Storing Up Profits

Capitalize on America's Obsession with STUFF by Investing in Self-Storage

Paul Moore

• Editore: BiggerPockets
• Anno: 2021
• ISBN:
  9781947200364
• Argomento: Business
• Categoria: Real Estate

Are you tired of overpaying for single and multifamily properties in an overheated market? Investing in self-storage is an overlooked alternative that can accelerate your income and compound your wealth!

With the popularity of real estate investing causing an unprecedented stampede to the housing market, smart investors are now turning to self-storage. There are more than 54, 000 self-storage facilities in the United States—equivalent to the total number of Starbucks, McDonald's, and Subway restaurants combined—and a large percentage of these can be profitably upgraded to operate or sell.

In this comprehensive overview, self-storage fund manager Paul Moore will teach you how to profitably acquire, operate, and sell storage unit facilities of all sizes. Get in front of your competition while you can—and build a multigenerational income machine!

Inside you'll learn:

• How to make the jump from residential or multifamily investing to commercial self-storage
• The little-known strategy used by operators to generate over 40 percent annual returns
• Ten surprising tax benefits for commercial self-storage investors—and why many investors pay zero taxes
• How to locate a mom-and-pop self-storage asset in the path of growth
• How to succeed in self-storage without quitting your day job or abandoning your retirement
• Four powerful strategies to build a self-storage empire
• And much more!

SECTION IWHY SELF-STORAGE?

CHAPTER 1THE BASICS OF SELF-STORAGE

When I originally heard about self-storage, it sounded awfully boring. Where are the value-adds? We’re talking about four pieces of sheet metal, some rivets, a door, and a slab of concrete. No countertops to upgrade. No cabinets. No carpet or hardwoods. Multifamily just seemed a lot more exciting. Perhaps that’s why multifamily podcasts and books and training programs abound, while those for self-storage are rare.

I was surprised to learn that self-storage has a wide variety of value-add opportunities. As I will demonstrate later, there may be more value-add opportunities in self-storage than in most multifamily properties currently. This trend may continue for years to come due to the fractional nature of self-storage ownership in the United States versus higher corporate ownership in the more mature and consolidated multifamily realm.

Check out the same-property net operating income (NOI) growth in these various commercial asset classes. Manufactured housing and self-storage lead the pack!

Source: SNI Financial “Indexed Same Store NOI Growth Publicly Traded REITs.” Assumes $100 starting point

Self-storage has intrinsically powerful drivers behind its income and equity growth. We’ll review many of these in the coming chapters, but one of the reasons for this sector’s recent surge in popularity among investors is overflow. There is overflow from other asset classes, such as single-family and multifamily. As of now, multifamily is overheated and pricing has reached such a boiling point that investors of all sizes are looking for value elsewhere.

This can be good news for self-storage syndicators and investors, but it can also mean that this sector is becoming overcrowded too. As we’ll see, the fragmented nature of self-storage ownership plays a balancing role here.

Why Is Self-Storage Hot?

Self-storage shares several characteristics with multifamily. For instance, multifamily economics are based on commercial real estate valuation principles. Later, you’ll see that this is a powerful driver toward your investing success and perhaps the reason that most of the world’s wealthiest invest in commercial real estate. (Hopefully you’re about to join them.)

Like self-storage, multifamily has powerful demographic drivers that are predictable for decades to come. Baby boomers, millennials, immigrants, and Gen Z tenants are all flocking to multifamily. Additionally, both self-storage and multifamily performed well during the last downturn, with very few foreclosures. Government faux pas, complicit lenders, and irresponsible buyers starting in the mid-1990s drove an unnatural homeownership boom that burst in the mid-to-late 2000s. Multifamily has been on the rise ever since.

Unlike self-storage, though, multifamily is a sexy asset class. Apartments are a cool investment; self-storage is decidedly uncool. That made it difficult to get excited at first. But I soon learned that the value-add opportunities in self-storage actually outweigh those of multifamily. While many of the demographic drivers are the same, the tenants are far stickier (less likely to leave due to rent increases), and the market is far more fragmented. (Fragmented markets, those dominated by mom-and-pop operators, provide some of the best opportunities in the real estate world.) Plus, self-storage is easier and less costly to manage. All these qualities make self-storage much more exciting than multifamily at this moment, and frankly, I believe it’s a better opportunity.

Self-storage, like multifamily, can be overheated. But this is true only in certain locations rather than throughout the entire market. The fragmented nature of this asset class creates opportunities that simply don’t exist in the multifamily and single-family space right now. I’ll explore these in detail later.

Self-Storage by the Numbers

1. According to the Self Storage Association (SSA), the self-storage industry has been one of the fastest-growing sectors of the U.S. commercial real estate industry for more than 40 years.¹
2. Total rentable U.S. self-storage space is approximated to be over 2.3 billion square feet. This represents more than 78 square miles of rentable self-storage space—three times the size of Manhattan—and a total storage capacity of 7.3 square feet for every person in the United States.²
3. The SSA breaks down the distribution of self-storage facilities as 36 percent urban, 51 percent suburban, and 12 percent rural.³
4. Approximate national average monthly rental rates are $1.25 per square foot (non-climate-controlled) and $1.60 per square foot (climate-controlled) for a 10 x 10 unit.⁴
5. The national average occupancy rate for self-storage facilities is 92 percent as of 2018, according to Neighbor.com.⁵
6. The 2020 Self Storage Demand Study estimates that 10.6 percent of U.S. households rent a self-storage unit.⁶
7. The SSA puts the average size of a “primary” U.S. self-storage facility (a storage facility that is the main source of revenue for a business) at about 57,000 square feet, and the average facility size is 546 units.⁷
8. Facilities offering boat and/or RV storage total 18.7 percent; 31 percent offer truck rentals.⁸
9. The top six companies (U-Haul and five real estate investment trusts) own about 12 percent of all self-storage facilities, according to the SSA.⁹ That amounts to about 31 percent of all rentable self-storage square footage.¹⁰
10. Neighbor.com estimates that about 17 percent of all self-storage renters will rent for less than three months; 20 percent for three to six months; 17 percent for seven to twelve months; 21 percent for one to two years; and 15 percent for three to five years. The average rental duration is 14 months.¹¹
11. Approximately 72 percent of self-storage tenants live in a single-family home and 26 percent live in an apartment or condo, according to the SSA.¹²
12. Approximately 68 percent of tenants have a garage but still rent a unit, 53 percent have an attic in their home, and 40 percent have a basement.¹³
13. The income of 61 percent of self-storage tenants is less than $75,000 annually; 44 percent have an income of under $50,000.¹⁴
14. Of self-storage tenants, around 4 percent are military personnel.¹⁵
15. About 84 percent of all U.S. counties have at least one “primary” self-storage facility.¹⁶

Self-Storage: A Brief History

According to Neighbor.com, ancient China is the birthplace of self-storage, though there is no hard evidence to back up this claim. Other stories tell of enterprising British explorers who stored personal contents at a bank while they sailed away. When the banks filled up, their items were brought to a warehouse.¹⁷ This is all speculation, so take this with a grain of salt. But it’s not hard to believe that for as long as humans have been on the move, they’ve needed places to hold their stuff.

When it comes to the history of self-storage in America, the facts are clearer. Brothers Martin and John Bekins of Omaha Nebraska, founded the Bekins Van and Storage Co. in the 1890s. The business entailed three horse-drawn vans, aka buggies. They later expanded to Los Angeles, California, and eventually built the city’s first reinforced steel and concrete warehouse building. They expanded across southern California in the first half of the 20th century.

According to SpareFoot.com, the first facility with garage doors was constructed in 1964 by Russ Williams and Bob Munn in Odessa, Texas, for the oil industry. I’m not sure about their marketing acumen, since they succinctly named their facility A-1 U-Store-It U-Lock-It U-Carry-The-Key. The facility was created for oil workers to store their tools and supplies. Other companies followed their model, and an industry was born.¹⁸

It’s interesting to speculate about the change in mindset of Americans from the Great Depression to the recent Great Recession and how self-storage played into that change. I’ve seen photos of furniture—chests of drawers, couches, bed frames—left along the road during the Depression, perhaps abandoned by people making the brutal trip west to California in search of work on farms.

I don’t recall seeing any photos like that from the recent recession. Do you? These days, I can’t imagine most Americans ditching their stuff, especially with the opportunity to utilize self-storage at a relatively low cost (compared to a mortgage or the rent for an apartment). Perhaps that’s one of the reasons self-storage weathered the last recession relatively well compared to other asset classes.

Who’s Renting Self-Storage?

As you can see in the following graphic, almost 50 percent of the customers in this 2020 study are long-term residential tenants. The second-largest group is short-term residential tenants, followed by commercial operators, and a few other segments.

Source: www.ibisworld.com

Why Are People Renting Self-Storage?

Industry experts often refere...