Self-Storage: Achieving Value-Add Returns, Without Significant Cap Ex
If you have read any of my previous articles, you know that providing your portfolio with downside protection is the most critical part of investing in real estate. The truth is, if you can invest in recession-resistant assets, you know your investment will perform in all stages of the economic cycle. This is especially true of investing in self-storage, one of the leading asset classes of the last decade.
Why is self-storage a great investment?
There is significant demand for self-storage even during economic downturns. During the 2008-2010 recession, a massive number of individuals needed to downgrade to smaller living quarters but didn’t want to sell off their possessions. This resulted in a high demand for self-storage even though many other areas of the economy were struggling. This trend is typical of previous recessions, as the majority of self-storage tenants are going through some kind of transition, often due to foreclosures, layoffs, or kids from college moving back home, all of which are common during economic downturns.
Self-storage customers are not as price sensitive as tenants in typical investment properties. Rental rates for self-storage facilities are relatively inexpensive from a gross dollars perspective, especially when compared to housing rental rates. Because of this, it is possible to raise rents much more aggressively, compared to other real estate investments. For example, even though a typical self-storage operator might raise rents by 6% per year, this increase may only result in monthly rates increasing from $150 to $159. Very few tenants will go through the trouble of renting a rental truck, packing up their stuff, and moving to another self-storage facility over such a negligible increase. For investors, this can result in very high cash-on-cash returns, especially when implemented over the long-term.
There is a great misconception among both potential investors and existing self-storage owners that these facilities are a very hands-off asset class. The truth is that the top-tier operators already have systems in place for the following aspects of the business:
- Online Marketing/ Sales – Website management, S.E.O., pay-per-click
- Leveraging pre-existing relationships with truck rental companies, universities, and military bases
- Implementing extensive management protocols which have been optimized for decades through hundreds of properties
- Branded merchandise sales
- Utilizing secret shoppers to validate market supply/demand for the product
While it is true that self-storage can still be profitable without optimizing all of these strategies, the benefits of implementing them can be extremely lucrative for investors.
Because of the misconception of the asset class, there are a significant number of mismanaged properties whose owners fail to optimize efficiencies, especially ancillary income. Independent owners control 77% of the self-storage properties in the U.S. Many of these “mom and pop” owners do not maximize their property’s income potential via merchandise sales, frequent rental increases, partnerships with local businesses, online marketing, and relationships with moving companies. All of these components can create a tremendous value-add opportunity, with very little capital expenditure.
Monthly lease renewals allow for faster rental increases. This is especially beneficial if a property has been significantly below market rent prior to purchase. Within 30 days of acquisition, new management can aggressively raise rents due to the “sticky” nature of the tenant base.
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