Self-storage investment is the fastest-growing commercial real estate investment. At first, it might look like a straightforward investment without much downside to it compared to other commercial investments but just like any other investment, some amount of leg work required to make it profitable.
Until we purchase one and gain experience with operations, management and maintenance- we can’t neglect to leave any stone unturned. The best is to seek and learn from professionals in the initial stages.
When it comes to owning a commercial property, it is generally considered as a higher risk asset and hence the reason for banks not lending as much as they would on residential type properties.
As with any financial investments, there is always a risk associated with the return, the higher the reward and so is higher the risk.
The decision of whether to invest in residential property or commercial real-estate is totally a personal choice based on your financial situation, goals and risk tolerance.
If you are contemplating to understand the return on investment of self-storage investment then my previous article on Are self-storage units a good investment? might help.
Following are some of the tips that we can follow while investing in a self-storage facility.
Location Matters
Just like any other real estate property, self-storage is not immune to location laws. A storage facility that’s located in close proximity to highways and freeways will perform better. There could be storage facilities that are located well outside of towns and performing well, but it will only do so until one pops up close to or inside the town.
Appearance Matters
Storage facilities need to look appealing, facilities that have graffiti all over the place not only loses its aesthetic appearance but also will give an impression of less secure to its tenants thereby running at lower occupancy rates than otherwise, it would.
Recruit a Consultant
You can’t possibly know everything when it comes to investing paying a professional company to do a feasibility study may cost you a few thousand dollars initially but will save you from buying a dud.
Vacancy Rates
Vacancy rates are crucial for the success of your investment before we become serious on any self-storage investment opportunity to check the local vacancy rates.
Real Estate Agent
Not all agents are same, an agent who takes care of the residential or another type of real estates might probably- will be ignorant of self-storage facility investments. When dealing with self-storage investment only deal with agents who have industry knowledge in this area, this will save you tonnes of money and time.
Like for Like
Make sure that the self-storage facility is reflecting the area that it’s serving. A storage facility located in an industrial park or suburb should have larger storage spaces where trucks can pull inside. So similarly, if it’s located in CBD or close to a lot of high rise apartments, a smaller space will serve a lot of customers in the area at a better price for both.
Get Building Inspection.
Look for the signs of deterioration, even though there are little to no interiors in this type of investment, there are other types of structural problems you can find.
A damp or mouldy wall means poor roof drainage or salt dampness rising in the facility.
Hiring a professional to do inspection will provide a report of all potential problems in the property, whether they can be repaired or not and how much does it cost to repair them.
Quantity Matters
If looking for an opportunity to buy an ideal self-storage unit is not time-consuming enough then you have other time burning tasks of finding a proper loan and once purchased you will have to spend enough time to maintain it.
Buying a self-storage facility with 50 units will cost you the same amount of time as that of 100 units.
When buying a facility, if your finances allow, aim for bigger units. This will not only make the price per unit cheaper but also you will find higher returns.
Council rates, Outgoing and fees.
Even though this is a low running cost business but you need to do your due diligence in estimating a bottom line. There are costs associated with council rates, maintenance costs, marketing fee, staff wages, taxes and other miscellaneous expenses.
Financial Health
Before deciding to buy an existing self-storage facility, seek all the financial documents for the last 3 years. This includes all-expense paid to staff, maintenance and taxes, including the revenue from clients. Compare business gross profits to business trends, any room for revenue improvement is great.
Check Assets
Some owners who have more than one storage facility provide vehicles to its staff that can be used to serve between units.
When purchasing an existing facility check what all assets are included in the price and list out any potential expenses that you might incur on day one of purchasing the facility.
Employee Promises
It’s ideal to meet and interview any staff or managers of the facility, before purchasing it, making sure that they are as per your expectations and you are not inheriting any promises from the previous owner.
Tenants and Rent
A self-storage investment with an occupancy rate of 80% is much more preferable to that of a 100% occupancy rate. This will give you the opportunity to review and increase the price for new customers.
Goods and Service Tax (GST)
GST applies to the purchase of commercial property, allow extra 10% while you purchase a self-storage facility.
Who pays maintenance costs?
Unlike other commercial properties where the tenant bears the cost of maintenance of the property, it is upon the owner to maintain the maintenance of the property.
Again no matter how many tips and tricks you read when it comes to investing or for that matter anything in life nothing can beat the education from the school of experience.
I have a lot clients who invest in self storage facilities. They can be great investments if bought and managed correctly. They have more stability and are easier to manage than most commercial and multi-family investments. Since we have a country of hoarders, I expect them to do well in the future.