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Investing in Self-Storage: Do You Want to Be Active or Passive?

Investing in Self-Storage: Do You Want to Be Active or Passive?

Self-storage is a high-performing asset class, making it attractive to many would-be owners and investors. The important question to answer is, do you want to be active or passive in the business? Here are some key considerations to help you choose your path.

After conducting a long search in which you attended several real estate conferences, read dozens of articles and listened to loads of podcasts, you’ve finally settled your investment target on the best asset class around: self-storage. So, now what?

There are two main approaches to investment—active and passive. As an active investor, you’ll directly own the facility. You’ll determine feasibility, obtain a loan, oversee operation, maintain the property, etc. In contrast, a passive investor can enter the market through a publicly traded real estate investment trust (REIT) or private syndication, known as a private placement. Let’s examine these options to help determine which is right for you.

Active Investment

If rolling up your sleeves and managing your self-storage business sounds inviting, active investing might be the best route for you. First, consider these three critical areas.

Feasibility. If you’re building, a feasibility study helps determine whether there’s enough market demand to support a new project. If you’re acquiring an existing facility, it’ll help you understand your micro-market. There could be building permits in the pipeline, which would mean increased competition from new developments or expansion of existing properties. If those projects come to fruition, how will they impact your business prospects?

Don’t try to tackle feasibility on your own, especially if this is your first development or purchase. There are several consultants in the industry who can help you.

Financing. Though less complex than other real estate asset classes, self-storage has become more expensive in the last few years. Unless you’re sitting on a pile of cash, you’ll need a loan. Two great options to consider are local banks and the Small Business Administration, though there are others, such as commercial mortgage-backed securities and life-insurance companies. Whatever lenders you approach, have your attorney review all loan documents and choose the one that best fits your needs.

Facility operation. An active investor needs to be educated in effective facility operation. What’s your marketing plan? How will you maintain the property? How will you train employees? What will be your policies and procedures? What are the legal concerns?

Of course, you can outsource to a third-party management company. This can be a great strategy, and there are numerous options available; but it’s important to vet your candidates, as you’ll be entrusting them with a multi-million-dollar asset. Think of it this way: How will you manage the management company?

Passive Investment

If directly owning and operating self-storage sounds daunting, don’t fear. You can still own a piece of a single facility or even multiple properties by becoming a passive investor and collecting “mailbox money.” In this case, you’re a partial owner, but you won’t be required to engage in any part of the operation.

One way is to invest in a publicly traded REIT. It’s as easy as finding the company’s stock on any exchange and purchasing the desired number of shares. If you like the idea of owning a larger piece of the pie with a smaller group, making a private placement is the way to go. Either way, you’ll need to do some homework to ensure you’re making a good investment.

The team. The most important aspect in any private placement is to know the people with whom you’ll be in business. A good team can take a poor investment and turn it around, while a bad team can take an amazing opportunity and destroy it. I make all my private-placement decisions based on the team first and the deal second.

To get to know your team members, Google them. Dig into their personal lives. Ask any question you want. Nothing is off the table here. How many deals have they done? What are their average returns? What are their mission, vision and values? Do they align with your own?

The deal. The other key here is the deal itself. Do the numbers make since? Did the team perform a sufficient level of due diligence?

Make sure you understand your rights in the deal. All private placements will include several documents to review, and some could be 150 pages or more. Read them all. If you aren’t comfortable reviewing them, spend the money to have an attorney do it. Just make sure the attorney you hire has experience with private placements. Some investors have missed out on good deals because their lawyer lacked the proper experience in these kinds of transactions.

For anyone on the fence about which investment track to take, I often recommend finding a sponsor with whom you can invest passively and learn what it takes to operate self-storage. Once you’ve been part of an investment for a while, the right path for you will become clearer. Because self-storage is such a great asset class, either investment strategy—active or passive—can yield years of rewarding ownership, each with its own benefits.

Scott Lewis is the co-founder and chief executive officer of Spartan Investment Group LLC (SIG), where he’s responsible for developing business strategies and overseeing all operations and business activities. Scott has led several successful real estate projects ranging from single-family flips to ground-up self-storage developments. He’s also a major in the U.S. Army Reserves and a veteran of Operation Iraqi Freedom. SIG has completed $9 million in development projects, with $70 million underway. For more information, call 866.375.4438; e-mail scott@spartan-investors.com; visit www.spartan-investors.com.

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