Is Investing In Self-Storage A Good Idea?

Now we really love self storage for a lot of reasons. There are about 55,000 self storage assets in the US and over 2/3 are owned by small time operators. These mom and pops don't have the knowledge or the desire or the resources to upgrade the facilities, increase the income and maximize investor roi. And the tenants are sticky. Now think about it Jim. If I'm leasing a $1,500 apartment from you and you raise my rent by 10%, I might leave rather than pay you the extra $150 a month and lock myself into $1,800 more in the next year. But if you are renting a self storage unit to me for 150 bucks and you raise the rent by 10%, well, I probably won't get a U haul, get my friends together and waste a weekend to move my junk, excuse me, my treasures down the street just to save 15 bucks a month. Especially when you've given me a month to month lease. And the new facility could raise their rent next month too. And besides, you know how it is. You know, we all think that we're going to get down there the next free day we have and we're going to clean that unit out and stop renting it, right? Well, a friend of mine who leases self storage, he was talking to a doctor about this and the doctor started laughing and he said he was going to invest right on the spot. And my friend said why? He said, because I just remembered I have a self storage unit that's been hitting my credit card for like seven years and I've basically forgotten about it. And that's the situation for a lot of people in self storage. There's also lots of value adds. I mean our operators sell retail items like locks, boxes, tape and scissors. They rent U hauls, they can add a cell tower in the back and they can put a billboard in the front. They can add a propane filling station, ATMs, they can use spare land to rent, you know, RV and boat storage and so much more. So self storage just has so much upside for a professional operator. This is a 33 year look. In the green line we see the occupancy of self storage versus the see sawing GDP in the red. So this is one of the assets we invested in. I was here in Colorado Springs at this asset several years ago. It was acquired for $10.9 million. The operator was completely hands off. He had a guy running it that wasn't doing a good job. It was acquired for $10.9 million. And listen to this. Not only did it have about 100,000 square feet of self storage inside, it had a lot of unused, poorly organized parking space outside. And it had about 90,000 square feet of unused warehouse space inside that was in decent shape. So our partner rented the warehouse out to three tenants. He raised the self storage rates to market. He organized the outdoors and rented that for boats and RVs. He sold off the retail, and in about four years total, he was able to get a 40% IRR on this property. And like I said, we were the largest investor in our earlier funds. This was another asset in the booming metropolis of beeville, Texas. By the way, you might think self storage is overbuilt. It can be overbuilt, but it's not typically overbuilt. And there's typically not the big competition in these smaller cities. Places like beeville, Texas, Ishpeming, Michigan, Grand Junction, Colorado. This one was acquired from five feuding siblings. Unfortunately, the parents had passed away and the kids were running this into the ground. They were asking 5 million bucks for this asset through a residential realtor. When my partner, our operating partner, acquired this for $2.4 million cash. Now, he did upgrades, he kicked out delinquent tenants, he added marketing, and again even added a website, brought it into the 90s, and it was appraised at $4.6 million just four months later. And he actually sold it for that price about a year after that. We were the largest investor in this in our earlier funds as well. You see, one of the secrets to this business is having full time people trying to contact these mom and pop operators. This operating partner I'm mentioning has eight full time people working 40 hours a week, making over 100 calls, texts, emails each per day to mom and pop operators trying to find these types of properties. Lots of people want to do that, but very few people pull it off. Now, in our current fund, they just recently acquired this property in Las Vegas. The builder in 1982 was still operating it for 42 years. They had handwritten records, no marketing, free units to friends. They were renting it illegally to homeless people. And the rates were only 40% of the market, if you can imagine that. So these rates could be raised from like, you know, average $60 a month up to $148 a month and stay competitive. So these are the types of deals that are again, not only throwing off income, but also providing refinance proceeds to buy other assets and eventually, hopefully have a very strong exit. So we love investing in self storage.

The hosts of the White Coat Investor are not licensed accountants, attorneys or financial advisors. This podcast is for your entertainment and information only. It should not be considered professional or personalized financial advice. You should consult the appropriate professional for specific advice relating to your situation.