Self Storage Investments

Real Estate Investing Course

By Steve Gillman - 2005

Why invest in self storage units? They have simplified management and potentially consistent cash flow. That makes them an attractive investment. You have to shop well, however, because the return on investment is probably low in most areas now, due to competition.

Self storage units were a better investment 30 years ago when they weren't already everywhere. Now that every little town has several of these facilities, you may have to do some serious research to determine if there is still room for one more. On the other hand, if there is a need for more storage space, there are some real advantages to this kind of real estate investment.

If you build a new self-storage complex you likely won't have any real maintenance costs for many years to come. Other costs can be predictable as well. This means that if you did your research, and so can get those units rented out, you can have fairly consistent and predictable cash flow for years.

Investing in Self Storage Units

Let's suppose you decide to build a self storage facility as an investment. First, you look at what is out there, and what the various sizes rent for. You call several places and ask if they have any units available. If they all had vacancies, you would likely drop the idea, but you find that most are full, meaning there is probably some demand for more.

You call the county offices and find that there have been no permits issued for self storage buildings. You check the census statistics online and see that the population of the county is growing. Noting the income statistics, and the high prices on homes, you figure that most newcomers will be renting. These are the ideal customers for self storage business.

The demand is there, it seems - or at least it will be soon.

You find a construction plan for a 102-unit building that you like, with three unit sizes. With 90% occupancy, the facility should bring in about $4,800 per month. You have projected the regular expenses (taxes, insurance, advertising, maintenance, legal costs, etc.) to be about $12,000 per year, or $1,000 per month. You decide you don't want to manage the place yourself, and find a management company that will do it for $500 per month.

Deducting that $1500 per month from the projected income of $4,800, you arrive at a net income before debt service of $3,300. This is the amount you have to work with to cover your financing and provide a decent return on your investment.

There's a piece of land on the edge of town you can buy for $55,000. You talk to a company that specializes in building self-storage buildings, and get a quote for the 102-unit building you want. You call a paving company and get a quote for a driveway. You also find out what fencing will cost. You estimate closing costs, initial advertising costs, holding costs prior to getting the units rented, and every possible expense you can think of to get this project up and running.

You run the numbers and project the total cost to be around $270,000. With your plan in place and in writing, you go to the bank. They will loan you only 70% of the money - $189,000. At 9% annual interest, amortized over 30 years (but probably with a 10-year balloon), this will cost you $1520 per month. It also means that you'll need $81,000 additional for the deal.

Since you don't have the money, you put a second mortgage on your home to borrow $54,000. The bank is okay with this, because it leaves $27,000 of your own cash in the deal, which is 10% of the total. The second mortgage is at 7.75% for 30 years, costing just $387 per month. Your total debt service will be around $1900 per month ($1907, to be exact). With your regular expenses of $1500, you'll have $3,400 going out.

If all goes according to plan (90% occupancy and $4,800 per month gross income), you will have cash flow of $1,400 per month on your investment of $27,000. Not bad, but once you get that occupancy rate up to 95%, you will have cash flow of $1,665 per month - and without managing it yourself. That's a 74% annual return on your investment. You also feel relatively safe knowing that you can have as much as a third of the units vacant and still have cash flow.

You'll need to have forms signed that release you from liability from theft or damage, while still assuring the customers that you have decent security. You have to think about locks (better to let the customer provide his own, perhaps). You need to know the law in regards to opening units and selling the contents when rent isn't paid. In other words, there is a lot to learn about the self storage business, but it can be a great real estate investment.

Try not to do this on too small of a scale. The rent you collect for each self storage unit will not change, but the cost per unit will go down with bigger complexes, because of per-unit cost for land goes down. For example, A $60,000 piece of land costs $3,000 per unit for 20 units, but you might fit 120 on the same land, which makes it just $500 per unit. Good cash flow is easier to achieve with a decent-sized self storage building.

Steve

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