You may have heard that PassiveInvesting.com has added Self-Storage as an asset class in our investment portfolio. Since this space as an investment may be new to you, I thought I would take some time in this article to explain some pros and cons related to self-storage and how it compares to multifamily as an investment.
Pros of Self-Storage:
Lower Expense Ratio: The expense ratio for a self-storage facility is roughly 35% to 40%. This means that about $0.35 to $0.40 is used to pay expenses for every dollar of revenue. The remaining $0.60+ is the Net Operating Income (NOI). This ratio is considerably lower than other types of real estate, including multifamily. This is the result of not having leaky toilets, broken fitness machines, or troublesome residents as you may see in multifamily. As a result, self-storage has fewer unexpected expenses and has almost no turn cost.
Month-to-Month: When someone rents a storage unit, they sign a month-to-month rental agreement instead of a long-term lease, as you would see in multifamily. This can be a positive because if you see an increase in pricing in your market, you do not need to wait 12 months for a lease to expire to raise the rents. You can do so 30 days after notifying the tenant.
No Evictions: An eviction can be lengthy and costly, especially during COVID-19 where eviction moratoriums have ballooned. Self-storage operators do not foreclose or evict customers. They simply lock out nonpaying tenants and auction the contents of the unit.
Higher Cap Rates: Self-storage has not yet seen the competition that multifamily has and therefore the cap rates have remained much higher than multifamily. On average, self-storage tends to be a point higher on the cap rate scale than multifamily.
Cons of Self-Storage:
Longer Stabilization of Value-Add: Because self-storage is not as much of a needs-based industry as is multifamily, it tends to take longer to stabilize. For example, if I develop a new multifamily neighborhood, it may take me 8 to 12 months to be stabilized (over 90% occupied). Self-storage takes a considerably longer time. A lease up may take anywhere from 18 to 24 months to be fully stabilized. This is because everyone needs a home, but not everyone needs a storage unit.
Lower Actual NOI: As I mentioned in the pros section, self-storage has a lower cost ratio equaling about 35% or less. However, the total overall rent ceiling is much lower than you may be used to seeing in multifamily, even though multifamily has an expense ratio of around 50% on C and B class assets. As an example, an average storage rent would be $100.00 with an expense ratio of 35% totaling an NOI of $65.00. Whereas the average rents in a typical multifamily deal would be around $1,300.00 per unit with an expense ratio of 50% totaling an NOI of $650.00. However, this is balanced out by the lower cost to entry and the higher cap rate that self-storage enjoys.
I want to introduce you to Kris Bennett who has joined the PassiveInvesting.com team as Self-Storage Acquisitions Lead. Kris brings 14 years of real estate experience to PassiveInvesting.com, spanning self-storage, residential investment and brokerage. Read his full bio on passiveinvesting.com.
Kris was recently interviewed by independent freelance journalist Hilary Daninhirsch for Commercial Property Executive. Here is some of what Kris had to say about the ins and outs of the self-storage industry:
Daninhirsch: What are some facts and figures regarding the self-storage industry?
Bennett: The U.S. is by far the country that has the most self-storage facilities per capita. There is a debate as to what constitutes a self-storage facility, but let’s say there are 40,000 to 50,000 facilities that are purely self-storage. That is more square footage than all the McDonald’s plus Starbucks combined. On average, there are seven to eight feet of self-storage square footage that exists per person in the U.S.
A lot of self-storage is still owned by mom and pop (companies). There is more opportunity here versus multifamily, where about 75 percent are owned by the sophisticated investor. While in storage, 25 percent are owned by the sophisticated investor.
The rule of thumb is that about half the tenant base will stay 12 months or more, the other half, about 30 to 60 days. In that sense, storage is kind of a retail business. People come in and out and you have to have good customer service and treat people well.
Daninhirsch: Is it easier to develop than multifamily?
Bennett: Yes, it’s easier to develop because it’s a metal building on a concrete slab. There isn’t as much to build compared to a three-story apartment (community) across 10 acres. The developer is more concerned with the width of the drive aisles and if there are enough bollards to protect the buildings than if the clubhouse is painted pretty, the furniture matches, or if the gym has the right equipment. Some firms have pivoted from multifamily to self-storage. Several cities are pushing back on self-storage development by implementing moratoriums. Miami being the latest. It seems we are our own worst enemy.
Daninhirsch: It’s been said that this is a recession-resistant business, do you agree? Why or why not?
Bennett: I do, looking at history. If you look back to 2008-2009, storage was the only asset class that showed a positive return, so that is why they called it recession-resistant. When the SBA (Small Business Administration) started lending in self-storage via SBA loans around 2010-11, the government began to view self-storage as an actual business like they would view any other business, which is really interesting, because there is no asset class in real estate you can do that with.
It’s worth mentioning that we are not slowing down on the multifamily investment side of our business. We will continue to expand our multifamily business by bringing you profitable investments that will help you secure your family’s financial future. Having said that, we are extremely excited to present you with Self-Storage, another lucrative investment opportunity.