Are Self-Storage Units Profitable? (Real Estate Investing Profits Without Conventional Tenants): Gold Rush of People’s Stuff
Are you looking for an investment opportunity that combines stability and profitability?
Look no further than self storage units.
In recent years, the self storage industry has experienced tremendous growth, making it a lucrative option for investors.
With the increasing demand for storage space due to the rise of urbanization and downsizing trends, self storage units have quickly become an essential part of people’s lives.
But what makes them such a promising investment?
In this article, we will delve into the world of self storage units, uncovering the secrets to their success and exploring the potential profits they can generate.
Whether you are a seasoned investor or someone looking to diversify their portfolio, this comprehensive guide will provide you with all the information you need to unlock the potential of self storage units and maximize your returns.
So, let’s set out on this exciting journey and discover the profitability that awaits you in the self storage industry.
Self-storage Investing: Profitable Business with High Annual Growth Rate
Smart real estate business owners are continually trying to add value to their portfolios while increasing long-term cash flow.
We all know that one of the best ways to make money as an investor is through real estate. When you think about it, owning a piece of property can net you a high return on investment.
Compared to some other styles of real estate investing, one style of investing that has been labeled by some as an “easy way” is investing in storage units.
A profitable self-storage unit business can be a great part of your real estate investing portfolio.
Are storage units profitable?
The truth is storage unit businesses are a growing sector of the rental and real estate industry.
Self-storage companies have been around for decades and have proven themselves to be profitable businesses that generate high returns over time.
In fact, the self-storage industry has grown rapidly over the past 40 years to become one of the most popular real estate investments in the United States and the fastest-growing commercial real estate sector.
Self-storage Units Are Profitable
With a growth rate increasing at an annual revenue of 2.6% to a projected $26.9 billion over the five years to 2022, the Storage and Warehouse Leasing industry, which largely rents and leases self-storage space, has performed well.
The self-storage industry continues to be one of the sectors of the US economy with the highest growth, according to IBISWorld.
Self-storage investments are profitable. There are many reasons for this:
- It’s an alternative to investing in real estate
- The best short- and long-term returns in commercial real estate may be found in self-storage facilities.
- There is always a high demand for self-storage businesses due to people downsizing and needing more space in their homes or offices.
- High-profit margin. Self-storage businesses generally have an average profit margin that is over twice as high, at 41%, compared to the average profit margin for all industries, which is 22%.
Self-storage REITs Offer Advantages Over Other REITs
The major difference between self-storage units REITs and other types of real estate investment trusts (REITs) is that the self-storage portfolio typically consists of smaller, independent self-storage facilities rather than large apartment buildings or office buildings.
These self-storage facilities provide tenants with more flexibility in how they use their space, which means that investors can achieve higher returns on their investments than with other types of REITs.
As self-storage operators continue to grow, purchase prices will rise as well. It’s a growing industry, which means there are more opportunities to buy and sell storage units.
On September 30, 2022, Public Storage, the biggest owner, and operator of self-storage facilities in the United States, boosted its net profit margin to 110.91%, while Extra Space Storage, another self-storage REIT, obtained a net profit margin of 50.97%.
Compared to other investment classes, self-storage REITs have outperformed them extensively over the past five years, with average annual growth rates of 68% (as opposed to 45% for stock market indexes, 11% for 10-year treasury and swap rates, and 24% for gold and oil). Self-storage investments are a niche that can be financially rewarding.
Regarding taxes, self-storage facilities offer tax advantages over other types of investments. In addition, cost segregation may result in lower income taxes for self-storage properties, freeing up the owner to use the money saved to make capital investments, pay down debt, or simply increase cash flow.
Like other real estate ventures, another advantage is that self-storage owners are now secured against non-paying customers.
The items in the storage facility can be put up for auction to make up for the lost rental revenue, and the contents of a storage container are auctioned off to the highest bidder. Self-storage facility owners can rest easy because of this.
Pros and Cons of Self Storage Business
Self-storage units are a great option for potential investors who want to add value to their properties and generate an operating income, but it’s not for everyone.
To determine whether self-storage investments are suitable for you, consider the following pros and cons:
Low maintenance or upkeep, since there aren’t any tenants living in these units, you won’t have any extra responsibilities related to maintaining them.
The self-storage business is very lucrative and can provide a stable additional income.
Flexible, a self-storage business can also make money by providing additional services such as selling products like locks, boxes, and more.
Self-storage units are a great recession-proof business. Despite recent economic downturns, with the high demand for space remaining strong and the cost of space remaining low, self-storage units’ market value continues to grow.
Competitive industry. The self-storage industry is saturated with companies trying to get in on the action. So, if you want to make a lot of money, hard work is the key.
Construction costs are high. The location of self-storage facilities plays a big role in the development costs.
The storage unit size, whether it be smaller units or larger units, also makes a difference in your overall costs, not to mention the cost of land and property taxes.
The cost of insurance coverage can be expensive if you want to protect your property from fire, theft, or vandalism.
There are several types of insurance policies available for this purpose, including general commercial liability, professional liability, property damage liability, and workers’ compensation coverage.
Self-storage Occupancy Rate
Storage facilities provide short-term or long-term storage space to customers. Short-term storage is usually rented out for one to three months, while long-term storage can be rented for up to a year.
The Self-Storage Association estimates that 9.5% of Americans currently rent self-storage space. The median physical occupancy rate remained constant from the previous quarter and climbed by 1.0% from the third quarter of 2021, while REITs showed no change from the second quarter of 2022 and declined by 1.0% from the third quarter of 2021.
Since their low of 75.7% in 2010, occupancy rates have been rising, with the national average for self-storage reaching 91.7% in 2018.
According to malestoragegroup.com, even though the physical occupancy rate declined, the rental income increased due to rises in asking rental rates across the country.
Notably, both Nationwide and REITs saw an increase in rent per available square foot in the third quarter of 2022. This quarter, as well as when compared to the entire previous year, supply and demand measures seem to be increasing.
By the third quarter of 2021, construction starts had climbed by 27% since the last quarter.
A cash flow analysis via insideselfstorage.com shows self-storage facilities with 40,000 net leasable (sq ft) square feet in a market with $ 9 square foot annual rents will generate $450,000 in gross annual rents at a 100 percent full occupancy rate.
Company size also plays a big role in determining the cost of self-storage rental units. Smaller companies generally have lower prices than larger ones.
Still, they may not be able to offer the same level of service or value for customers who want security and peace of mind when renting their storage space.
Return on Investment (ROI)
Although the return on investment (ROI) rate for self-storage facilities varies depending on a number of factors, a storage facility often has cheaper operational and overhead expenses than other businesses, which results in a lower break-even income for the facility as well.
This indicates that a storage facility can offer a high return on investment and frequently has a higher profit margin than other types of businesses.
A 29.6% return on investment is considered to be an average self-storage profit margin, according to research by Parham Group’s self-storage specialists.
Starting a Storage Unit Business
There are many factors to consider when looking into your options. This can range from very simple and informal to quite complex and high-class.
As an aspiring self-storage investor, it is a good idea to learn and understand self-storage market research before making your own self-storage facility.
If you’re wondering what type of storage unit is right for your new business, here’s a quick guide to help you decide.
Types of Storage Units
1. Climate-controlled Units
According to priceselfstorage.com, these units are meant for sensitive items, including electronics, instruments, antiques, or clothing, in their proper condition.
These are the most common type of self-storage facilities in the United States. They’re usually located in large cities, industrial areas, or retail centers. Climate-controlled facilities offer customers peace of mind knowing that their belongings will be protected from extreme temperatures.
2. Outdoor/Drive-up Storage Units
These storage units are common in single-story storage facilities. These are basic units located on the ground level, usually with a drive-up door that opens from the side of the unit to an area where items can be unloaded. These are the most popular type of self-storage units, as they allow customers to enter and exit the facility at their convenience.
3. Indoor Storage Units
Indoor storage units are designed to hold smaller items that require less space than traditional outdoor storage units. These units are ideal for storing seasonal items like shoes or sports equipment or even just things like boxes and packing materials.
4. Vehicle Storage Units
Vehicle storage units are ideal for storing a car, boat, or RV. These units are also called auto-warehouses or auto-storage facilities.
Permits and Licenses When Opening Self-storage Facilities
Say you are planning to construct a new facility from the ground up rather than purchasing an existing one.
There are other things that you must consider before deciding to open your own self-storage facility business. One of the first things is permits and licenses.
These are required by most cities and counties to operate self-storage facilities. Some of these permits include the following:
Building permit: This is the first permit you must obtain to build your storage facility. You will need to submit an application to the local building department, which will require you to provide detailed plans for your project.
In addition, you’ll need to provide details about how much space you plan on building and where it will be located in relation to other buildings or structures.
Your plans should also include information about any existing facility and utilities that may be in the way of your project.
Zoning Permit: You may also need a zoning permit before opening your self-storage facility in certain areas of the country.
For example, suppose your self-storage business plan calls for additional parking spaces that are allowed within zoning regulations.
In that case, you may be required to get an extension from your local area zoning board before proceeding with the construction of your new facility.
Fire Department Exemption Certificate: The fire department exemption certificate grants permission for businesses that have an approved emergency plan and have been inspected by the appropriate authorities prior to their opening date.
Self-storage loans are a type of small business association loan that may be utilized to fund the development, acquisition, expansion, and/or enhancement of a self-storage facility.
Many different lenders, including the Small Business Administration, online lenders, conventional banks and credit unions, and online lenders, provide these loans.
SBA loans are government-backed loans that offer low-interest rates and flexible terms.
There are different types of SBA loans; among them are the 7(a) loan and the 504 loans.
Both can be used for self-storage units. SBA loans (504) are popular among operators of self-storage facilities because they come with much lower interest rates (about 5%) than traditional 7(a) SBA loans (usually between 7.5 and 11%), which makes them more affordable in the long run.
Keep in mind, though, that SBA 504 loans are only permitted for the acquisition, improvement, and construction of commercial real estate as well as the purchase of long-term equipment (defined as equipment that will be in use for at least 10 years.) according to sba504.loans.
How to Maximize Your Profit from Self-storage Units
Analyzing different markets and market rates can make a difference in terms of costs and profitability.
This will allow you to choose the best deal possible without having to pay additional charges than necessary.
To make the most of your self-storage investment, you need to know how to maximize profits from your self-storage property. There are many factors that you should consider.
First and foremost, establishing a marketing plan for your business model attracts customers to your storage unit business and increases sales volume.
Secondly, increasing the value of your self-storage business by maximizing revenue, minimizing normal operating expenses, and using asset management software can maximize profitability.
When it comes to choosing the right location for your storage unit business, you’ll want to make sure that the area has enough foot traffic for easy access in order for potential customers to find your establishment.
In addition, promoting your self-storage business through online platforms or physical business cards can help increase your customer base and allow you more room for growth.
Overall, it is concluded that self-storage units can be profitable.
Regardless of whether you’re an investor, a manager, an expert in online marketing, or someone else entirely, knowing the fundamentals of how self-storage operates can help you understand what’s involved in the self-storage industry and how profitable it can be.
However, self-storage business is not for everyone.
Although there may be a sizable return on investment (ROI), there may also be risks that must be seriously considered.