Day 3: Self Storage vs Apartments: Which Real Estate Investment Actually Wins?

All right. Welcome back to day 3 of the Storage 100 series. I am Joe Downs with the Self Storage Mastermind. All right. Today we're going to tackle questions everyone asks. Do I go self-storage or do I either go into residential, either apartments? Let's say that's the example we're going to use today. Or should I stay in it? Now, a lot of folks we see in our Self Storage Academy are Converts, if you will. I'm one myself. People who started in the business in residential, whether it was buying, flipping, buying, rehabbing, the BRRRR methods, you know, everything you think of. And then, you know, your natural progression is into multifamily from there, small multifamily, larger multifamily. But before we do all that, let's pump the brakes a little bit. Let's analyze which one actually makes more money. I know I did, and I was kind of surprised. So today we're going to go head to head comparing the 2 most popular real estate assets classes, and I'm going to show you exactly why self-storage, in my opinion, is the more superior investment vehicle for the modern-day investor. All right. I know many of you started your real estate journey looking in residential and looking at multifamily, like I just mentioned, and that's great. But the numbers and the operational reality, which might be the difference maker for you, even if you find 2 deals that look the same from a numbers standpoint, and you can, You can find great multifamily deals and you can find, you know, great self-storage deals. But the operational reality might, might tell you a different story as well. It might change, might sway you. So let's break down 5 critical areas why I think self-storage is consistently going to outperform apartments. No hype. It's all about cold, hard data, operational efficiency. By the end of this episode, you're going to understand why smart money is moving into self-storage. All right, so let's dive into the first and most important comparison: operating margins. All right, where the rubber— this is where the rubber meets the road. So self-storage consistently delivers 10 to 15% higher margins, operating margins, than apartments. So in self-storage, we're talking 50% to 65%. Most facilities we buy at the Bellrose Group are operating in that 35, maybe 40% operating margin versus, you know, 40 might be where you're top out for multifamily, but I think 50 is where most live, right? So we're not crazy different, but listen, 10 to 15% is no joke in operating margin, right? And that difference goes straight in your pocket. So why is this margin so much higher? Well, it comes down to fundamental simplicity of the product, in my opinion. So for us, we're renting metal boxes. It's kind of boring. I say that all the time when we talk about value-add. We don't get to rip out granite or sorry, Formica granite countertops and put in granite, right? We have metal boxes and it's kind of boring business, but that's the beauty of it. That's, that just means we're not spending more on the physical facility itself, right? So when you're renting an empty box, you don't have to worry about expensive appliances, HVAC systems, HVAC systems, you know, painting when, when a tenant turns over, right? Carpet paint. Smoke detectors, inspections, you know, just think about every time a unit turns over and ours turn over more than yours if you're in resi. Barely broom swept, you know, maybe some trash left behind. Maybe we have to— you've seen the show Storage Wars. It's not— I don't want to go on record as saying anything actually about that. You've seen the show Storage Wars. I'll let you decide if that's reality or not. But Think about an apartment turnover, right? You're repainting, replacing carpets, fixing plumbing. None of that exists really in self-storage. So plus our utility costs are minimal. We don't have— even in the turnover where you have to— you're your landlord and sits vacant for a month or 2, you're back picking up water, gas, uh, you know, whatever. Uh, you know, you're always responsible for taxes. I guess we are in self-storage too, but, um, we don't, we don't have that. We, we have electric and it's Minimal. If we have electric, it's minimal, right? Low overhead means more of every dollar of rent goes right into our profit. So it's fundamentally a more efficient business model right there. And the efficiency actually leads directly to my next point, which is management intensity. So higher margins, as we discussed, are directly tied to the low management intensity of the self-storage. So look at a comparison. You can run a self-storage facility spending maybe 5 to 15 hours a week on strategic tasks. This includes things like checking with your remote manager or third-party manager, reviewing marketing performance, approving pricing adjustments, right? Nothing major. Compare that to apartments where you're easily spending 20 to 40 hours a week dealing with tenant emergencies, coordinating constant maintenance, managing the turnover. Self-storage requires Like 60 to 75% less of your time. This is key to be more. That's never truly passive unless you're a passive investor or a passive partner, as we like to say. But it's more. It's it's passive-ish, right? Compared to really more hands-on, right? So you're building a system, and that's if you build a system, right? If we build a system that runs itself, it's not really a second job. A lot of people do use it as their kind of side hustle or their second business or the business that. That they, that they're planning on growing and buying a second and third to get them out of their W-2. I mean, everybody's different. We all have our own goals and dreams and all that. Not everybody gets into self-storage for that reason, but you can. That's the beauty of it. It can be that kind of second job, if you will, that doesn't feel like a job, even though on the last episode I told you it's work. It is. But that's really more in the learned, right? It's not so much in the activity of doing. It's really just The understanding, right? And how to, how to keep this to 10 to 15 hours a week, right? And if you learn the business, then you can keep it to 10 to 15 hours a week versus people that don't, they just dive right in. They don't know what they're doing. And then it probably does become a second job for them. And then you probably do hear them complaining about it. All right. But it really does and can for the most part run itself, right? And then you're just focused on strategic decisions, not Fixing a leaky roof, you know, emergency at 2 a.m. All right, it's a massive difference in time commitment, and that's why it's so scalable. And and and the reason for the low intensity is is simple: it's the tenant themselves, right? And this is the brutal truth: storage units don't call us at 2 a.m. People do, though. Your tenants do. I've gotten those calls. I know you have. Excuse me. The complexity of managing the human home versus managing stored belongings is night and day, right? Just consider the fact that the average self-storage customer visits the facility. every 4 months, right? Not wakes up in the unit, right? At least we hope not. Sometimes that happens, but that's not part of the business. Anyway, in self-storage, your, uh, your tenant issues are just so much more simple, right? Maybe we have late payments or access questions or an issue with the lock, but it's nothing, and there's never an emergency. In apartments, you're dealing with emergency maintenance all the time, neighbor disputes, noise complaints, emotional drama that comes with Someone's home, the lead paint that I had to have somebody come in and, and, you know, scrape off of windows and repaint for one tenant years ago because what, I guess their kid was planning on biting into the windowsills or something, even though the disclosure was there. It's like, come on, we don't have that issue in self-storage, right? The stakes are just so much lower. If the tenant doesn't pay, the eviction process is so simple. 45 days, you're out pretty much across the board, every state. Simple lien process, not a lengthy, you know, expensive court battle of eviction. And then how long does that take depending on which state you're in? I mean, you could see— gosh, we've all lived through the nightmares. It's taken me a year before, and then even then it was a nightmare, right? You're not subject to the same tenant protection laws or rent control issues that you have in residential. All right. It's just a completely lower emotional and legally complex business compared to, you know, residential. So it's infinitely cleaner and less stressful. You're not a landlord. We don't have leases. You're a storage provider with a contract. It's very different. And that difference is worth its weight in gold. But so how do you get started in this low-stress, high-margin business? One of the biggest barriers to entry in the commercial real estate world is capital, but self-storage sector of the commercial commercial real estate world has a significantly lower barrier to entry than apartments, thanks to the drum roll. The SBA. Look at the numbers. You can get into your first self-storage deal for. I've seen it done for as low as fifty grand, but typically around a hundred and hundred and fifty grand. I feel more comfortable saying, and that's because SBA loans allow you to put down just ten percent. SBA seven A is a ten percent down loan. If you're buying a million dollar facility, let's do the math. If you're buying a million dollar facility. You only need $100,000 plus your closing costs, plus your reserves, you know, whatever. I covered that already. But compare that to an apartment, right? We buy a million-dollar apartment building. Now I need 20 to 20, probably 25% down, right? That's especially if it's your first one. That's $150,000. If I'm saying $100,000 on a million-dollar self-storage facility and $250,000 on a million-dollar multifamily, That's a $150,000 difference right out of your pocket right there. And you didn't get anything more for it. You just got the, you got the luxury of putting $150,000 down more because of the type of loan you had to take out. All right. Self-storage cuts your required down payment almost in half. If you think about it, that's huge accessibility for a new investor. It means you get into a high-performing commercial real estate class, commercial real estate asset class much faster and with less risk, less personal risk to you in that. With that $100,000 out of pocket. The lower capital requirement combined with the higher margins is a very powerful combination. Tomorrow we're going to look at the ultimate test, how these 2 asset classes perform when the economy tanks. All right. So we've established self-storage has better margins and lower management headaches, but how does it perform when the economy tanks? So this is where self-storage truly shines, right? Let's look at the data from 2008-2009 financial crisis. Right. Which seemed to last into '10 and '11 and '12. But while, while the apartment vacancies, the vacancy rates spiked 8 to 10%, which is huge in apartments in a lot of markets, self-storage occupancy held. So traditionally self-storage, our stabilization is like 85 to 88%, depending on your market. And that's just historically. So we do expect our vacancy, since I give you a vacancy number for apartments, we expect our vacancy numbers to be in that, you know, 12% to 15%. That's very standard, very normal. It's incredible resilience. We, our industry held. I wasn't in it then, but our industry held. We have all the data. It held serve in that crisis. Then, during the 2020 pandemic, and this is just, I don't like talking about this because it takes a pandemic and, you know, recessions are obviously more common than pandemics. But what did it do during that? Demand for self-storage actually increased. Why? Because self-storage is actually countercyclical. So when people are forced to downsize, when they go through any major life transition, like a divorce, a job loss, death, disability, they need to place their stuff in storage. They need a home for their stuff, right? So the demand drivers for self-storage are just fundamentally different for housing. We're tied to housing in a good way, but when housing gets hurt, we actually don't. So it's just a need driven by transition, not just prosperity, right? So we do well when people are buying a lot of stuff and we do well when unfortunately people are having personal situations which causes them to downsize, right? So that makes our investment actually incredibly stable. I'm not saying we can't be outperformed in other markets. But if you're looking for like a nice tight band to live in for a commercial real estate asset class, tough to beat self-storage. And, you know, and that's regardless of what the stock market does. So the stability of the market is just a massive advantage, in my opinion, over almost every other real estate asset class. That's one of the reasons that drew me to it. All right, let's talk about how easy it is to grow the business. The operational simplicity of self-storage means it scales incredibly well. So, and that's a huge factor for building wealth. So think about scaling from 1 property to 10, 1, in my case, 1 facility to 10, or if you were looking at apartments or multifamily, from 1 apartment building to 10, right? But the complexity of what you're doing at 1 facility compounds by 10. You need a dedicated staff at some point. Maintenance issues multiply. Your time commitment goes from maybe 25 hours a week in 1 multifamily deal to 100 hours a week. Right? Which you can't do, so you need staff. So it becomes a full-time job for a team that you have to build. Self-storage is kind of the opposite, right? Because of the automation we talked about, the remote management, automated billing, low maintenance, you can manage 10 facilities with about 20 to 25 hours a week because you're just managing your managers, right? Now, there are folks that manage their own facilities, at which point you can easily— it's easy to scale that too. You just place managers either remote or third party in place. But that means if you're doing that, things are going well. Obviously, they're going well in multifamily too. But excuse me, we can, we in self-storage can leverage our people much greater than we can in multifamily, right? So you centralize your management. And by the way, we can leverage technology even as well, including AI, and that's coming soon. We'll cover that in the series as well. But you can centralize your management. You can share staff across locations. You don't have to be local like you do in multifamily, and you can use all the same systems or the technology. enables massive management leverage. And to me, this is why it's just a clear winner for any investor who wants to build a large portfolio without creating a massive complicated management company. And we're at the point, and technology in our industry is even at the point where when my company started, Belarus Group started, we were managing on our own and we won't be in short order. So let's put some real dollars and cents behind the comparison here. So let's break the numbers down. Here's a— this may not be standard, but this is a fairly typical example. So million-dollar investment in both self-storage and apartments. And I have to use generic numbers in both because every deal is different, I'm sure, in both industries, right? So these are just kind of some sample numbers using industry norms, right? The difference in the returns that was staggering. So for self-storage, you can see we can use an SBA loan, meaning we're only putting $100,000 down. And with its higher operating margin, that self-storage deal, we're going to say averages $44,700 in annual cash flow, right? And by the way, for sake of the purpose, let's assume our closing costs were the same, our CapEx expenses are the same, although I promise you, if we're buying value-add in both, we do not have the same CapEx budget, but that's not even in here, right? And why is that? Because you're painting, you're carpeting, you're putting in granite countertops, new kitchens, new bathrooms. I'm not. I might be putting in a bollard here or there in a corner, maybe improving my camera systems and lighting, and maybe I'm spreading some gravel around. We're probably— most of our facilities aren't even paved. But so anyway, back to just the numbers. And I just wanted a little disclosure there. I don't even think this is a fair comparison, but you're going to have to put down a much larger down payment, $250 grand, right? Typical 25%. A little while ago you couldn't even get that. But I think, I think we're back to 25% down for multifamily. All right. So already out of the gates, you're $150,000 out of pocket more than me. You have a lower operating margin than I do. So your cash flow is less. So your cash flow, instead of being at a kind of a gross 44%, is down at an 11% cash-on-cash return. I mean, the self-storage deal requires less than half the capital upfront and delivers 4 times the cash flow potentially. Right. And even if you, you don't like my numbers, you think I'm being too Self-serving self-storage, cut them in half. I think it's still twice the cash flow. So, and we didn't talk about all the other things, right? Well, I did, but they're not included in this analysis. So you can see the power of self-storage in this business model. It's just simply more efficient at generating cash flow. So which is better? I don't know. The honest answer depends on what your goals are, right? Who you are, what you like, what you know, what you feel comfortable with. But the data clearly points If you're paying attention to self-storage being the winner for most investors. So if your primary goal is high cash flow, low management intensity, and efficient scalability, self-storage is, in my opinion, the hands-down winner. It requires less capital to start, performs better in recession, gives you 4 times, let's say, let's be generous, 2 to 4 times the cash-on-cash return. And if you have a massive amount of capital, or I should say, Or if you have a massive amount of capital or, and you love dealing with tenant issues and you prefer residential real estate, then maybe apartments are for you. I'm not, like I said, to each his own. But for the investor who wants to build a profitable, scalable, limited capital business, self-storage is a simpler path to wealth. So to me, it wins on cash flow, simplicity, scalability. But you, you could both could build wealth, right? But one's smoother and Frankly, I think a more profitable ride. If you if you're going to educate yourself in one or the other, and I've been in both, I'd head you over to self storage if I were you. All right, so whatever your key takeaways are from today, please drop them in the comments as well as any questions you have. And again, I'm going to answer them. If this is the first time you're watching, I'm going to repeat myself for the first couple episodes here. I will definitely answer them for you. When I roughly every 2 weeks when I do my live recap. And, and that is the perfect segue into what I'm going to give my little disclosure again. You can drop off if you've already done all this, but if you haven't, if it's your first time listening, stick with me. Give me 60 seconds here because I don't want to give you the throwaway line, please like, subscribe, and share that everybody always says after every video or podcast. I want to break it down for you why it's important. All right, so first the like button. That's for me. It's a long journey. This is day three of a hundred. Actually, think it works out to a hundred and six. So this is a marathon. Do me a favor. Just give me a like. All right, it's a little dopamine, a little fuel for the next ninety-seven days. Simple as that. All right, the subscribe is for you, and it's for you. It's an easy one. You're already there. Hit like. Hit subscribe. And it's. Just so you don't miss an episode. I'm dropping these, you know, 15— I keep going longer. I'm supposed to be doing 12 to 15 minutes. I'm beating myself up here. This 20-ish minute, you know, YouTube video is recorded. They're going to drop every morning, 6 AM. So, you'll get notified. But more importantly, it's about the lives. So, when I finish a session and I recap it, that's going to be on a Tuesday or Thursday night. It's going to be at 8 o'clock Eastern time, and you're not going to want to miss that. So subscribe so you don't miss that. Plus, well, I'll tell you in a second. All right, and then the share button. Share button, it may sound like it's for me to help me promote my SEO and all that, and yes, I will get the direct benefit from that. However, um, this is really for you and your network, and here's why. Most people don't realize you have friends out there who are interested in self-storage, but they haven't talked to you about it yet. So why not share this with them? Let them know you're looking at it, you're interested in it, you're learning about it. Right. But here's the actual sneaky strategic play. When you share these videos on whatever social platform that you're, that you're watching this on or are on, and I'll say it that way for a reason, share it on every single platform. And here's why. This is for you. Trust me. You're indirectly letting everyone in your network know that you are now somehow involved in self-storage. And this is important. I'm going to share later in the series with you another anchor as to why this is important. But you're positioning— by doing this, you position yourself as a self-storage expert in your circle. Why does that matter? Well, fast forward a few months from now, you find a deal and you're looking for capital partners, right? Do you want them thinking you just started looking at self-storage yesterday and stumbled upon a deal? Or do you want the psychological effect of, Hey, yeah, Joe's been looking at self-storage for what seems like years now. It'll only be a couple months, but to them it's going to feel like years. Same thing happened to me. So, and trust me, it's the latter. They're going to be like, oh yeah, that's interesting. So when you go to talk to them about self-storage and how far along you in your process and you found a deal, they're going to naturally be more interested in hearing about it from you, not as a fly-by-night, just started learning about it type of person, but Oh yeah, you've been really spending some time in this. You must know what you're talking about, right? So go ahead, like, subscribe, and share. All right. But oh, before we do that, tomorrow we'll see you tomorrow for day 4. We are going to break down exactly how much money you actually need to get started in self-storage. So you're not going to want to miss that one. But go ahead, like, subscribe, and share. Right? Like for me, subscribe for you, share for your colleagues and friends. They will thank you later.