By: Ryan Clark
The self-storage asset class offers investors many advantages, but belief in common misperceptions can inhibit success. Here are six common investment myths of which you should be aware.
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. Like other business investments, a storage facility can provide an income stream, employment independence, equity and appreciation, and tax benefits. However, before you embark on investing in a property, it’s important to dissect and dismiss common myths that woefully mislead many prospective investors in their decision to invest in the business.
Myth 1: Business Operation Is Effortless
A self-storage acquisition comes with many operational responsibilities. To successfully compete in a growing industry, they must be properly managed. Some of these obligations include:
- Increasing rent to compete with nearby competitors
- Physically maintaining the facility and grounds
- Keeping detailed and thorough financial records
- Maintaining legal requirements
Myth 2: Larger Facilities Mean Larger Profit
In more traditional real estate, size is a huge factor in how profit is made. In self-storage, property valuation, cash flow, operating revenue and occupancy are the primary factors in pricing a facility for sale. Larger numbers of units and square footage can add value, but high occupancy rates and positive financials are what will make or break a deal in the end.
Myth 3: Location Isn’t Important to Revenue
Whether a property is in a thriving urban area or a slow-paced rural market, self-storage has been popping up everywhere you look. This has resulted in a common misconception that facility location isn’t important. The truth is location is one of the most important factors to success. As an owner or prospective buyer, you should be aware of the following:
- Traffic: Facilities in areas with low residential and employment turnover rates are less likely to perform well than those in proximity to university dormitories, military-housing developments or multi-family apartments.
- Visibility: Facilities in prominent locations are more likely to maintain higher occupancy and command higher rental rates than those in hard-to-find locations.
- Accessibility: Properties that are easy and convenient to access, especially for large moving trucks, are more likely to perform well than properties with entryways on tight turns, or driveways built on steeply inclined or declined grades.
- Surrounding area: Properties next to major retail chains tend to be successful, whereas facilities that are far from main attractions often struggle.
Myth 4: Self-Storage Is Always a Sound Investment
Self-storage carried relatively lower investment risk during the industry’s early days than it does in many markets today. The industry has become much more competitive through growth. Incoming investors need to enter flourishing markets with greater care.
Myth 5: Storage Facilities Are Guaranteed Cash-Generators
Self-storage businesses do have a comparatively low default rate among leveraged real estate purchases. However, due to inadequate planning, many owners who don’t default on loans often find themselves struggling to meet financial obligations.
New owners who don’t anticipate having time to invest in the business or who lack applicable business-management skills should take caution. Otherwise, they may unintentionally take on many more routine operational responsibilities than expected and experience buyer’s remorse.
Myth 6: Self-Storage Is Cheap to Acquire
Modern self-storage projects must meet consumer demands for security, safety, convenience, service quality and competitive pricing. These requirements make a contemporary, high-quality property a larger investment than in the past. There are many factors that go into valuing a facility including:
- Land costs: Self-storage land prices 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 storage was once common.
- Development costs: Building materials and other costs associated with new commercial construction are higher than in previous years.
- Quality demands: Today’s customers typically expect quality construction, electronic access, security fencing, fully paved driving areas and walkways, and sophisticated digital surveillance systems. Properties also typically include a lot of units today, which necessitates onsite management personnel.
- Investment value: Acquiring a successful self-storage business requires a larger amount of capital than it did during previous periods of industry growth. In addition to the reasons mentioned above, the market now bears higher prices because even novice buyers are aware of the exceptional investment that well-developed and managed self-storage businesses have proven to be.
If you’re looking to invest in a self-storage development or acquisition, being aware of these misconceptions can help you avoid costly mistakes.