Why Invest in Self-Storage Facilities?

With more than 24 million self-storage units in the country you have all seen them and perhaps many of you have used them.  My sister kept some of her stuff in storage for more than 10 years before deciding to part with some of it.  Self-storage facilities offer an attractive long term revenue/profit generation opportunity.

They offer advantages over apartment complexes because the tenants don't live there, in other words, you collect rent without having to fix toilets.  This low maintenance factor, along with lower utility and staffing expenses creates a total cost to operate of approximately 35%.  This means that a self-storage facility can produce a profit at an occupancy rate of around 65% versus approximately 80% for an apartment complex.

Self-storage facilities are relatively resistant to economic swings.  For instance during the recent single family home meltdown, people who had to vacate their homes utilized self-storage facilities to store their extra stuff while they downsized their living accommodations.  During good times, people acquire more stuff and often need a place to store it or store their old stuff.  In our housing development, large items such as boats, campers, and RVs can't be stored in our driveways so residents here use self-storage units for these items.  In addition, many businesses use self-storage facilities to store records or goods for sale.

In the event renters don't pay, evictions are much easier with self-storage units.  If you've ever seen the show Storage Wars you know that the contents of a storage unit can be sold when the rent isn't paid.  Generally there is no need to go to court, just follow the specific laws of the State, and then sell the contents.

Like apartment complexes, self storage facilities may be positioned to add additional revenue generating operations on site.  Additional revenue generating operations can include:

• a U-haul rental operation
• a retail operation that sells cutters, tape, locks, boxes, etc.
• a packing and shipping business
• sell insurance to renters
• mobile storage such as "rat pack" or "pods"
• an e-bay listing service
• climate controlled storage options
• office services, including copy and fax services, conference room rental
• or anything that your imagination and the surrounding community will support.

Due to the items listed above, self-storage facilities have the lowest failure rate and subsequently lowest loan default rate of any real estate type.  Given the information listed above you can understand why industry experts often refer to self-storage facilities as one of the "cash cows" of real estate investing.

As a continuation of last month's discussion of short sales, I heard on the news today that short sales now outnumber foreclosures and this trend is expected to continue for some time.

Investor Confidence Hits a High Note

Marcus and Millichap reports that the economic recovery and greater access to capital are fueling property sales in 2012.  Positive news in recent months, on everything from jobs data and consumer spending to rising occupancies, appears to be striking a chord with commercial real estate investors.

The Investor Sentiment Index, hit a high of 166, the highest level since the index began in 2004, and has been an accurate indicator of economic and market direction.

That growing confidence is further reinforced by investor plans to expand real estate holdings.  More than half of the survey's respondents (58 percent) plan to increase their commercial real estate investment in the next 12 months.   That is consistent with fourth quarter survey results, when 60 percent of respondents said they intended to grow their real estate portfolios.  An additional 25 percent expect investments to remain the same, while only 4 percent expect their real estate holdings to decrease over the next year.

Commercial real estate is expected to capture more capital investment in 2012, in large part because of its competitive yields and improving fundamentals across all property types.  Half of the respondents believe that property values have bottomed out, while 52 percent agree that occupancies have bottomed out.

The majority of respondents (70 percent) somewhat or strongly agree that commercial real estate offers favorable returns relative to other investment classes.  In addition, most respondents would rather have their money in direct real estate investment as opposed to REIT stocks.  Only about one in three respondents (36 percent) agree that now is a good time to invest in public REIT stocks.  

Laughs and Interesting Stuff 

Living to be 100      

A woman in her late 50's was praying mightily to know how long she would live.  After many months of prayer the answer came, responding that she would live to be 100!

Well, she got to thinking about this and decided if she was going to live that long she was going to look good. She invested in a new hair style, a tummy tuck, a boob job, a face lift, and some other incidental treatments that had her looking 20 years younger.

Shortly thereafter she was crossing the street to meet with her new exercise coach when she was hit and killed by a passing truck.

When she got to heaven she asked, "Hey, what happened? You told me I was going to live to be 100!"

"Oh, it's you" came the reply, "I'm sorry I didn't recognize you."    

Getting the Loan

Edgar needed a loan, so he walked into a New York City Bank and asked the loan officer for a $5,000 loan to attend a festival for two weeks in Paris. The loan officer said he would need some form of security for the loan, so Edgar handed him the keys and title to his new Ferrari he had parked on the street in front of the bank. The loan officer agreed to hold the car as collateral and apologized for having to charge 12% interest.

Later, the bank president and several of the bank officers all enjoyed a good laugh at the Edgar for using a $250,000 Ferrari as collateral for $5,000 loan. An employee of the bank then drove the Ferrari into the bank's private underground garage and parked it.

Two weeks later, Edgar returned, repaid the $5,000 plus $23.07 interest.  The loan officer said, "Sir, we are very happy to have had your business, but we are a little puzzled.  While you were away, we checked you out on Dunn & Bradstreet and found that you have an advanced degree, are a highly sophisticated investor, and a multimillionaire with real estate and financial interests all over the world.  What puzzles us is why would you bother to borrow $5,000?"

Edgar just smiled and replied, "Where else in New York City can I park my car for two weeks for only $23.07 and expected it to be there when I return?"