How to Invest in Self-Storage Units

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Self Storage units can be a good 'beginner investment' for someone breaking into real estate.
Self Storage units can be a good 'beginner investment' for someone breaking into real estate. (Image: warehouse door with staircase entry image by Bo Widerberg from Fotolia.com)

Commercial real estate is built on owning property and renting it out to tenants; one way to do this is owning a self-storage facility. Self-storage facilities are less expensive to build (by a factor of 8 to 10) than a multi-unit apartment complex. There is also considerable flexibility in where they can be placed and still be viable. While nearly every small town in America has at least one of these businesses, self-storage facilities aren't 'easy money.' But they are an investment that can produce a reliable income stream, local conditions permitting.

Things You'll Need

  • A good credit rating
  • Available land for purchase in a suitable location
  • A business plan
  • Accurate information from your Chamber of Commerce about local employment conditions and small business growth.

Scout out the competition. Look up the local storage rental places in your town, and see how many there are, and what their occupancy rates are. In general, if they're all at full, or nearly to full occupancy rates, there's sufficient demand in your area to support another one.

Research locations. Look for locations that are a convenient drive from small office parks and small businesses. The majority of self-storage units with long term leases are now being used by small businesses that use them to store old inventory, trade show dressage, tax and business records and the like – things that aren't needed on a day to day basis, but cannot be gotten rid of for legal or financial reason. Secondarily, look for locations that are close to apartment buildings with a high tenancy rate of professionals or young families.

Research regulations and staffing needs. You will need to provide both gate staff and a leasing officer, and security for the facility. Factor those costs in as continuing expenses from the beginning, and don't forget to account for training costs and employee turnover issues. Similarly, look at what sort of insurance you must carry, and what permits you need to have.

Investigate financing. Depending on the local market and how much competition there is, or how much pent up demand there is (a new office park opening up, or new housing units opening up represent potential demand drivers), you may have to borrow anywhere from $50,000 to $300,000 or more to buy the land and build the storage facilities on it. (Unlike most rental properties, the improvements on the land – the storage facilities themselves – tend to be less expensive than the land itself in this business.)

Calculate your monthly expenses. This is the cost of any permits, the cost of your employees, the cost of your debt services, and the cost of proactive maintenance. Now, figure out (based on what competitors are charging) how much you can rent units out for, and what your property can generate assuming 50% occupancy. As a general rule of thumb, if you cannot hit break even (the facility pays its own operating expenses and debt services) at 50% occupancy, the business is not viable. If it is a viable business, it's time to look at securing the financing and getting the process in motion. Understand that it will be a good 5-6 months between when you secure financing and when you can open the facility.

Promote your business, first to local, small businesses, and then to new renters. Work out cooperative agreements with landlords of both office parks and rental properties; you'll direct business to them if they direct business to you.

Tips & Warnings

  • Understand that all investments--even beginner real estate investments--contain some element of risk. Your business will survive or fail based on how you meet the demands of your customers, and competition from other businesses. The key figure to keep in mind is occupancy rate versus monthly expenses mentioned in step 5; if you cannot make the facility pay for itself at 50% occupancy, it's not a worthwhile investment in your area.

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