Maintaining diversity in a real estate portfolio is essential, especially for those in the commercial sector. Among the many investment opportunities to consider, self-storage has emerged as a promising one with potential for consistent revenue. Before making your decision, let’s examine some pros and cons of investing in self-storage.
Types of Self-Storage
Self-storage has come a long way. Today’s storage units are built with an increasing emphasis on design and amenities, as well as security and convenience. No matter what you need to store, there is likely a spot that will provide the space you need with a few bells and whistles, too. As the industry has grown, so has the value associated with this type of investment.
From multi-story buildings to climate-controlled spaces, people can choose from a variety of storage options depending on the best fit for their needs. For example, here are the three categories of self-storage units:
- Class A: Constructed within the last 10 to 15 years, these units feature modern amenities and professional management. Rent is high, vacancy is low, and they are usually conveniently located.
- Class B: These are older properties with limited amenities and less on-site management. Rent is usually more affordable, since these properties are typically located in less populated areas.
- Class C: These properties often require significant improvements as they are aging and situated in less desirable locations. Security, oversight, and amenities are usually lacking.
Before you call your investment real estate agent to start hunting for properties, consider these categories and develop a checklist of questions to ask sellers. This will help you gather important details about the state of the building, as well as earning potential. If you can’t find what you’re looking for on popular listing websites, don’t be afraid to dig around for off-market properties.
The Pros of Investing in Self-Storage
Here are a few of the perks that investors look forward to when owning self-storage properties.
1. Consistent Demand
From boat and recreational vehicle storage to small units that accommodate a few moving boxes, there is generally a reliable level of demand for this type of commercial real estate.
What’s more, self-storage businesses can usually weather the storm of an economic downturn or recession. When people are forced to downsize or move, self-storage becomes a valuable option.
On the other hand, when the economy is strong, people are more likely to buy things or pursue home renovations that require temporary furniture storage.
2. Flexible Management Options
In comparison to other businesses, interaction with customers is minimal in the self-storage industry. You may choose to have a small team, but it’s not uncommon for a single person to run this type of business.
Aside from providing tours and signing contracts, it usually isn’t necessary to have someone on premises at all times. Upon signing, tenants have access to their unit and can automate payments each month.
Whether you decide to run the business yourself or hire a team to handle daily operations, there are options that allow you to be as involved as you want to be.
3. Opportunities for Additional Revenue
The base rent for your storage units will be your main source of income, but many self-storage locations offer a variety of other products and services to generate more revenue.
In addition to selling moving and storage supplies, such as boxes and packing materials, many storage businesses partner up with U-Haul to offer additional value to tenants. Providing truck, trailer, and van rentals can be lucrative. Plus, this business model may attract new customers who aren’t tenants.
4. Low Maintenance Costs
If you have homes in your investment portfolio, you know that maintenance can feel like a perpetual issue. From plumbing to appliances, there’s always something that needs fixing.
Self-storage is very different. Aside from proper lighting and security, there isn’t much to tend to. Common areas should be clean and well-maintained, but there’s no reason to invest in extensive landscaping or decor.
The Cons of Investing in Self-Storage
Here are a few downsides to think about before you take the leap into the self-storage business.
1. Security Investments
When it comes to personal belongings, tenants want to know their items are safe and secure. That means security is a necessary investment for your new business.
You don’t have to hire a security guard to man the building 24/7, but there should be multiple levels of reasonable security. This may include:
- A gate around the premises with key card or code entry
- Security alarm systems to detect when a storage unit is tampered with
- Cameras with off-site security monitoring for suspicious activity
2. Tenant Issues
Though it isn’t always the case, many self-storage tenants are going through some sort of personal turmoil.
The truth is, there are many people who rely on storage after being evicted or forced to downsize. This can often lead to late or missed payments.
A tenant that is delinquent for months on end will force you to auction their items in order to empty out the unit and make it available to a new tenant.
3. Location Matters
Location can make or break your self-storage business. People want convenience, especially when it comes to accessing their belongings. That means a property that is highly visible and easy to get to will have higher rates of occupancy.
Although it may be tempting to invest in an affordable option off the beaten path, it can be tough to get tenants into these properties. If you’re looking to save on the initial investment, it’s better to cut costs by hunting for rebates or an affordable realtor rather than skimping on the location.
It’s important to keep in mind that location will also be a factor if you ever decide to sell your property. In addition to making improvements and taking steps to reduce capital gains tax, the location will have an impact on how much revenue you generate from a sale.
4. Hiring Takes Time
One of the most difficult parts of managing a self-storage business is finding staff who will get the job done right every day. If you don’t plan on running the business yourself, you’ll need a manager who can oversee daily operations and keep you in the loop.
Although it can be hard to find someone you trust, it isn’t impossible. Take your time conducting interviews and don’t settle.
Ben Mizes is the Co-Founder and CEO at Clever Real Estate, the nation’s leading real estate education platform for home buyers, sellers, and investors.