Self-storage investments have become increasingly popular in recent years, offering attractive returns and stable cash flows. This blog post will discuss why investing in self-storage facilities can be a lucrative opportunity for investors, focusing on the growing demand, excellent tax benefits, impressive performance history, high-yield potential, recession resilience, and low overhead costs.
Armed with this information, you can make an informed decision about whether self-storage investments are the right choice for you.
- Strong Performance History:
Over the last 20 years, self-storage has consistently outperformed all other major real estate asset classes, including office, retail, industrial, and multifamily properties. According to the National Association of Real Estate Investment Trusts (NAREIT), the total return for self-storage REITs between 2000 and 2020 was 17.43% annually, compared to 12.33% for industrial, 10.98% for retail, 9.61% for office, and 8.42% for multifamily REITs. This impressive track record demonstrates the long-term potential and stability of self-storage investments.
In a study conducted by Cushman & Wakefield, self-storage investments outperformed the broader commercial real estate market in terms of total returns, with a 10-year compound annual growth rate (CAGR) of 16.85% compared to 9.53% for the NCREIF Property Index (NPI) as of the fourth quarter of 2020. This further highlights the impressive performance history of self-storage investments and their ability to deliver strong returns for investors.
The strong performance of self-storage investments can be attributed to several factors, including growing demand, favorable demographics, and the industry's resilience during economic downturns. Additionally, self-storage facilities generally require lower capital expenditures compared to other real estate asset classes, which can result in higher net operating income (NOI) and increased cash flow for investors.
- Increasing Population and Household Demand:
The US population is continuously growing, resulting in an increased number of households. In 2005, there were 112.1 million households, which has grown to 132.3 million households in 2022. This increase in households directly contributes to the rising demand for self-storage facilities, creating a favorable market for investors.
- Wider Adoption of Self-Storage Facilities:
The percentage of the population using self-storage facilities has increased over the years. In 2005, only 8.95% of people utilized storage, while this number has grown to 11.10% in 2022. This trend highlights the growing popularity of self-storage facilities, providing investors with an expanding customer base.
- Lifestyle Trends Fueling Demand:
Millennials and Baby Boomers are increasingly choosing to downsize to smaller, amenity-rich homes, leading to a higher demand for storage space. The national storage usage has grown from 2 square feet per person 20 years ago to 8 square feet per person today. These changing lifestyle trends indicate a sustained need for self-storage facilities in the future.
- Tax Benefits of Self-Storage Investments:
Real estate investments offer significant tax benefits, such as depreciation. Self-storage facilities provide even greater advantages, making them an attractive option for investors looking to maximize tax savings. There are ways to use investments in self-storage to offset other taxes such as income and capital gains. Speak with a qualified CPA or tax advisor to learn more.
- High-Yield Business with Low Expense Ratios:
Self-storage facilities are high-yield businesses, offering investors strong income potential due to their relatively low operating costs. According to industry data, the average operating expense ratio for self-storage facilities ranges between 25% and 40%, depending on factors such as location, size, and management structure. In comparison, operating expense ratios for other commercial real estate asset classes, such as office or retail properties, can be significantly higher.
One of the primary reasons for the low expense ratios in self-storage facilities is the minimal requirement for on-site staff. Unlike other property types, self-storage facilities do not require a large workforce for day-to-day operations, resulting in reduced labor costs. Additionally, self-storage properties generally have lower maintenance and repair expenses, as the buildings are often simpler in design and construction.
- Resilient During Economic Fluctuations:
Self-storage facilities have proven to be resilient during both up and down markets, including recessions. For example, in many markets storage rents grew by 30% to 40% during the COVID-19 pandemic. This resilience makes self-storage investments a reliable choice for investors seeking stability amidst economic uncertainty.
- Low Overhead Costs and Capital Expenditures:
Self-storage facilities typically have low overhead costs, with operating expenses often running below 35%. Tenant turnover requires minimal investment to re-lease a unit and can be accomplished quickly. Additionally, self-storage facilities generally have low capital expenditure requirements, allowing for more capital to be distributed or used for expansion.
- Flexible Pricing and Stable Cash Flows:
The month-to-month lease structure of self-storage facilities allow for flexible pricing based on inflation and supply and demand. Approximately 70% of tenants are on autopay, and the average rental duration is around 14 months. This flexibility and stability contribute to consistent cash flow for investors.
- Low Cost to Expand or Build:
Self-storage properties can be built or expanded quickly due to their prefabricated nature, resulting in higher returns on capital. Construction costs start from $65 per square foot, while sale values in good rental markets for stabilized properties can range from $130 to $200 per square foot. This makes development or expansion projects highly profitable for investors.
- Legal Advantages and Stable Cash Flows:
Self-storage facilities are typically composed of 200 to 500+ units, resulting in stable cash flows for investors. Laws tend to favor landlords, allowing for the swift eviction of non-paying tenants and the re-leasing of units. This legal advantage further enhances the stability and profitability of self-storage investments.
Conclusion
Investing in self-storage facilities can be a home run for investors seeking attractive returns, stable cash flows, and resilience during economic fluctuations. The growing demand, favorable tax benefits, strong performance history, and low overhead costs make self-storage a lucrative investment opportunity.
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