When we talk about rental properties, we’re typically referring to single family homes or multifamily properties. But there’s another type of rental property that has increased dramatically over the pat few years, and those are self-storage units. In 2019 alone, there was $5 billion in new construction on self-storage units. Let’s take a look at why so many people jumping on the self-storage bandwagon.
Low Overhead
When you’re renting out a property for tenants to live, people will want more than four walls and a ceiling. But when it comes to storage space, people just want a secure place to store their belongings. You won’t need to worry about repainting between tenants, replacing carpets, taking care of a swimming pool, or making sure that the landscapers maintain the property’s curb appeal. On average, for every dollar of self-storage revenue, 35 cents of that are utilized for business expenses and the remaining 65 cents is net operating income.
Fair Competition
According to the Self Storage Association, 85 percent of storage facility owners own three or fewer storage facilities. This is good news because newer investors won’t be trying to make inroads into an industry dominated by giant corporations that can afford to offer very low rates. As a group, owners of self-storage facilities tend to be in the “set it and forget it” category. If you’re a newcomer to the self-storage industry, you have the opportunity to implement your own value adds to make your facility more competitive and profitable. That can include increased automation or offering related products like tenant insurance. If you’re able to improve the business’s profitability, that increases your ability to scale up.
Consistent Profitability
Self-storage has consistently held its value during economic downturns. In 2008, the only real estate investment trusts that were able to turn a profit were self-storage REITs, at about 5 percent. In a recession, people still need a place to store their belongings. In fact, the need to downsize makes storage facilities more necessary.
No Evictions
Due to the lower cost of a storage facility, even people facing financial hardship are still usually able to keep current on their rent. In the event that one of your renters falls behind on their payments, you don’t need to go through a difficult and expensive eviction process. The owner of the storage facility can simply clear out all of the items and rent the unit to someone else.
The Cons
While there are advantages to self-storage, this type of real estate is not without its drawbacks.
Lower Net Operating Income Than Residential
As a percentage, the net operating income from self-storage is high, at about 65%. But bear in mind that your renters will be paying far less than the cost of renting an apartment. Typically, storage units rent for anywhere from $50 to $300 per month. The cashflow per unit is going to be substantially lower than what you would receive from a residential property.
The Competition Is Heating Up
Many investors are being enticed by self-storage due to the reasons mentioned above. Between 2008 and 2019, self-storage construction nearly tripled, reaching $5 billion per year by 2019. Even Bill Gates has become a self-storage investor through his investment company. This is a market that could see oversaturation within the next few years.
Conclusion
According to the Self Storage Almanac, the average occupancy rate for self-storage units in the US was above 92 percent in 2020. This is a huge increase from about 75 percent in 2010. While this type of property is becoming increasingly more popular with investors, there would have to be a massive, unprecedented increase in self-storage construction to significantly reduce its demand and profitability.
