We're living in a very exciting era for the self-storage sector, and savvy investors everywhere are wasting no time in capturing attractive double-digit returns. They realize the opportunities available in the storage industry today may not be repeated for a very long while.
One challenge owners and investors may run into, however, is funding. Having liquid capital to diversify and take advantage of opportunities can be difficult. Some may be able to invest in a single deal, but then have to wait a year or more to fund their next acquisition or development. A way around this is to partner with accredited investors looking for alternative ways to grow their retirement accounts and generate passive income. These typically are individuals who are making a very nice salary or have a minimum $1 million net worth (excluding their primary residence).
Private equity presents an excellent opportunity for self-storage owners and investors whose growth is limited only by the amount of liquid capital on hand; and luring this money has never been easier. This is largely because our current investing system is heavily skewed toward stocks and bonds, even though there’s an entire world out there about which Wall Street doesn’t want Main Street to know. It’s a world that pits investing in assets like self-storage facilities against traditional vehicles such as stocks, bonds, mutual funds, etc.
Breaking Through the Noise
Not surprisingly, asset investing gets very little attention, mostly because Big Money (e.g., Wall Street) has a far easier task in marketing to the masses; it doesn’t have to worry about accredited investors. After all, popular finance magazines are sponsored by mutual-fund companies that have the products (stocks, bonds and mutual funds) to sell, so investors tend to read about only those types of investments.
Most of these products are tied up in qualified long-term accounts like traditional 401(k) plans and IRAs, which are limited, narrowly focused and not liquid. Consider, as well, the concept of beta, which measures the volatility of an investment. The higher the beta, the higher the volatility, which theoretically makes it a riskier venture. While the U.S. stock market has a beta of 1.0 and the Russian stock market may have a beta of 2.0, the beta for self-storage is 0.5!
When you factor in the historical performance of self-storage as an asset class, it’s risk-adjusted returns are far superior to stocks. Most people are unaware of this because they aren’t exposed to it from the media, their local financial planner, etc. It’s much easier to sell the masses on simple stock-and-bond portfolios and charge an asset-management fee each year than to try to characterize the advantages of the storage industry.
How Big Is Big?
So how big is the pool of private investors with whom you may be able to partner? The latest estimates indicate there’s approximately $50 trillion of capital sitting on the sidelines, being held by investors who seek a viable alternative to the stock market. Many of these folks are tired of stock volatility and want to invest in something they can see and touch, such as bricks and mortar, or in the case of self-storage, steel.
Your job is to create relationships with these private investors and show them how they can participate in your next project. Where do you find them? It’s sometimes as easy as weaving self-storage into conversations with the people you interact with daily, those with whom you’d feel comfortable partnering. It might be the owner of your local dry-cleaner, or your brother-in-law, or your dentist. You’d be surprised who has funds to invest.
When asked how these potential partners can invest with you, here are some options you can present:
Establish a self-directed IRA (SD-IRA). Ideally, investors will already have a traditional IRA established. If it’s all in stocks, they should see if they can allocate money from that account to a new SD-IRA. SD-IRAs are typically established by companies focused exclusively on these types of specialized accounts. It allows them to invest in a much broader array of asset classes, such as real estate, business entities, etc.
Establish a solo 401(k). If an investor has his own business and is the sole owner, he can consider establishing a solo 401(k). Similar to the SD-IRA, this allows investing in a much wider set of asset classes. The kicker here is individuals can contribute much higher amounts than with an SD-IRA. As of this writing, solo 401(k)s also have a tax advantage when it comes to leveraged real estate. The Internal Revenue Service seeks “unrealized business income tax” on the gains from the leveraged portion of real estate, which applies to SD-IRAs, but not solo 401(k)s.
Transfer money from an existing 401(k). There are several angles here, and each brings a unique set of considerations for your equity partner. One method is to borrow money from the account and pay it back over time at a low interest rate, which is essentially paying oneself back with interest. If the individual is employed and planning to quit his job, this is an ideal time to transfer money to an SD-IRA after he exits. If the investor is married, working and living in a community-property state, he may also be able to transfer some percentage of money to a spouse’s SD-IRA.
The paths to success in self-storage are always changing, and tapping into the trillions of dollars available in the private-equity space has quickly become a viable addition to a fruitful investing strategy. This could also become critical during a future recession, if development slows to a crawl. The merits of this strategy have proven to be profitable for many investors, who choose an alternative path to bank financing and the limited amount of capital on hand.
Scott Meyers is the founder of Self Storage Profits Inc. and has been involved in the self-storage industry as a developer, owner, syndicator and operator since 2005. He owns and operates 15 storage facilities across seven states. His website provides information, software and seminars designed to assist individuals launch and grow their self-storage businesses. For more information, e-mail [email protected]; visit www.selfstorageinvesting.com.