How to Invest in Self Storage: Complete 2023 Beginners Guide

Self storage is on an upward trajectory, with 4,536 properties in development and ever-growing demand. It is a viable investment option for portfolio diversification and a steady passive income source. However, many people do not know how to invest in self storage to get a high ROI.

This industry and asset class differs from other investment options depending on stability, risk, and cash flow. So, you must know how to invest in self storage to reap the benefits of this lucrative investment opportunity.

We have compiled all the necessary information in this guide to make self storage investing easier for beginners.

What is Self Storage Investment?

Self storage investment is a form of real estate investment where you invest your funds in self storage facilities and earn a return by rental income from the storage units. Your customers can be individuals or small and medium-sized businesses.

You can become an active investor by operating and managing the facility or a passive investor with no participation in business operations.

Some renters may rent the storage unit for a short period, while others need storage space for the long term. Either way, you earn rental income as long as the tenant keeps their belongings in the storage unit.

Self Storage as an Investment: What are the Benefits?

Experts view self storage as a flourishing business and a profitable investment opportunity. Here is why investing in a self storage business is worth it.

Low Risk

Every business has some risks that can impact the return on your investment. You must invest in less risky options for a safer ROI. Self storage has low operational costs and, therefore, lower business and operating risks. Low operating costs mean you have high profit margins and can manage short-term revenue fluctuations better.

Self Storage as an Investment

Furthermore, if a tenant breaks some rules or does not pay rental charges, you can mark a lien against their property. This means that in case of non-compliance by tenants, you may auction or sell their property to compensate for your dues.

Moreover, the demand for storage units is also not seasonal. You can always find tenants for your storage units if you’re in a good location and offer excellent customer service. All these factors lower the risk and make it a viable investment.

High Demand

Self storage businesses experience growing demand. From students to large and small businesses, everyone needs a storage unit. High demand for self storage means you can operate at capacity, taking more rental income. More rental income leads to high revenue and high profits, so you can get the best value for your investment.

Investors can diversify income streams from a storage unit by attractive add-ons like loading and unloading equipment or vending machines and increasing tenant capacity. This ensures a steady cash flow for the investors.

Economic Durability

Self storage has proven to stay resilient during tough times, such as the 2008 financial crisis and the Covid-19 pandemic. It is unarguably one of the most thriving businesses in today’s world. The low operating costs and decent profit margins make it a remunerative business for investors.

The economic durability offered by this industry makes it an ideal investment for risk-averse investors and a passive source of income for portfolio diversification.

Low Maintenance

Self storage infrastructures are simple and easy to maintain. Once you build a storage facility, you do not usually need to spend frequently on improving or enhancing its infrastructure. All you need is a secure space with good lighting, a security system, and fire protection equipment.

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What is Self Storage Investment

If a self storage facility uses self storage management software, operations can be automated, reducing the need for on-site staff. These facilities reap the efficiency and cost benefits of automation. You can automate the following and several other functions with efficient management software.

  • Profile management
  • Billing and invoice management
  • Storage unit booking
  • Move-ins and move-outs
  • Unit locks out on overdue payments

Flexible Business Model

The self storage business model is flexible to power through tough times. You can start a storage facility from an empty building and scale once you start earning enough profits. Besides self service kiosks, you may also add valet storage to increase the scope of your services and use management software to manage valet storage efficiently.

Many storage facilities offer a valet service; these are truck rental services as an add-on to help renters move their belongings. The flexibility of this business model helps investors get the best ROI in all economic situations. During the boom, you can focus more on commercial storage units, whereas during a recession, there is high demand for rental units for downsizing.

Risks of Investing in Self Storage

However, nothing is ever completely risk-free. You must know about the key self storage investment risks to mitigate them effectively. Here are some common risks that you may face when investing in this industry.

Tricky Market Positioning

Although self storage is a lucrative business, you can only leverage its pros if you position your business right. Finding the right market for your storage facility and securing a place in the market is tricky.

The following factors make market positioning a challenge.

  • Locating competitors
  • Understanding customer demands
  • Building the right mix of units
  • Offering the amenities that renters want
  • Finding an ideal real estate space in a busy location

If you do not analyse all these factors thoroughly and execute the right market positioning strategy, you may not get desired results from the storage facility.

Need for Active Management

Unlike the common assumption, self storage management is not completely hands-off. Even if you install the latest self storage management software and automate most functions, as mentioned previously, you still need active management to oversee some business operations.

Ensuring that the security systems, management software, and other utilities are upgraded timely is vital. You need a comprehensive business plan and an expert team to execute the plan.

Risk of Oversupply

As storage facilities are easy to build and maintain, more investors are attracted towards self storage investing. This creates the potential risk of oversupplying storage facilities. This can intensify the competition and reduce the potential demand for your particular storage facility.

self storage investing for beginners

As a result, you may not be able to achieve your desired growth objectives within the projected time frame. It is equally crucial and challenging to consider your area’s current and potential competition.

High Tenant Turnover

Typically, storage facilities offer rental units on a monthly basis. This means that tenants continuously move in and out of the units. The business needs a comprehensive self storage marketing strategy to maintain a high occupancy rate. Offering tenants lower monthly prices can also help maintain long-term contracts.

Self Storage Classes

Before researching how to invest in self storage, you must know the different classes self storage is classified into. The following are the three classes representing different self storage groups.

Class A

A class includes self storage facilities that have been newly built in the last 10-15 years. These facilities are in ideal locations with all the modern amenities, such as climate-controlled storage units, modern storage management software, and advanced security systems. Due to these amenities, such storage facilities have low turnover and high occupancy rates.

Class B

Storage facilities more than 15 years old are classified into B class. These facilities offer amenities and maintenance but are not as good as A-class facilities. They may lack round-the-clock maintenance and climate-smart features. The rental charges of such storage units are also average.

Class C

Older storage facilities that are not found in a prime location are known as C-class storage. They have low rental charges with limited amenities. The security measures may also not be up to the mark.

As an investor, you must consider the features and amenities offered by each facility class to make your investment decision.

How to Invest in Self Storage Businesses? 4 Popular Ways

If you wish to invest in the self storage market, here are four popular ways to do so. You can analyse each one of them closely to decide which one to choose.

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Invest in Real Estate Investment Trust (REIT)

Another way is to invest in real estate investment trusts, commonly known as REITs. Self storage REITs own and manage self storage facilities and earn profits by renting storage spaces to individuals and businesses.

They are one of the best investments in self storage in terms of performance and return. You can start investing in REITs with low capital and become a passive investor.

How to Invest in Self Storage Businesses

Select a well-performing self storage REIT with good profitability projections and invest in it. You can earn a return the same way you would earn through stocks.

Self storage REITs earn income through multiple sources. This includes rental income, management fees, reinsurance income, and overdue fines.

Pros of Investing in Self Storage REITs

  • Rising demand benefits REIT investors.
  • High-profit margins and ROIs.
  • The passive investment makes self storage operations hands-off for you.
  • You can get started with a small capital investment.

Risks of Investing in Self Storage REITs

  • The risk of oversupply and high competition exists.
  • As a passive investor, you have no control over business operations.

Buy a Self Storage Facility

If you have enough funds, consider buying a self storage facility. It involves buying an existing income stream by paying a fair market value. You do not have to do the initial work, and you can start earning right after closing the deal.

For a beginner, buying an existing storage facility is better than building it from scratch. Experts suggest buying existing facilities and adding value to them before operating your business. This way, you can charge high rental rates and earn profit.

As your business grows and the facility starts making a profit, you can earn a significant return on your investment.

Pros of Buying a Self Storage

  • It is a hands-on investment, and you have complete control over business operations.
  • You are in charge of the management and decision-making.
  • A faster time to market helps you reach breakeven quickly.
  • All the profit you earn is yours, with no shareholder claims.

Risks of Buying a Self Storage

  • Buying an existing facility is more expensive than building one.
  • The risk exists of misunderstanding or underestimating the repairs and maintenance needs.
  • A lack of knowledge about market demand and customer needs may lead to buying the wrong self storage class.
  • Security expenditures may be higher than you estimate.

Build a Self Storage Facility

Many active investors want to build a storage facility from scratch to obtain their desired objectives. Building a storage facility takes a lot of work and requires significant investment. You need extensive market research to choose the right location and find the ideal site.

After building, you need strong marketing to attract customers and offer high-quality services to retain them.

Pros of Building a Self Storage

  • Building a storage facility can be cheaper than buying one.
  • You can control all aspects of construction, layout, and design.
  • You can build your desired unit mix.
  • New facilities are more appealing to renters and can generate high rental income.

Risks of Building a Self Storage

  • The market risk is higher in building than in buying.

  • You need industry expertise and knowledge to avoid construction and design mistakes.

  • The building is time and labour-intensive.

  • It may take three to four years to reach 90% occupancy and realise your fair market value.

  • You must get your self storage marketing on point

Invest in Self Storage Syndicate

Another way to invest in self storage is through self storage syndication. It refers to a group of investors who pool funds to invest in self storage collectively. All investors in the syndication agreement are passive investors and considered limited partners in the deal.

The management and operations of the projects are led by the sponsor of the syndicate. The investors benefit from the profit and take their respective shares in it. You can become a passive investor in a self storage syndication if you are an accredited or sophisticated investor.

Choose a reputable syndication company and apply for membership as a passive investor in a self storage syndication.

Pros of Investing in Self Storage Syndicate

  • Real estate investing syndicate in self storage offers higher returns than a self storage REIT.
  • Investing in a group reduces individual risk.
  • It offers tax advantages to passive investors.

Risks of Investing in Self Storage Syndicate

  • A self storage syndicate project lacks liquidity.
  • The investor’s share of funding commits for the duration of the investment lifetime. They only get it back when the project concludes.
  • REI syndications lack due diligence increasing the risk of fraud.
  • Lacks control over business operations.
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Things to Know Before Investing in Self Storage

Investing in self storage syndicates, stocks, or REITs does not involve any input from the investors except the funding. However, building or buying a storage facility is an active investment.

These types of self storage investments take a lot of research and analysis to generate a good return on investment. When you choose to invest in building or buying a self storage facility, it becomes even more important to consider some important factors.

Choosing the Right Location

The location carries the primary importance in the self storage industry. Choose a location with a considerable population and avoid basing your decision on projections.

Things to Know Before Investing in Self Storage

For instance, you buy a storage facility in an area that is expected to have 1,000 new homes by the end of this year. The projection may not meet reality, and you will not be able to generate enough demand for your storage units.

Know your Customers

Understanding your target customers and knowing their habits is important to cater to their needs. As an investor, you must know the consumer habits of your target market to allocate your resources thoughtfully.

The major target customer groups for self storage are residential, commercial, students and military personnel.

  • Residential customers usually need medium-sized storage units to keep furniture and other belongings during downsizing and home moving. They rent a storage unit for around 6 and 13 months.
  • Commercial customers are small and medium-sized businesses that rent a unit to store their inventory. They usually need a medium to large storage space for 2-4 months.
  • Students rent storage space during holidays, academic breaks, or internships. They prefer renting a unit near their campus for 3-4 months. Small storage units with pocket-friendly rates are suitable for students.
  • Military personnel need storage facilities near their military bases. They rent out storage space during their deployment that can continue for six or more months.

Mitigating the Risks

To earn maximum return on your investment in self storage, you need to control risk factors as much as possible. Prior planning and market research can help you minimise certain risks and maximise your ROI.

  • The first concern for you must be how often storage units get broken into in your target location. If the rate is high, you need to take some extra security measures. Ensure that there is adequate oversight at the storage facility.
  • Instead of trying to reduce costs, invest in amenities and repairs that can increase the rental charges. For instance, good lighting, advanced management software, and a modern lock system.
  • Target secondary or tertiary locations to avoid the risk of oversaturation. Primary locations are usually overcrowded with large operators.

Is Self Storage a Good Investment for 2023?

When investing in self storage, the first question that may cross your mind is, “is owning a self storage unit business profitable?” The profitability of the business determines if it is worth the investment. Here is the quick answer.

Yes, self storage is a good investment for 2023. With more people opting for downsizing and the trend of work-from-home surging, the self storage market is on a growth kick. There are multiple ways you can invest in self storage choosing between active and passive investment options.

Is Self Storage Investing Right for you?

Self storage investment is different from other forms of real estate investments. Despite its growing popularity, positive growth trend, and resilience against recession, self storage investing is not for everyone.

Knowing how to invest in self storage is not enough when making the investment decision. There are many reasons to invest in this industry and many others for not making this decision.

Is Self Storage Investing Right for you

You must define your investment objectives clearly and thoroughly analyse the self storage opportunities and risks. Consider the long-term impact; it will help you make the right decision.

How to Invest in Self Storage: Bottom Line

Self storage is here to stay, and it makes sense to invest in it. The positive growth trends, along with efficient self storage management software and advanced security systems, make self storage a lucrative investment opportunity. However, you must prepare well before entering this competitive market. It is better to take professional guidance to gather information and make better self storage investment decisions.