How to Invest in SElf Storage?

For many who are reading this magazine for the first time, this is the question you are asking. You have already discovered that self-storage is one of the best investments available today. So you ask, just how do I join the club?


The development project offers the most return for the self-storage investor. Commensurate with that return is the risk. The risks of self-storage investing have risen dramatically over the last few years. Recently, steel costs have extracted much of the return from already “thin” deals, pushing projects off the table and into an indefinite holding pattern. The risk in steel has far-reaching effects. Not only in the metal buildings and the door and hallway systems, but also affecting masonry (concrete/brick/cement block) projects by the increase in (couldn’t read the word here?) and structural steel costs. Beyond the structure, steel commodity markets also have driven the cost of cable and wire to new levels.

The largest risk for a development project is not the sticks and bricks (steel) or any building material. The risk is in the location. Is it the right site? The right market? A correct unit mix? The right percent of climate control? Do you have the proper amenities? Are you priced right for the location and the market? Of course, your professionally prepared feasibility study answered these questions.

There are several entry points to the industry in development.

Raw Land: Requiring 100% development

Merchant Developed: Zoning is obtained but may require (couldn’t read word here?) and permitting.

Merchant Built: Sold at certificate of occupancy, the construction risks are mitigated, but the developer/owner/investor still bears the risk of lease-op (the greater of the two)

At Stabilized Occupancy: This is the safest of all development projects and commensurately, the most expensive for the developer. A sale at this point has the most profit, but also has endured the trials and tribulations associated with “bringing the project home.”

In summary, investors can pick their level of comfort and risk. There are fewer projects for sale at the safer level, as most developers who have profited or survived the lease-op to “prove”(?not sure if this said “prove”) the location are not interested in selling now that the hard work is done.

» Buying An Existing Store With Mature Cash Flows

At such time as the cash flows are seasoned, meaning that the project has reached and maintained stabilized occupancy, a project in this category has the least amount of exposure to failure. Buyers can expect to pay a premium to for these projects – IF THEY CAN FIND THEM! Very few self-storage projects are for sale relative to the total number of facilities. Contact your broker who deals in self-storage projects to see what is available. The institutional buyers (Extra Space, The Ansdell Companies) often acquire many of these projects before they are brought to the open market.

There are two groups of strong, noninstitutional buyers offering to pay premium prices for self-storage properties with mature cash flows. These are TIC and 1031 buyers. Both of these groups are paying as much as, and in some cases more than, the best institutional buyers will spend to buy cashing flowing self-storage properties. One of the most often asked questions is how many self-storage properties fail that are sold in the open market? The answer is few, very few. Only one facility comes to mind as one that “failed” and was torn down and the land redeveloped to another use. What tends to happen (historically) is that the projects do not fail in the sense that they close their doors, but they are more apt to be classified a failure because they do not meet the expectations of the investor relative to return on the investment.

The largest risk in a proven self-storage location is diminished occupancy and profit attributed to newly developed competitors. These new, state-of-the-art stores are technologically advanced to older first or second generation products, which are typically in superior locations.

Beware of acquiring projects that are in “B” locations. Many times these projects are wildly successful for their owners, but many investors are feeling the “sting” of having built in a secondary location. Do not fool yourself into thinking if you buy land at the end of a cul-de-sac because you got a great deal on the land that you have made all of the right decisions. Look further into the costs and zoning opportunities for self-storage to be purpose built or from conversions of big boy retail stores.

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