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How to Invest in Self-Storage Real Estate

Kayleigh Kulp

In a hot real estate and stock market, investors may be looking for new and innovative opportunities beyond the high-priced apartment buildings and buildable land.

Self-storage facilities have the upside of being "fairly resilient through both economic booms and downturns," and capitalize on society's need to accumulate stuff, says Paul Letourneau, manager of commercial loan originations at Alliant Credit Union in Chicago.

Despite self-storage experiencing a runup in pricing and demand, the markets continue to grow and capitalization rates (a method of factoring return on investment) remain attractive.

[See: 5 Ways to Invest in Real Estate Without Much Money.]

"The flexibility of self-storage facilities makes them incredibly resilient through all economic cycles because people always seem to find a use for them," Letourneau says.

During a boom cycle, you might see customers using self-storage facilities in more novel ways, such as short-term product warehousing for small businesses or incubator space, whereas in a downturn people will be downsizing into smaller homes and moving sentimental items and excess furniture into self-storage facilities, Letourneau adds.

And now, there's also opportunity in a millennial shift in mindset that prefers not to commit to a specific location, Patrick B. Healey, founder and president at Caliber Financial Partners, says.

This is in part why self-storage trends with the multifamily property type. Self-storage is also helpful to certain business sectors, such as the pharmaceutical industry, whose reps need to store drugs they distribute to doctors and hospitals, or possibly other home-based or remote working businesses that need storage space, Healey says.

Look beyond the largest metro areas to find cities with unmet self-storage needs such as Tampa, Florida; Chattanooga, Tennessee; Birmingham and Huntsville, Alabama and Des Moines, Letourneau says.

Ryan Smith, principal at Elevation Capital Group in Orlando, Florida, suggests a couple of ways to invest in self-storage facilities: buying into a real estate investment trust, referred to as REIT, that is focused on the asset class, or buying a facility individually (or with partners) in your local area.

To further decide whether owning an individual facility or a REIT is best for you, you'll need to decide whether your goal is income, capital appreciation, or both, Smith says.

If you own a self-storage facility yourself, you can make many missteps without the right experience or knowledge. Management can be time intensive, and your lack of access to quality available deals and financing options may be limiting.

To find something off-market with less competition, you might need to develop a list of facilities around you and begin calling them to generate leads of owners interested in selling, Smith says.

There's also no quick liquidity options if an individual self-storage facility you bought doesn't work out. However, you would have more control over the property and possibly take on less risk than other actively managed real estate assets such as industrial, apartments and retail.

[See: 8 Real Estate Investing Mistakes to Avoid.]

Unless you have "scale," self storage is difficult, Healey says. You really have to pay attention to the saturation of the self-storage market in your target purchase area, since it can inhibit your ability to raise rents or keep occupancy rates high.

But on the upside, "the ability to grow rent at a much more significant level than other property types like office or retail is a very attractive feature, especially in a rising interest rate environment," Healey says.

Self-storage is a type of real estate with low capital expenditures, making the expenses low enough to maintain cash flow in a down period. Insurance costs are also low, he says.

If you decide to make a go of it, you also need to know your local marketplace, Letourneau says. In urban environments, for example, customers want multi-story, climate-controlled space with high-tech monitoring and security systems. The needs of suburban customers differ and have markets where storage for RVs and vehicles are in high demand.

"For your first self-storage facility, buy within your market to stay heavily involved with oversight," Letourneau says, and use a broker to buy and sell who specializes in self-storage.

Talk to local owners and operators of self-storage or your local commercial real estate contacts for a broker reference, and do your homework on who you select as they will likely help guide you through the process and may assist with sourcing financing, Letourneau adds.

Finally, make sure your own finances are in order and you have sufficient cash flows for a down payment and ongoing cash reserves, if necessary, he says.

Meanwhile, operating storage units is more difficult than it may appear, Healey says.

"Many of the well-performing storage units are professionally run. They have very sophisticated technology systems that allow them to do dynamic pricing of units to offer incentives and to raise rents when it's appropriate," he says.

The difficulties and nuances of the sector make owning self-storage REITs a better option for many, because they allow investors to capitalize on the sector's unique competitive advantage without having to be hands-on. That doesn't mean you don't experience market risk, Smith says, but you also have market liquidity, an experienced management team, and an income stream.

Public Storage (ticker: PSA) is currently trading at about $255 a share, up from about $214 a year ago, and a dividend yield at about 3.3%. Extra Space ( EXR) is trading at about $118 per share, up from about $93 a year ago, and pays a dividend of about 3%.

[See: How to Invest in Real Estate Without Buying Property.]

Also, consider Life Storage ( LSI), National Storage Affiliates ( NSA), and CubeSmart ( CUBE) for other opportunities to diversify in the self-storage sector.



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