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Six Common Self Storage Investment Myths

Posted: 8/27/2018
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Self storage has been among the most steadily growing U.S. industries for more than 40 years and its expansion is predicted to continue through the remainder of this decade. As with other business investments, a self storage facility can provide an income stream, employment independence, equity and appreciation and tax benefits. However, before you embark on buying a self storage facility, it is important to dissect and dismiss common myths that woefully mislead many prospective investors in their decisions to invest in the self storage business.

1. It Is a Business that Is Effortless to Operate. Purchasing a self storage facility comes with many operational responsibilities that must be properly managed in order to successfully compete in a growing industry. Some of those responsibilities include:

  • Increasing rents to compete with nearby competitors
  • Physical maintenance of the facility and grounds
  • Keeping detailed and thorough financial records
  • Maintaining legal requirements

2. Larger Self Storage Facilities Mean Larger Profits. In more traditional real estate, size is a huge factor in how profits are made. With self storage property valuations, cash flow, operating revenues and occupancy rates are the primary factors in pricing a facility for sale. More units and larger square footage can help to add value in a facility but more importantly, high occupancy rates and positive financials are what will make or break a deal in the end.

3. Location Is Not Important to Self Storage Revenues. In today’s world, we see self storage facilities everywhere we look. Whether it is a thriving city area or a slow-paced rural area, self storage has been popping up everywhere. Due to this, there can be a common misconception that the location of a facility is not important however, the location of a facility is probably one of the most important factors to its success. As a self storage owner or prospective owner, you should be aware of the following:

  • Traffic Proximity — Facilities in areas with low residential and employment turnover rates are less likely to perform well than self storage businesses located, for example, in close proximity to university dorm buildings or military base housing developments or areas with numerous multi-family apartment rental properties.
  • Visibility — Facilities located in prominent locations that are easiest to find are likely to maintain higher occupancy rates and be able to demand higher rental rates than those in harder-to-find locations.
  • Accessibility — Properties that are easier and more convenient to access, especially for large moving trucks loaded with storage items, are likely to perform better in rentals than nearby properties with front entryways located on tight turns or with driveways on steeply inclined or declined grades.
  • Surrounding area — Properties located next to major chains tend to be more successful where facilities located away from main attractions can see a loss when it comes to occupancy.

4. Investment in a Self Storage Business Is Always a Sound Investment. Back in the early days of the industry, it was a relatively low risk to invest in a self storage business. However today, the industry has become much more competitive through its growth. In currently flourishing local markets, incoming owner-operators and investors need to enter the market with greater care.

The most informed determination of whether or not it is a sound investment to develop a new or buy an existing facility at a given location involves multiple analyses. These should include thorough storage rental market and competitive market analyses, feasibility studies and broader regional and national short and long-term economic analysis.

Additionally, at this point in the evolution of the self storage industry, some local market areas are overbuilt or soon will be. Over-built markets indicate high risk in terms of potentially extreme difficulties in lease-up and low occupancy on average, over time. These indicators also point toward predictably low ROI when the property is eventually re-sold.

5. Self Storage Facilities Are Guaranteed Cash Generators. Self storage businesses do have a comparatively low default rate among leveraged real estate purchases. However, often, due to inadequate planning prior to taking ownership, many owners who do not default on loans do find themselves struggling to meet financial obligations.

Individuals who do not anticipate having time or who do not have sufficient applicable business management skills should take caution. Otherwise, new owners may unintentionally be taking on many more routine operational responsibilities than expected and may experience buyer's remorse.

6. Self Storage Is a Cheap Business to Acquire. Modern self storage facilities must meet the demands of today's customers, for security, safety, convenience, service quality and competitive pricing. All of these requirements make contemporary higher-quality self storage businesses a larger investment than in earlier decades. There are many different factors that go into valuing a self storage facility including:

  • Land Costs — Land prices for self storage facilities are higher now because developers typically want to build in urban commercial locations with relatively high consumer traffic. They no longer gravitate to the more obscure sites in industrial areas where such storage facilities were common in the past.
  • Quality Demands — Today’s self storage customers typically expect storage facilities that are of higher quality construction with electronic security gates, security fencing, fully paved driving areas and walkways and sophisticated digital surveillance systems. Properties also feature larger numbers of units, which necessitates on-site management personnel.
  • Development Costs — Building materials and other costs of new commercial construction are higher today than in previous years.
  • Investment Value — Acquiring a successful self storage business requires a higher amount of investment than in prior periods of the industry's growth. In addition to reasons mentioned above, the market now bears the higher prices also because even novice buyers these days are aware of the exceptional investment that well-developed and managed self storage businesses have proven to be.

Work with a Self Storage Expert

SkyView Advisors represent self storage property owners in the sale of their businesses. Our national commercial real-estate brokerage team leads the industry in self storage facility sales expertise. Skyview brings an abundance of strong industry relationships and our exceptional record of success in completing over $1.8 billion in sales transactions to the service of our valued clients. We are also unique in employing a comprehensive team-based methodology to serving each client, as well as our own 252-point system for ensuring that every detail of the preparatory, marketing, selling and closing processes are properly managed.

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