Self-storage is often touted as one of the best asset classes in commercial real estate, and given where other markets stand after the volatility of the coronavirus pandemic, I'd suggest it’s the No. 1 class on the planet. There’s a lot to like! Let’s explore why self-storage investing is advantageous and how to leverage the wealth created into an extraordinary life.
Why It’s Attractive
Self-storage is physically and conceptually simple. Physically, there’s a concrete floor, metal walls and roofs, and one rolling door per unit. As an asset, it’s pretty easy to maintain. Conceptually, it’s similar to other rental-based investments: Buy low, rent space to maximize revenue and sell high (or hold on to it for long-term cash flow). The beauty of the industry is success tends to be a lot easier to accomplish than with other asset types due to fewer inherent physical and operational complexities.
Perhaps the greatest advantage owners and investors enjoy is legal simplicity. Rather than endure the often painful processes of eviction and foreclosure that plague so many multi-family landlords, self-storage is fortunate to fall under the governance of lien laws. As a result, proper handling of collections and delinquencies is far easier.
This is truer today than ever. In response to COVID-19, several states enacted moratoriums on home evictions, making it harder for landlords to collect rent. In contrast, storage owners have largely benefited from loosened restrictions and streamlined collection procedures. For example, states are increasingly allowing facility operators to serve lien notices via email rather than Certified or registered mail. The end result is greater efficiency.
The crisis-induced, culturewide transition to contactless commerce is also proving to be beneficial to self-storage. Though many investors (myself included) have successfully deployed unmanned, remote-management strategies within the industry for several years, current circumstances have accelerated the adoption of such practices and amplified their benefits to operators and customers alike.
Numbers Don’t Lie
While the above assertions may sound compelling, the question is whether the numbers tell the same story. Well, let’s take a look. Statistics will vary from market to market, but typical expense ratios in self-storage hover around 30 percent to 35 percent. That’s the amount of gross income used to cover operating costs, leaving 65 percent to 70 percent to cover debt service. Anything left over is profit!
If you compare this with the 50 percent to 55 percent expense ratio experienced in the apartment sector, it’s easy to see why self-storage has such great investment potential. There’s an extra 20 cents from every rental dollar available for owners and investors to use as they see fit. With this in mind, it becomes much easier to understand why mortgages backed by self-storage properties default less often than those backed by any other asset class.
Now, Let’s Get Philosophical
All the above really just scratches the surface, but it’s clear that self-storage is an incredibly powerful investment vehicle. Still, it won’t automatically make you rich. Even if it does provide all the wealth you could ever need, it may not allow you to create the extraordinary life you deserve. It certainly can, but whether or not it does will depend on you and your approach.
Generating profit is only half the equation. What you do with that profit is just as important. Mounds of evidence support the suggestion that making more money doesn’t necessarily bring more happiness. In fact, studies show that income growth of up to $70,000 annually does bring increased levels of satisfaction, but not much beyond that.
Money is an incredibly powerful tool, but its ability to provide fulfillment depends on how we use it. A hammer can secure a nail, but it can also put a giant hole in your wall. The same applies to self-storage profit. Too many folks get into real estate with the idea that it’ll magically give them a life of freedom. What they neglect to consider it that requires intentional design and disciplined execution.
Design Your Happiness
If our lifestyle grows as fast as (or faster than) our profit, that feeling of security and freedom we’re all after will elude us. If we instead focus on increasing the gap between how much money we make and how much we spend, our lives can become increasingly remarkable. I’m not suggesting we live like paupers. This is simply a reminder that freedom and fulfillment depend more on how we use our money than how much we make.
I believe true happiness can be achieved when we spend our time and money in alignment with our deepest values. This requires that we set our own personal definition of success. There’s a segment of our culture that defines it as a faster car and bigger house. While there’s nothing wrong with those things, I encourage you to consider how your self-storage profit might be better used. Could you enhance your relationships, invest in personal development or contribute more to the needs of others? For me, this is where true contentment lies.
Parlay Wealth Into Fulfillment
We humans have a tendency to “over satisfy” our basic needs as a way to compensate for unmet, higher-level needs. Here’s my adaptation of Abraham Maslow’s Hierarchy of Human Needs:
Many self-storage investors fail to find the level of happiness they set out to achieve because they get stuck at level two, financial safety and security. They over satisfy their financial needs in an attempt to meet their unmet higher needs. But anyone who’s achieved financial success will tell you it isn’t the same as finding true fulfillment. That isn’t to say that wealth should be avoided. Instead, we should strive to parlay it into something more meaningful. In my opinion, aligning your money with your deepest values is the key to getting unstuck and ascending up through levels three, four and five.
This message runs counter to much of what we see in our culture, but it’s one I've seen to produce the most predictable increases in well-being. Self-storage has provided me with an extraordinary life, and I’m beyond grateful for that. What I learned along the way is profit is only half of the equation. The second half (what we do with it) is arguably more important. I hope what I’ve shared can help you claim the fulfillment available to all of us in the self-storage business!
Mike Wagner is founder of The Storage Rebellion, a training and community platform that teaches people how to use self-storage to regain control of their time and create an extraordinary life. After a short stint as a profitable but overwhelmed landlord, Mike transitioned to self-storage in 2011. He generated more than $1 million on each of his first three properties and now owns a portfolio that offers his family financial freedom.