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, it’s 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 the 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 to 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 the 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 a mere 3.6 % per cent.
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 per cent. 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 a business rather than an 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 the 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 the CBD region then it’s 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 the residential property you will only be generating revenue if the house is occupied. It’s either on or off. In the case of self-storage units, there will always be a tenant who would be paying the rent.
Also, returns on a storage unit depending 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 a low vacancy rate to make this a profitable deal.
When it comes to capital growth of the property, the zoning of the council has a lot of impact on the price cap. If you hold the unit for longer periods of time and depending on how your neighbourhood is changing there could be a 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 a 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?