They say that the road to financial freedom is to start your own business. Do you know that out of the 585 billionaires in the U.S., 363 or 62% of them are self-made? Yes, there may be difficulties along the way but with hard work and dedication, you’ll never know how profitable a business can be. To start your way to financial comfort, you need to decide what kind of business you should venture into.
There are a lot of good business ideas, to begin with. One industry to look out for is real estate. After all, millionaires themselves agree that this industry is still believed to be the best investment one can make. While the most common method is purchasing properties to rent out for potential tenants, another option you can try out is storage investment.
What Is Storage Investment?
Storage investment is buying out a property mainly to set it up as a self-storage facility. Self-storage facilities are common in the U.S.A. In fact, 10.6% or about 13.5 million American households are currently renting one. With the persistent number of individuals renting out self-storage, no wonder a lot of new investors see this business as a potentially attractive business idea.
Why Self-Storage Is an Appealing Investment?
Families always search for “cheap storage units near me” online to seek a facility wherein they can temporarily keep their possessions while figuring out their residential space. This facility is also helpful when families are relocating. For businesses, storage rental is an economical way to store their inventory, documents, and other significant items.
Compared to buying and renting out properties like offices or apartments, storage units offer lower overhead costs. Because no one lives in storage units, you don’t need to worry about maintenance when someone moves out. Construction and operating costs are also cheaper. This is ideal for new or conservative investors who are simply aiming for a decent return on their investment (ROI).
Cash Flow and Tax Benefits
With the steady stream of customers and low overhead expenses, you can expect that your investment can give you a positive cash flow. You may also get unrealized tax savings out of your self-storage facility. Storage unit owners can benefit from accelerated deductions through different strategies, including bonus depreciation, cost segregation, or Section 179 expensing.
There’s no other way for the self-storage industry to go but up. One research shows that the market is expected to grow by $17 billion during 2020-2024, developing at a 4% compound annual growth rate (CAGR). Even during the Great Recession of 2007-2009, the industry has continuously performed well, with only a 2% actual loss rate. These reports just show that investing in self-storage can be really lucrative.
How to Start in Self-Storage?
Image link: https://unsplash.com/photos/jazDgxNWax0
Alt-text: Brown cardboard boxes about to be placed inside a self-storage unit
There are self storage investment opportunities available so you may want to check them out first before deciding which one is the best option for you.
Have you heard of Real Estate Investment Trust or REITs? They own or sometimes finance income-generating properties in various sectors. These companies do not build properties from scratch but rather buy and develop properties to operate them. The properties also become a part of the company’s investment portfolio. For investors looking for a passive investment option, this is suitable for you as you won’t need to buy, manage, or finance properties. The good news is that you’ll still be able to earn dividends.
Active Self-Storage Participation
If you want an investment wherein you’ll be totally hands-on, you have two options—you can either build a facility from the ground up or buy an existing facility.
Building a Self-Storage Facility
Indeed, this option can be the most expensive and labor-intensive option in storage investment. However, the return on investment can be promising if done correctly. The first step is to find a lot area wherein the location has a high demand and low supply of storage units. The ideal site location must at least have three acres for construction.
Next is to check with the local municipality if you are allowed to develop a facility in the area. Make sure that you have secured all the zoning, permitting, and development requirements and understand each procedure. You will also need to take note of the local building, fire, and safety codes and ensure that your facility is abiding by these. Aim to build a facility that will appeal to the REITs.
When the facility is finally constructed, it will be in a “lease-up” mode. This is where the owner will strive to market for new tenants and lease units. Therefore, you must develop an effective marketing plan and have each unit properly priced. Depending on your goals, you can hold the lease-up property on a long-term basis, complete a cash-out refinance, or offer the property to third-party buyers.
Buying an Existing Facility
You can look for an existing facility and make it your own mini storage investment either through working with a commercial broker or searching on industry websites. Another option is to send a message to current facility owners.
Self-storage facilities are priced depending on their capitalization rates or cap rates. Properties with a higher cap rate offer a better rate of return for the buyer. As an investor, you are likely to have a higher return on investment with facilities with higher cap rates. Before buying a property, it’s also important to take a look at its cash flow analysis. Check all expenses such as real estate taxes, utilities, insurance, repairs and maintenance, and all other miscellaneous fees involved.
Facilities that are older in age, have some wear and tear, or anything that falls on a Class B or C facility category are still worth the investment. You can always apply capital improvements, like repairing the drainage, painting the facility with fresh colors, installing automatic gates and security cameras, and more. Investing in these features will surely add value to the property.
Once you already found a target self-storage facility, negotiate a purchase price. You should be able to come up with a price based on your cash flow analysis, desired return rate, and current facility operations. Don’t forget to secure financing and conduct a thorough inspection. The management of the existing facility will be transferred to the buyer once the transaction is completed.
You can never go wrong with self-storage investment. With the people’s constant need for extra storage space, you’ll be sure to have a steady stream of income coming. Plus, you can choose to be passive with your investment or be fully hands-on. Either way, you’ll have a good return on your investment.
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