It’s common for new self-storage investors to look for deals close to home. But what are the pros and cons of this strategy? What path has PassiveInvesting.com taken, and why? In this article, I will answer these questions and more.
Pros of staying close to home
Market Expertise: If an investor buys self-storage deals located only in their home market, they will develop a sense for the best deals and eliminate the bad ones. When deals hit the market, they can quickly make an offer on the ones that make the most sense.
Self-manage: An investor who buys close to home can self-manage their own properties if they choose. Some owners like the idea of control and the ability to visit every property in a day, so this style of investing may suit them.
Higher resell value: It takes a lot of work to aggregate a portfolio of self-storage facilities in one market. A savvy buyer will reward the seller of a concentrated portfolio of properties because it’s easier to buy several properties at one time than it is to buy them one by one.
Cons of staying close to home
Limited deal flow: Deal flow can be sparse if an investor limits their search to a select market. For example, between 2016 and 2020, an average of 16 deals per year sold in the Charlotte market, or roughly 3.5% of the 450 existing self-storage facilities. If an investor needs to look at one hundred deals to close on one, knowing they won’t win every deal, then there are barely enough deals in Charlotte to close one per year!
Competition: Well-capitalized buyers love primary or secondary markets. If an investor lives in one of those markets, they will face an abundance of competition for a select number of deals. If an investor lives in a tertiary market, most buyers will probably be local; however, that doesn’t limit the number of offers a storage listing will receive. If one investor thinks a deal looks good, ten other investors probably do as well!
Pros of multiple markets
Deal Flow: One of the best reasons to look outside an investor’s home market is deal flow. If an investor expects to close at least one deal per year in their home market, they should be able to close two deals in two separate markets, three in three, and so on. In other words, by expanding an investor’s search to other markets they will increase their probability of closing more deals, provided they don’t become overwhelmed with too much deal flow.
Better opportunities: If an investor expands their search to other markets, there will be more opportunities to buy higher-quality deals. Instead of owning one exceptional deal and three others that are so-so, an investor can own four exceptional deals.
Cons of multiple markets
Takes longer to qualify deals: An investor looking for deals in multiple markets typically won’t have first-hand knowledge of those markets. They will have to rely on data pieced together from various resources (Census data, RadiusPlus.com, Google Maps, etc.) and will probably have to pay for some of that data. It will take that investor longer to get comfortable with a new market.
More qualified competitors: An investor looking for deals in multiple markets will face more competition from a diverse set of top operators. Brokers will typically control the market for deals larger than 30K square feet, so an investor must be prepared to prove they are qualified to buy and provide certainty of closing.
There are more pros and cons to consider, like capital constraints, debt options, size of deals, size of the team, and so on. What makes sense for one investor won’t make sense for another. There is no one-size-fits-all. Plenty of investors have found success in one market or many. Now let’s cover PassiveInvesting.com’s approach…
Why PassiveInvesting.com is looking in multiple markets
The answer is simple: deal flow and better-quality deals. Our goal is to close on 15 to 20 quality deals in the next 12 months. To do that, we need to be in multiple markets to increase our deal flow and closing ratio. We can target larger properties that provide us with better debt terms, which allows us to be more competitive with our offers.
As for management, we’ve partnered with an experienced third-party management company so that we can quickly grow our portfolio. At this stage of growth, we don’t want to dilute our focus by searching for and closing the best deals and manage our properties in-house.
We also know that self-storage is a three-mile game. This means deals will succeed based on their location within a submarket, not the entire market. As long as the submarket is strong, usually within a three- to five-mile radius around the property, the facility will perform well. This means we’re comfortable looking at deals outside of our multifamily market criteria, which provides us with more opportunities to make offers.
Conclusion
We’ve covered the pros and cons of looking for deals close to home versus multiple markets, and why PassiveInvesting.com has chosen the latter. I hope this helps you to understand why we feel this strategy makes the best sense, not only for us but for you as an investor.
