For the past few weeks I have been on lookout for my next investment, that’s when self-storage investment caught my attention. I had been curious and been doing lot of research on this, I haven’t yet decided though to invest my money on these eggs or not.
I have almost paid off my mortgage, which means there is a whole set of equity sitting with the bank and doing nothing. I would like to use this equity on home as surety and purchase an investment property without laying any cash on the table.
I have purchased properties before but all of them being residential, its challenging to buy a commercial property as banks don’t lend as much as they would on a residential property (let’s say they see residential property more bank friendly) and the rules of investing is a bit different from that of residential property.
If you are new to this idea of self-storage units, it’s nothing more than a small storage space that can be rented out to an individual person or company. These units are usually divided into small spaces, starting anywhere from 6 Cu.Mt, there are also large storage units that are built with specific company needs in view.
I don’t want to dwell into the advantages of investing in self-storage that will be an article by itself, besides why do you care as an investor, or Do you care? More than the return on investment (ROI), tax and revenue.
Before we go on into details of understanding return on investment on storage units, I would like to see how much we can expect in returns from a residential property.
To calculate ROI I need know the price of the house and rental return for the property. In average Melbourne’s median house price is at around $619000 at the time of writing this article. The problem with average is, its average, there are no specific details to compare like for like.
I don’t want to take into consideration average price for our calculation, as it’s vague to pinpoint the median price to type of dwelling, hence can’t estimate the rent and rate of return for average prices.
Speaking of specifics, let’s consider Laverton a suburb in Melbourne west, the average house price here is $350000, at the time of writing this article there was a house for sale at $335000 and if you include stamp duty the price investor will pay to purchase it will be $354000.
The rental return for the property is $290 per week, $15080 per year making it 4.2 % return before deductions. If we consider the agent fees to manage the property, council rates and insurance then the return on investment drops to mere 3.6 % percent.
If the residential property is old then the cost of maintaining the property is higher and giving us even lower returns.
In case of storage units, the cost of owning one is low and can start at $100000, (for that price you need to move away from CBD locations), making the return on investment (ROI) high. The industry average return is between 7 to 8 percent. What’s more is that the cost of maintaining the property is very low.
With all the staff and management to handle this can be categorized as business rather than investment opportunity. Just like a residential property where you have the choice of an agent managing the property or you taking care of itself. Similarly you can hire companies that do all the management work for you making it almost passive income.
Without doing any further analysis it is clear that this is the best real-estate deal you can jump into compared to residential property. But before we conclude, I want to consider one important information that most buyers tend to ignore on their path to self-storage investment.
When you own a self-storage, you have to remember that it’s a piece of real-estate which by nature will have two components, capital growth and yield.
With residential properties, they have potential to almost double in 7 years (depending on which dynasty we speak). Even though self-storage units provide better yield, they have very low capital growth compared to residential properties. If the property is located within CBD region then its hard to afford and you won’t find anything for that price and a property that is located away from CBD will have little or no capital growth.
As an investor though the cash flow is never ending, for example with residential property you will only be generating revenue if the house is occupied. It’s either on or off. In case of self-storage units there will always be a tenant who would be paying the rent.
Also returns on a storage unit depends on the local vacancy rate, demand vs supply and the uniqueness of the storage facility for example, if there are no 24/7 secured storage units around the place making the facility secure gives you a leg up in price and demand.
Even though the initial advertised cost is low for buying a storage unit, in order to do it properly you need to hire a consultant to understand demand and supply for the area. Unlike residential properties, your investment doesn’t have a significant capital growth so you need to make sure that there is low vacancy rate to make this a profitable deal.
When it comes to capital growth of the property, zoning of the council has lot of impact on the price cap. If you hold unit for longer periods of time and depending on how your neighbourhood is changing there could be lot of potential options at hand that can be explored for higher capital growth.
If the neighbourhood changes to industrial park you can consider applying for a permit to demolish storage unit and build an office facility. This will instantly put the price of the property into a new zone doubling the investment.
There are lot of options one can consider depending on the investment strategy you have at play. If you are low on capital then I believe this will be an ideal investment considering the returns you will have. You can also form a joint venture partner to acquire units in an area and thereby distributing the work required to maintain them.
So readers, what are your thoughts or experience on investing in self storage units.
You are one hundred % right on all your thoughts ,however the increase in the value of the property
is one opportunity that is much lager in Germany.
For example we own 3 operating self storage facilities total purchase price 11 million Euros
average holding period = 4 years increase in value (estimated value today 25 million Euros.
These are properties that were purchased as warehouses and than converted to self storage
Your article is characteristic of scribes not involved in the self storage industry, due to the fact that knowledge of the industry can only be gained by working within. In the main you refer to investing in strata titled spaces. This has been tried a lot in various parts of the country, mostly without success. There may be one or two exceptions, however returns aren’t as you’ve stated. Management fees range between 7 and 10% plus outgoings and you’d be hard pressed to buy just one space. Often they are for sale in lots of 3+. The major problem, is that once you’ve parted with your cash, there’s no guarantee that your space will be rented. Your space is just one or 3 or 5 or 10 among a 600 or 700 hundred sheds on the site. If the Manager owns 500 of the 700, guess which spaces will be rented first. All your investment has done is pay down the Managers outlay. Therefore the greater the number of spaces you own, the higher the risk of vacancy.
One such facility was created by someone who has exited the industry in Townsville 10 years ago. It went bust and has changed hands 4 times since, without anyone making it work, because it contains a mammoth 1200 storage spaces, many strata titled.
On the other hand if you were to invest in a small regional complex which have sprung up in most towns across Australia, or build you own, then your future is assured if you remain involved and proactive.Take a look around and see how many are for sale and how many have sold recently. Very few. This speaks volumes.
To build 60-80 spaces on a 2000m2 block along he coastal fringe ensures 2 things. Cost effective set up and earlier return on investment.
On the other hand, who has the funds to go it alone on a 600 unit storage complex in major cities where land and council head works charges will cripple you. It will take $5 -$6 million (perhaps $10m) outlay and up to 10 years to reach a satisfactory return that investors will accept. The joints don’t fill over night. It will take many, many years to attain an 82% national average occupancy. Most investors won’t hang around for a return that long, but those that do can expect in excess of 12% and often 15%+ return ongoing. Would you be prepared to wait 10 years of your investment life with minimal return during that time?
Beware of developers springing up within the industry promising 6,7,8% instant returns. The returns are not guaranteed and they are built into the cost price of the project, They’re are also paid out for the guarantee period (usually 5 years) from borrowed funds. If the complex under performs and fails to fill, is poorly managed, then the likelihood of failure is very real and the developers will walk away without a scratch, because his profits are in the construction. You lose the lot, unless you are in a position to buy out the entire project. Not likely.
Finally, if you wish to invest in a development, then do your own due diligence. It’s simple really. Jump in your car, drive around the proposed development site for a radius of 15 klms and walk into all existing storage businesses to determine for yourself how viable they are. Rent a space within them. See how they work. Are there also other future proposed sites in the pipeline? Expansion of existing sites likely? What is their yield, occupancy? There’s many owner operators willing to impart their knowledge and give you a leg up, if you think self storage is for you. But be wary, it is a very limited and incestuous industry where the majors dominate by discounting, but that’s another whole chapter for another day..