astor, all he did was buy land and then he rented land out. He didn't build structures. He didn't rent structures. He didn't build buildings, apartments, industrial buildings, anything. He just rented land. So our whole industry began with land.
And in storage, often, where you're talking about land that is well-located on important corners and main thoroughfares, the land has its own intrinsic value. So when you buy a self-storage unit, part of it is all about the storage, but part of it is a simple fact of land. In fact, many people look at self-storage as a way to warehouse land. So they'll buy an important corner and they'll build a self-storage facility on it, but not because they intend it to always be self-storage. They know that corner may one day be a shopping center, or a hotel, or an office building, or a higher use than storage. But in the interim, because of the demand for storage, because of the location, because of the inexpensive manner of building storage buildings, that's how they warehouse the land. That's how they pay the property tax and the mortgage while they wait around for land values to go up. And that's an important feature because that gives you a backstop to your investment.
When you invest in many other items, if anything goes bad, you have nothing. Look at a restaurant. If I go invest in a restaurant, what do I get? Well, let's see. I get a leased building, so I don't even own that. I get some restaurant equipment, which, on the used market, I might be able to sell for a penny on the dollar. I get some old tables and chairs, not worth much of anything. I get whatever food I had at the moment to cook from. But again, not worth much. It is perishable. Entirely different on a self-storage facility. You own the buildings. Yes, that's true, and that would just be basically scrap metal if you ever were to tear it down. But the key item that you own is the land. So the land gives people a lot of comfort.
Another reason that self-storage is a popular investment is it's a very simple business model. In fact, it's perhaps one of the most simple in the United States. You're not doing anything but renting a space to somebody. You don't even get involved in the lock. They provide their own lock. On a lot of these facilities, you don't provide anything but the space, no utilities of any type. However, you do, typically, but not always, provide some degree of security. In urban self-storage facilities, that would be in the form of a fence and a gate, perhaps an electric gate, perhaps an on-site manager, even perhaps security cameras. But in a more rural facility, none of those items are typically provided.
So all you basically do is sign a lease with the customer who rent the space. They agree to pay you one check or money order, or perhaps, in some cases, cash per month for that unit. And that's the entire basis of your relationship. You are not required to do anything for them. You're not required to provide any services, not provide any utilities. Simply, all you do is rent them that little rectangle or cube of floor space, and they can freely then put all their goods inside.
And because the model is so easy to understand, it's very easy to manage from afar because you know the key drivers to what makes the thing work. It's not like trying to buy a sophisticated business. Can you imagine how difficult it would be today to own a telecommunications company? New technology coming out daily. 3G, 4G, 5G. You'd spend all your time just trying to stay up with the competition, and the entire time be terrified that every night when you go to bed, when you wake up, technology may have shifted and no longer is the business that you thought you had invested in still a viable business. That would be a pretty terrible ending. But in storage, because it's so old-fashioned, it really can't change. There really is nothing technology can do to change the simple facts of life when storing goods. Yes, we can store data in the cloud. That is true. But you can't store your Christmas tree in a cloud, unless you want to shoot it up into space, and, of course, then it would be really hard to retrieve it.
Finally, storage seems to work kind of well throughout America. We've got 50 states, and all 50 states have storage facilities in them. It's not like a boat marina where you have to be specifically on the water. And even then, sometimes specifically on only certain bodies of water. Storage is an investment that you can find throughout the United States. Big cities, medium-sized markets, even small towns. All that really changes, though, between them, is the rent, and then sometimes the way that they are managed and operated.
Take, for example, a self-storage facility in St. Louis, Missouri. St. Louis, Missouri, your storage facility will be on land on a major thoroughfare, the land being fairly valuable. You'll probably have a fence around it, an electronic gate, and a full-time person who lives there at the storage facility to guard it. Now that's one business model, but if I just go down the highway about 20 miles, I'll see more storage. This time, not in St. Louis, but in smaller towns outside of St. Louis. And in that case, same things I just discussed, but maybe with less security. This time maybe there's a fence, maybe an electronic gate, maybe though not electronic gate, and maybe not someone who lives on site.
And if I go just another 20 or 25 miles down the highway, I'll find self-storage in small town America. In that case, it's the same story. Metal building, roll-up door, but often has no fences at all. No security besides that lock on the door, because you don't really need it. There's not a lot of crime in small town America. So it's really something that's very basically expandable. It's something that can be utilized in markets throughout America. It doesn't matter where you are currently. It doesn't matter what town you're in. Storage is around you. And certainly, there's a ton of storage to look at buying within maybe a four-hour radius from wherever you live.
So another feature of storage that makes it attractive to people is there's always some nearby. There's always some to look at to buy. And if you say to yourself, "Well, I only like buying investments that are within 20 minutes of my house." Well, storage meets that profile, because I know there are storage units within 20 minutes of your house. Additionally, storage is still something that's being built from scratch. Some sectors of real estate are not. Mobile home parks, there hasn't been a new one in half a century. But in the world of storage, you can still build new. And that intrigues some people because they may live in an area that's fast-growing, they feel underserved with storage, and therefore they decide, "You know what? I'm going to build a new storage facility to meet that need."
Now, of course, that can also be a drawback. So be very careful, if you do want to build new storage, you're not doing it in an area where everybody else is. There have been very well-published lists of up to 20 markets in the U.S. that are currently overbuilt. Don't build in those markets. But in the rest of America, there is still fertile ground to build new storage facilities if that's the direction that you want to go.
So the bottom line is there are roughly about six key reasons why people invest in self-storage. And here on the Self-Storage Investment Mastery podcast series, we're going to help identify how the business works and help you make a better job of your acquisitions and your management. This is Frank Rolfe. Talk to you again soon.