How Self Storage Compares to Other Real Estate Investing Strategies
By Mike Wagner with The Storage Rebellion
Self storage investing is based on the same fundamentals as other REI niches. Quite simply, all we are trying to do is rent out space at a rate that exceeds (by a sufficient margin) the costs to own and operate the property. This is great news for you if you have previous experience in investing in Real Estate of any kind. You will be running the numbers just like you always have. While the similarities between self storage and say multi-family investing might make your entry into the world of storage a bit easier, the differences that we are about to discuss are what really makes self storage special.
First and foremost is the Income to Expense ratio. For those of you that might not know, the industry standard for income to expense ratios in typical multi-family investing is 50-55%. This means that for every dollar in rent you receive from an apartment rental, you should expect to spend a bit more than half of it on the daily operation of the properties. With the $0.45 to $.50 cents that you have left over, you will need to pay any debt service that you have. Anything that is left after that is your profit. In the storage world, the typical Income to Expense ratio is 30-35%. This means that you get to keep a full 20% more of your money. It gets better too. Despite having lower expenses, the income that storage generates is often equal to that apartments generate. I realize that this sounds crazy at first but its true for most markets. As an example, my storage facility in Western NY, generates on average $0.66 cents per square foot per month. Smaller units get far more than this (up to $1.10 per square foot per month) and larger units somewhat less ($0.50 cents per square foot per month) but on average, it comes out to $0.66 per square foot per month. Let's compare this to what the average apartments rent for in this same market. A one-thousand square foot, 2 Bedroom/1 bathroom apartment rents for $650-$700 per month. Broken down to the square foot, that's $0.65-$0.70 cents per square foot per month, not all that different from what we get for our simple little garages! One more variable to consider is the cost to build each of these two offerings. Storage can typically be built (exclusive of land) for around $30-35 per square foot. Apartments on the other hand are going to cost at least 3 times that to build from the ground up.
||$0.66 per square foot per month
||$0.70 per square foot per month
||$0.44 per square foot per month
||$0.33 per square foot per month.
|Cost to Build
||$35 per square foot
||$100 per square foot or more
|Net Operating Income = Income – Operating Expenses
These financial advantages are the primary reason that loans secured by self storage facilities default far less often than any other loan product on the planet. In other words, you are statistically more likely to lose the roof over your head to foreclosure than you are to lose a storage facility to foreclosure. Another key benefit that storage offers, is that it is relatively resistant to the cyclical ups and down of the economy. When the economy is good, Americans tend to buy a bunch of stuff. They then need a place to put that stuff (or more likely the perfectly good old stuff that they just upgraded). When the economy falters, on the other hand, people lose their houses to foreclosure or downsize to avoid such a fate. And while they are willing to downsize their home, they sure as heck aren't going to toss out Tommy's first bowling trophy. Since there's no room in their new smaller digs, they get a storage unit.
As much as I would like to pretend that the facts above mean making money in storage is a foregone conclusion, that simply isn't the case. Running a successful storage investing operation is a business and deserves to be treated like one. This is not mailbox money. It takes work (at least initially) and then a degree of oversight to make sure you maximize your profitability. Gone are the days where you can throw up a couple row buildings of garages in a corn field and make money. The industry is far too sophisticated today to allow that. For many years (think 1980's) storage was just coming onto the scene and it was seen by many as the ugly step child of commercial real estate. As demand grew and the industry matured over the subsequent decades, storage has emerged as one of the (and often the single most) profitable sector of commercial real estate.
These profits aren't automatic though. You have to be willing to learn the industry and apply what you learn. As an example, storage customers are largely impulse customers meaning when the need for storage arises, it arises quickly. And they, by in large, want that need met instantly. As such, when your phone rings, you or someone you delegate to (more on that later) have to be available to meet their need. If you aren't, they won't still need you by the time you get back to them. This is another big difference between storage and apartments. Think about it, if you post an ad to fill a vacant apartment and miss a call, its not likely that that potential renter will have found and moved into an apartment by the time you call them back the next day. In the storage world though, that potential renter could have very likely found someone to meet their need in the hours between when they call you and when you finally get back to them. This is a challenge for storage owners but also an opportunity for the savvy investor.
Personally, I spend about 5-10 hours per week running 3 storage facilities that total roughly 76,000 square feet of storage and generate $480,000 of annual revenue. And I would be remiss if I didn't give a shout out to Easy Storage Solutions for providing me with the infrastructure that allows me to be so efficient with my time. If you'd like to dive a bit deeper into the world of self storage you can check out www.thestoragerebellion.com or our facebook page https://www.facebook.com/StorageRebellion/ . Both have a bunch of free educational content. I hope you enjoy it and wish you all the best on your Journey into the world of Self Storage.