Investors looking for a new portfolio diversification method should consider self-storage. Making storage units part of your investment portfolio is a wise move, thanks partly to the tax advantages, low startup costs, low operating costs, low maintenance, and much more. Everyone needs more storage space, and there’s value in offering it. We’ll cover it all, from the basics to the outlook of the self-storage industry.
Understanding Self-Storage Investments
The self-storage industry is a business model in which property owners rent short-term storage units to tenants. The tenants pay a monthly fee or rent for the space, where they can store any furniture or belongings they wish (as long as they aren’t dangerous).
Individuals may generate a return on their money by investing in storage units and collecting rent from the tenants. Anyone from sole proprietors to owners of medium-sized firms might be among your clientele.
You can become either an active investor who helps run the firm or a passive investor who has no say in day-to-day operations.
There may be both short-term and long-term tenants interested in the storage unit. Rent is paid to you whether the renter uses the storage space.
Why Is Investing in Self-Storage Popular?
In recent years, investing in self-storage has gained popularity because many consider it a lucrative opportunity and an excellent way to earn passive income. There are now 4,536 self-storage facilities under construction, and the industry is booming. It’s a perfect way to diversify your holdings and bring in extra cash monthly. Nonetheless, many consumers need more knowledge to invest in storage units properly.
This sector and asset class are unlike others regarding security, risk, and cash flow. Learning a self-storage investing strategy to capitalize on this promising market would be best.
Is Self-Storage A Good Investment?
Self-storage provides investors with numerous opportunities for obtaining financial returns. First, this product can generate good returns in many ways. Storage buildings are generally lower in price than residential or commercial buildings so more money will be available.
How Profitable is The Self-Storage Business?
Self-storage businesses make between $365,000 and $800,000. The amount of money you earn depends largely on several variables, such as the location of your business, if it requires borrowing, and the range of products and services available.
In the self-storage industry, profit margins can vary widely, but they are generally considered favorable compared to many other sectors. A typical self-storage facility can expect to see profit margins ranging from 25% to 41%, depending on various influencing factors such as location, operational efficiency, and the range of services offered. Facilities located in high-demand areas with higher rental rates and efficient operational practices tend to enjoy higher profit margins. Additionally, diversifying services, such as offering climate-controlled units and enhanced security features, can also contribute to increased profitability. It’s essential for prospective owners to conduct thorough market research and cost analysis to optimize their business model for the highest possible profit margins.
Self-Storage Investment Strategies
Here are four common approaches you can take to invest in self-storage. Compare and contrast the options until you find the best fit.
Investing through REITs
Real Estate Investment Trusts (REITs) are a popular avenue, especially for those looking to start with a smaller initial investment. REITs own, operate, and manage self-storage facilities, generating revenue through rent, management fees, and additional channels. Investors in REITs can enjoy high returns, passive involvement, and a share in the growing demand for self-storage.
Benefits
- High return rates and profit margins.
- Minimal involvement required.
- Low initial investment.
Risks
- Potential oversupply and competition.
- Limited control over business operations.
Purchasing an Existing Self-Storage Facility
For those with substantial financial resources, buying an existing facility can be a direct route to revenue. This approach allows active involvement and full control over business decisions. Experts recommend acquiring underutilized properties for enhancement and quick market entry.
Benefits
- Active involvement and control.
- Immediate revenue generation.
- No sharing of profits with shareholders.
Risks
- Higher upfront costs.
- Potential underestimation of maintenance requirements.
- Importance of understanding market demand.
Constructing a New Self-Storage Facility
Building a new facility offers customization and higher rents due to increased desirability. However, it involves significant time, effort, and market research to ensure success. Achieving optimal occupancy and market value may take several years.
Benefits
- Customization of design and layout.
- Higher rents for new buildings.
- Full control over construction.
Risks
- Greater market risk compared to acquisition.
- Time-consuming construction process.
- Need for professional consultation to avoid flaws.
Joining a Self-Storage Investment Group
Investment syndication involves a group of investors pooling resources to invest in self-storage units. The syndicate sponsor manages the operations, and profits are distributed according to stakes. This strategy is suitable for accredited or sophisticated investors seeking passive investment.
Benefits
- Higher returns compared to REITs.
- Risk-sharing among investors.
- Tax benefits for passive investors.
Risks
- Limited availability of funds.
- Obligation to commit capital for the investment duration.
- Potential risk of fraud due to lack of due diligence.
Spotlight: Arabella Real Estate Fund
Amidst these strategies, the Arabella Real Estate Fund emerges as a compelling option, offering a diversified portfolio in self-storage and other real estate sectors. With expert vetting, strategic asset allocation, and a focus on high-growth markets, Arabella aims to maximize returns while mitigating risks for its investors.
Why Consider Arabella?
- Diversified Portfolio: Arabella’s fund encompasses a range of assets, including self-storage, ensuring a balanced investment approach.
- Strategic Allocation: The fund targets high-growth markets, optimizing asset allocation for enhanced returns.
- Expert Vetting: Arabella prioritizes thoroughly vetted and entitled opportunities, safeguarding investor interests.
Is Self-Storage a Good Investment In 2024?
In 2024, choosing to invest in self-storage presents an attractive option. The self-storage industry continues to flourish, with the self-storage market showing an estimated CAGR of 35% by 2025, despite economic uncertainties. This growth is fueled by high demand for storage spaces, making self-storage investing a viable avenue for real estate investors seeking steady cash flow and high profit margins.
What Are The Benefits Of Investing In Self-Storage?
The self-storage industry is booming, making it a good bet for investors. Here are some reasons it’s a good idea to put your money into a self-storage company.
Low Risk Factors
There are always dangers in each firm that might reduce your profits. For a more reliable return, select investments with lower levels of risk. The commercial and operational risks are minimal since storage units have few moving parts. Profit margins go up, and short-term variations in revenue are easier to handle when operational expenses are low.
You may also put a lien on a tenant’s property if they fail to pay rent or violate other policies. If a renter fails to pay rent, you can sell their belongings at auction.
The need for storage units is also not cyclical. If your storage facility is conveniently located and provides superior service, you will never have trouble filling your units. These considerations mitigate the investment’s danger and make it a practical choice.
High Demand
There has been an uptick in the need for storage units. Everyone, from college kids to owners of multi- and one-location enterprises, needs some extra space. When there’s a lot of demand for self-storage, it’s possible to run at total capacity, bringing in more money from renters. If you can increase your rental income, you can maximize your return on investment.
Attractive additions, such as loading and unloading equipment or vending machines and expanding tenant capacity, provide investors with additional revenue streams from a storage facility. This guarantees investors a constant flow of money.
Economic Stability
Storage units have survived economic downturns and even a pandemic (COVID-19) with remarkable success. It’s undeniably one of the world’s most successful companies right now. Investors should expect a healthy return on their money because of the minimal operating expenses and respectable profit margins.
Due to its long track record of economic stability, this sector is a great option for diversifying their portfolios without incurring significant risk.
Ease of Maintenance
The systems behind self-storage facilities are straightforward to keep up with. Once a storage facility is constructed, it often only needs regular upgrades to the underlying infrastructure. You need a safe location with enough lighting, a security system, and fire extinguishing tools.
Using self-storage management software, a storage facility may streamline its processes and reduce the number of employees needed to run the business. Automation has helped these institutions save money and time. The following are only some of the tasks that can be automated by powerful management software.
- Management of profiles
- Administration of Billing and Invoices
- Reserve a self-storage unit.
- Changes of occupancy
- Due payments result in a lockout of the unit.
What Are The Risks Of Investing In Storage Units?
There is no such thing as a safe option. You’ll be able to learn about the significant threats to your self-storage investment to prepare for them. When investing in this sector, you should know the following potential dangers.
Marketing Positioning Difficulties
Self-storage may be successful, but only if your company is set up correctly to exploit the industry’s advantages. Identifying the best market for your storage facility and successfully positioning it there might be challenging.
Market positioning can be difficult because of the following reasons:
- Finding Alternatives
- Knowing what the market wants
- Creating a balanced portfolio of dwellings
- Having the features that tenants are looking for
- Locating an appropriate property in a highly trafficked area
- Results from the storage facility may fall short of expectations if you do not carefully consider these elements and implement the appropriate market positioning plan.
Need for Proactive Management
The operation of a self-storage facility requires more involvement than is often believed. As was previously noted, even if state-of-the-art self-storage management software is used and most tasks are automated, human oversight of some aspects of the company is still required.
Regularly updating the hardware and software used for security, administration, and other functions is essential. You can only run your firm with a detailed strategy and a capable staff.
Threat of Overproduction
Self-storage investments have drawn increasing capital since storage facilities are simple to construct and keep up. The possibility of storage facilities being overcrowded results from this. Customers may be less interested in renting from you if more storage facilities are available.
It’s possible that you will need more time to meet your expansion targets. Considering the existing and prospective competitors in your market is essential and challenging.
Low Stability of Tenancies
Storage facilities often offer monthly unit rentals. This implies a constant ebb and flow of renters in and out of the apartments. The company’s strong occupancy rate depends on its practical self-storage marketing approach. Rent reductions are another method for retaining long-term renters.
Can I Invest In Self-Storage?
The storage unit market is open to investors of various financial standings. For the sake of argument, let’s say that you’re interested in trying out the self-storage market with a modest investment. Investing in self-storage facilities might be a good option. Therefore, self-storage investments may be made either actively (via facility ownership) or passively (through shares in a business), depending on the investor’s preference and risk tolerance.
Future Outlooks on the Self-Storage Industry
According to an Aug. 2023 report by Cushman & Wakefield, the self-storage market has slowed somewhat but remains a highly performing sector of the investment scene. Self-storage investing transaction volume decreased by more than 50 percent year-over-year, but this shouldn’t alarm investors, as volume has remained above pre-pandemic levels.
Arabella Real Estate Fund
Arabella Capital stands as a distinguished real estate investment and development firm, specializing in a diverse array of assets including build-to-rent communities, self-storage facilities, and vacation rentals across the flourishing Southeast region. Our meticulously curated portfolio features prime land poised for residential development, innovative single-family build-to-rent communities, multifamily properties, state-of-the-art self-storage facilities, independent living communities, and exclusive short-term rental assets.
At Arabella Capital, we are committed to unlocking unparalleled investment opportunities, aiming to yield substantial returns by leveraging our expertise in identifying and developing high-potential real estate assets. Our strategic focus on diverse and resilient property types positions us, and our investors, for sustained success, even in fluctuating market conditions.
Don’t miss the opportunity to be part of our journey in shaping the future of real estate investment. Explore the Fund and discover the potential returns and unique advantages that Arabella Capital offers. Join us in building lasting value and transforming the real estate landscape.
