Self-storage properties aren’t as glamorous as twenty-store office buildings or power centers. But if you’re an investor interested in a property type that holds its value well and recovers faster than nearly all other assets, then you might want to take a second look at this often forgotten commercial real estate sector.
Overall, self-storage properties are a stable investment. With lower operating costs and comparatively high returns, investors don’t need to own hundreds of units in order to make a healthy profit.
With a break-even occupancy rate of just 40%-50% and an increase in capital flow from the private sector, it’s no wonder self-storage properties had the highest annual returns over 5,10, and 15-year averages when compared against five other property types over a 17-year period.
But beware- investing in self-storage may seem like it’s foolproof, still, there are several factors you need to know when analyzing whether or not a particular facility is likely to be profitable.
Which Factors To Consider When Determining The Profit Potential?
1. Who’s your target market, and why do they need to store their belongings?
One of the first steps towards evaluating the potential profitability of a self-storage facility is to have a good understanding of your target market.
And while it may seem like everyone has stuff they need to store, the reality is that not everyone will be willing to pay for it. Get detailed data about your prospect’s age, income, business occupation, and hobbies, and then use that information to determine what types of life events your prospect is likely to experience that will trigger a need for storage.
Here are some specific questions you should ask yourself regarding your prospects:
- How old are they?
- What gender are they?
- What type of property do they presently live in (apartment, house, condo)
- Do they have children?
- What is their occupation?
- What is their yearly income?
- How much disposable income do they have?
- What hobbies do they have (boating, camping, etc)
- What do they worry about when it comes to storing their belongings (theft, easy access, being safe when they retrieve their items, etc)
- What sorts of life transitions might they be experiencing (divorce, retirement, new job, etc)
2. What is the competition in the area like?
Storage facilities are a long way away from big drafty boxes secured with a simple padlock.
Self-storage facilities are quite sophisticated nowadays, and range from temperature-controlled units to highly secured spaces designed for holding expensive antiques or artwork, to extra-wide units built to accommodate an RV or a boat.
Don’t just examine the type of storage offered by the property you’re interested in; examine all the self-storage facilities in within 50 miles and see if there are some commonalities that can either differentiate your facility or cater to a unique audience.
Examining the demographics of the surrounding neighborhood as well as real estate trends can also give you some clues you can use to estimate profitability.
- Examine your competitor’s marketing materials, check their website, newspaper advertisements, online advertisements, and their brochures to discover:
1) Who their prospect is (pictures are an excellent clue: if ads feature a 30-something couple then that’s a clue about the age of their average prospect)
2) What benefits they ’re touting to their prospects (if all they talk about is security, that could mean that this is the number one fear of your prospect. It could also provide an opportunity for you if you discover through your research that your prospect is worried about something else entirely)
3) What “extras” their offering in order to lure new customers
4) Prices (this will help you determine how much your prospects would be willing to pay for a similar service)
Compare the data you get on your individual prospect to the information you’ve gleaned from a nearby competitor. If your competitor is doing very well, then you’ll know the minimum standards your prospects expect.
You can also use this information to help you craft a unique offer and message to your prospects so that your self-storage facility can stand out from the others in your area.
- Determine the occupancy rate of the facility
Normally the vacancy rate of a property must be full or near-to-full capacity in order to maximize a property’s profit potential.
Self-storage facilities, on the other hand, are able to profit even when occupancy is little more than half the full ratio. For example, a facility might be only 70% occupied, but management might still be able to increase rent on the occupied units so that gross income is closer to 80% income. Since tenants rent on a month-to-month basis and don’t sign leases, this procedure is completely legal.
- Check whether an additional profit can be made from product sales or other services
It’s common for owners to offer products such as boxes or other items necessary for storing belongings. In addition to cell towers, tenant insurance sales, and billboards, some self–storage facility owners have expanded to offering trucks for rent and towing accessories (for boats and RV’s).
These additional streams of income may make a significant difference in the facility’s bottom line.
- Consider the size of the facility
Even if a self-storage facility is in excellent shape, investors should consider whether it’s actually large enough to be profitable. A small facility will not only have less rentable space, but the addition of a property manager may eat into your profits.
If after examining the facility you find all other factors are positive, consider using an automated kiosk instead of a person, which can save you as much as $50,000 a year.
In the same vein, you’ll also want to consider whether you’ll be able to expand the facility:
- Can you add additional units?
- What about adding different types of storage units, such as RV or boat areas?
- And will there be any objection from area residents?
The ability to expand could increase your profit potential by as much as 40%-50%, so this is an important factor to consider.
Note: You should double-check whether the facility has the proper permits and that the area is zoned for self-storage use. You should also check whether the present zoning laws will allow you to expand the facility, and get specific details on what the law will allow.
Ask what the building height and requirements are, including setbacks; what the parking space minimums are, and if there are any easements or private restrictions on the deed.
And lastly, you’ll also want to make sure that the seller doesn’t lease the land, but actually, owns it.
Not only does a lease make things more complicated, but it’s not impossible for a landowner to decide not to renew a lease, leaving you high and dry.
Self-storage properties can be a profitable investment, as long as you do your due diligence. If you’re unsure whether or not a particular facility will be profitable, you can always network with owners of facilities in other states for an opinion, or call an experienced commercial broker for advice.
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