Self Storage Investing for Beginners: A Comprehensive Guide

Self storage investing is becoming an increasingly popular option among real estate investors seeking a steady, passive income with less hassle than traditional residential properties. With demand for storage growing as people need extra space for belongings during moves, business expansions, or even lifestyle changes, the industry has established itself as a reliable investment sector. In this guide, we will explore why self storage is worth considering, break down the types of facilities you'll encounter, explain common financing options, and debunk a few myths to set realistic expectations.

Why Invest in Self Storage Facilities?

The appeal of self storage investments lies in their potential for steady income, low operational complexity, and relatively high demand. At first glance, self storage may seem like an intimidating venture, but the investment benefits quickly become apparent. Unlike traditional real estate, where you may have to deal with tenants, maintenance issues, and regular turnover, self storage offers a more hands-off approach. It's essentially a business model where your customers pay for space without the complexities of providing living amenities like plumbing or waste management.

Another major factor is the ever-present demand. In the United States, approximately 1 in 10 people utilize self storage. People's lives are always changing—whether they're moving to a new city, downsizing, or needing additional space for business inventory—and this dynamic creates a strong, continuous need for storage solutions. Additionally, there are over 50,000 self storage facilities nationwide, yet the market remains fragmented, with many facilities still owned by independent operators. This means that, unlike some real estate markets that are dominated by large corporations, self storage is accessible to individuals and smaller investors.

One of the financial benefits of investing in self storage is cash flow. Unlike a single-unit rental, where your income depends on a single tenant, self storage diversifies your income stream across multiple renters. This consistent cash flow can give you peace of mind that expenses are covered and provide a profit margin that grows as you scale your investments.

Types of Self Storage Facilities

Self storage facilities come in three primary classes: Class A, Class B, and Class C. Each class has distinct characteristics and levels of risk, so it's important to understand the differences to determine which option suits your experience level and investment goals.

1. Class A Facilities
   Class A facilities are the latest, most modern storage properties built within the last two decades. These are often located in prime areas, such as downtowns or near large residential developments, and boast high-end features like climate control, advanced security systems, and 24-hour access. Because of their prime locations and modern amenities, Class A facilities are highly competitive and generally owned by large institutions or investment groups. These facilities typically require a significant upfront investment and may be less ideal for beginners due to high competition and the premium pricing.
2. Class B Facilities
   Class B facilities were generally constructed in the 1980s and 1990s and are most often operated by individual owners. These facilities are usually well-maintained, but they may lack some of the premium features of Class A properties. They are often found in suburban areas where demand is steady but not as intense as in urban centers. The stable cash flow from these facilities makes them a good choice for beginning investors, as they offer a balance of affordability and income potential without the high overhead costs associated with Class A facilities.
3. Class C Facilities
   Class C facilities are the oldest and typically in less desirable locations. Often built before the 1980s, these properties may face challenges with maintenance and occupancy rates due to their age and location. While they can present a high return on investment after renovations and upgrades, Class C facilities also come with the highest risk. This type of investment is usually best suited for experienced investors who have the capital and resources to manage potential challenges like extensive renovations or more intense competition from newer facilities nearby.

Structuring Self Storage Purchases

Investing in self storage can be structured as either turnkey or turnaround deals. Each approach comes with unique pros and cons that cater to different levels of experience, investment goals, and risk tolerance.

Turnkey (Stable) Deals
Turnkey deals involve properties that are already operational and have a stable revenue stream. These deals are generally less risky, as they involve Class A or B facilities with a steady customer base. For new investors, turnkey deals can be an attractive option as they require minimal renovation and have a faster path to profitability. Financing is often easier to obtain for turnkey properties, as lenders consider them lower risk due to their stable income and established operations.

Turnaround Deals
Turnaround deals, on the other hand, involve purchasing properties that need improvements before they can become profitable. These deals are typically found in Class C facilities or in areas where demand is lower, and they require a more hands-on approach. The process often involves making upgrades to the units, improving security, and marketing the facility to attract new tenants. Although turnaround deals are riskier, they can yield high rewards for investors willing to invest time and capital into enhancing the property's appeal and functionality.

Key Attributes to Consider When Investing in Self Storage

When evaluating a self storage investment, there are several important factors to consider that will impact your potential return and operational ease. WinnRPL, for example, looks at the following attributes to assess the suitability of an investment property:

1. Size
   The facility's total size, often measured in square footage, helps gauge how many units are available for rent. Facilities with around 30,000-40,000 square feet are typically large enough to employ a full-time manager, while smaller facilities are better suited for self-management.
2. Unit Mix
   A diverse mix of unit sizes can attract a broader customer base, as some renters need only a small unit for seasonal items, while others may want larger spaces for business storage. A variety of unit sizes can help increase occupancy rates and revenue potential.
3. Location
   Location is critical to a storage facility's success, as the majority of renters come from a 1-3-5 mile radius. WinnRPL thoroughly researches these areas to assess demand and nearby competition. Being in a growing area with high visibility, such as near residential neighborhoods or business parks, often translates into a consistent customer base.
4. Traffic Count
   The number of vehicles passing by the facility each day, known as the traffic count, affects visibility and accessibility. Higher traffic counts usually mean more exposure, which can lead to higher occupancy rates.
5. Signage and Visibility
   A clear and prominent sign is essential for a self storage facility, as it guides potential renters to the property and builds brand recognition. WinnRPL ensures signage complies with local laws and is visible from nearby streets to maximize awareness.
6. Management
   Effective management is vital for maintaining high occupancy and customer satisfaction. Deciding whether to manage the property independently or to hire a management company depends on the facility's size, location, and investor experience.
7. Drainage
   Poor drainage can lead to water damage and deter potential renters. WinnRPL ensures thorough inspections to identify and address drainage issues, protecting both the property's infrastructure and customer satisfaction.

Financing Options for Your Self Storage Facility

There are several avenues for financing a self storage investment:

• Local and Regional Banks
  These banks are often willing to provide loans for self storage projects in their area, as they understand local market dynamics.
• Credit Unions
  Credit unions typically offer favorable terms and rates for small businesses, including self storage investments.
• Small Business Administration (SBA) Loans
  Programs like the SBA 7A and 504 loans are designed to support small businesses and are frequently used by self storage investors.
• Private Investors
  If traditional loans are hard to secure, private investors or syndicates can offer a way to raise capital for a new purchase or development.
• Seller Financing
  Some sellers may offer financing as part of the sale, helping to bridge any gaps in traditional lending.

Debunking Common Self Storage Myths

1. Myth 1: It's a Hands-Off Passive Income Business
   While self storage may have fewer hands-on demands than residential properties, it still requires careful attention in several areas. Money management, effective marketing, proactive management, and regular maintenance—the "4 M's"—are crucial to sustaining profitability. Each area requires ongoing attention, and mismanagement in one can negatively impact the others.
2. Myth 2: It's a Quick Turnaround Business
   Many investors assume they can quickly renovate a self storage facility and start generating income, but the reality is more complex. Turnaround deals, especially those involving older properties, can take years to stabilize. Building a strong foundation through improvements, effective management, and targeted marketing is a time-consuming but necessary process for long-term success.

By understanding the types of facilities, financing options, and unique aspects of managing a self storage investment, beginners can approach this industry with the knowledge and tools needed for success. With the right strategy and commitment to the "4 M's," self storage investing can provide a lucrative and relatively stable source of passive income.