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Consistently high performance has made the self-storage industry an attractive investment target, but which entry path is the right one? The author explores four ways for an investor to proceed and provides pointers for deciding the best course.

Ed Osborne

September 20, 2022

6 Min Read
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Self-storage has become one of the hottest investment opportunities in commercial real estate. In the last couple of years, the sector has experienced a rush of capital from sizeable institutional investors and real estate investment trusts (REITs). In many instances, this has resulted in further industry consolidation, but even with that, there are still opportunities for retail investors to get involved. If you want to make this journey toward financial success, following are four paths to explore and some tips for deciding which may be best for your goals.

Path 1: Buy an Existing Facility

This is the fastest, most direct way to own and control a self-storage asset. However, once you buy a property, you must operate it yourself or hire someone to run it for you. This is a big decision. You have to determine if you have the time, desire, skills and resources to manage the site and the expertise to do so effectively. If you don’t, you’ll need a property-management company to handle the day-to-day. There are plenty of providers out there, but you must be mindful of the cost and understand the scope of work.

Self-storage isn’t overly complicated, but as with any business, there are myriad details you need to understand to become and stay profitable. Buying an existing facility is a significant investment, most likely seven figures, so information and a solid business plan are essential. Inside Self-Storage and the industry’s state and national associations offer great education to help with owning and operating your asset.

Path 2: Build a New Facility

The second way to own and control your own self-storage facility is to buy land and build one. This comes with a few more challenges than acquiring an existing operation. There are a lot of details to coordinate and execute with this path.

The first obstacle is finding a site in the right location that’s zoned for self-storage or eligible for special permitting. You should be aware that many municipalities have very strict ordinances that make building this asset type difficult. Even if you can get your project zoned, stringent municipal requirements may push it out of profitability.

This isn’t meant to scare you from pursuing ground-up construction. After all, if a project can get off the ground in the right location, it can be a home run. It’s simply important to be prepared and understand that this pursuit may not be as quick as you’d like. Once complete, a new facility will likely take a year to 18 months to lease up. That’s a significant amount of time for capital to be deployed before seeing a return.

To give you an idea of how circumstances can vary, I’ll share a bit of personal experience. I was recently involved with two new self-storage developments, one in the suburbs of Seattle and the other outside Portland, Oregon. The Seattle project took nearly four years to get entitled and built. The Portland facility was shovel-ready when we acquired the property and took about a year to complete. Both will be great for our investors, but you have to know what you’re getting into when you start on this journey. Plus, once your facility is built, you’re going to face all the same operational challenges as you would if you bought an existing property.

Path 3: Invest in a REIT

When you put your money into a publicly traded REIT, you’re buying into a company that invests in real estate. Over the last few years, the REITs have had a strong performance track record in comparison to the overall stock market, but they’re subject to the same volatility.

When compared to direct ownership, investing in a REIT has one distinct disadvantage: You lack personal control over the returns or performance. Your investment is in the company that owns real estate, not the real estate itself. On the other hand, you can take a small sum of money and spread it across multiple properties in multiple asset classes, which is a good diversifier.

There’s no barrier to investing in a REIT other than having enough money to purchase shares. This path is likely the most assessable way to invest passively in real estate. It’s also the most distant from owning a commercial asset.

Path 4: Invest in a Syndicated Offering

Investing as a limited partner in a syndicated offering may be the easiest way to enter the self-self-storage industry. In this scenario, you give your money to an experienced facility operator that seeks, buys and operates single properties or a pool of assets and shares the profit with you and other general partners (sponsors), whether that be revenue from operation or a property sale. Each deal has its own specifics. You need to research which operator and deal fit best with your investment priorities and values.

The main difference between investing in a syndication and a REIT is ownership in the property. Owning a share in a syndication gives you a percentage of the actual real estate. You benefit directly from the operation of the asset as well as the value gained over time. You’re compensated based on your percentage of ownership as it applies to operating income and profit from the sale.

The big advantage of a syndicated offering is it’s truly a passive investment. You have no responsibilities except to collect your return. If you pick a reputable, experienced operator with a proven track record, it should be a relatively pain-free process.

Choosing Your Path

As you can see, there are multiple ways to invest in self-storage. When choosing your best course, ask yourself:

  • How involved do I want to be in the facility ownership and operation?

  • How long do I want my capital to be deployed?

  • Do I have the necessary capital and expertise to buy or build my own property?

  • What are my investment goals?

Your answers should put you directly on one or two of the paths detailed above, depending on your personal objectives, timelines and abilities. If you don’t mind getting your hands dirty and want to run the day-to-day operation, buying or building are great options. If you want to put your money in a company that invests in self-storage and leverage its expertise to further your goals, a REIT may be the way to go. If owing a piece of a property while having no operational responsibilities sounds attractive, a syndication may be right for you.

Each self-storage investment path has its pros and cons. Assess your situation and choose the one that best fits your immediate and future needs.

Ed Osborne is vice president of investments for Spartan Investment Group LLC, which operates the FreeUp Self Storage brand. He has more than 25 years of commercial and corporate construction experience. He’s been involved in self-storage since the early 2000s. To reach him, email [email protected].

About the Author(s)

Ed Osborne

Vice President of Investments, Spartan Investment Group LLC

Ed Osborne is vice president of investments for Spartan Investment Group LLC, which operates the FreeUp Self Storage brand. He has more than 25 years of commercial and corporate construction experience. He’s been involved in self-storage since the early 2000s. To reach him, email [email protected].

 

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