When most people consider investing in commercial real estate, they often consider buying a multifamily home or renting out an apartment complex. However, there are various ways to invest in real estate—one of which is through storage units.
Depending on the local market, storage units can give real estate investors a significant return on investment (ROI).
This type of commercial property is gaining popularity among investors for its many benefits, such as providing a reliable source of passive income. Plus, self-storage properties tend to be worthwhile investment opportunities for those looking to diversify their portfolio.
In general, investing in storage units can prove profitable, offering several advantages that outmatch other real estate investments.
What Are Storage Units?
A storage unit is essentially a self-contained building that has secure access. Storage units come in various sizes, and you can find them in many locations, including self-storage facilities, warehouses, and even retail stores.
The cost of renting a unit depends on its size, location, and rental agreement length, though they’re typically rented out monthly.
The most common type of storage unit is the self-storage unit. These units are a popular option for people who are moving to a new home or apartment and need a short-term place to store their belongings before settling into their new living situation.
As for long-term tenants, storage units are invaluable when downsizing.
Other storage units include climate-controlled units, drive-up units, and shipping container units. Climate-controlled units, which are widely used by small businesses, are ideal for storing inventory or items that may be damaged by extreme temperatures or humidity.
Drive-up units offer the convenience of pulling your vehicle right up to the door of your unit for easy loading and unloading. Shipping containers can be converted into storage units by adding shelves, partitions, and other features.
An individual may rent out the entire storage facility or a portion of the unit. In addition, the investor is responsible for the property’s overall maintenance. This includes ensuring the units are clean and in good repair and that the renters have access to them.
How Do Storage Units Make Money?
Storage units are big business. In the United States alone, there are up to 60,000 storage facilities as of 2022, cumulatively generating more than $39 billion, and that number is growing yearly. You can find self-storage properties in just about every town and city.
So, how do storage units make money? The two main ways include rental income and the sale of stored items, though they can also generate revenue through late fees, merchandise sales, and other services, such as box rentals and moving supplies.
Rental Income
Most storage units are leased out to tenants by the month. The rent depends on the unit’s location, amenities offered, and square footage.
Storage units typically have a high occupancy rate, so there is little vacancy loss. This results in a steady cash flow covering operating costs and generating a profit.
Sale of Stored Items
When tenants fail to pay their rent or abandon their storage unit, the contents are auctioned off to the highest bidder.
These auctions are often conducted online, which makes them accessible to a broad audience of potential buyers. The proceeds from the sale of stored items can be significant, especially if the unit contains valuable items.
What Are the Benefits of Self-Storage Investing?
From the potential for high returns and the ability to be a hands-off investor, there are a variety of advantages to investing in storage units. Generally, storage units can be rented out at between $70 and $300 per month and are usually in high demand based on the units’ location.
After all, people continually look for extra storage space, whether it’s for their personal belongings or business inventory. As a result, self-storage properties usually have high occupancy rates, which may lead to consistent rental income.
It’s also possible for self-storage operators to set up automatic payments for renters and let the money come in passively. Self-storage investors can earn a steady stream of rental income without expending much effort after doing their due diligence and closing on the sale.
Another benefit of self-storage investing is that the units are often low-maintenance. After renting out a unit, an investor won’t have to do much in terms of upkeep.
An investor can also hire a property management company to take care of the day-to-day tasks of their self-storage business.
Lastly, storage units offer the potential for appreciation. Like any other type of real estate, the value of storage units can go up over time, making them a viable long-term investment that can provide financial security down the road.
Investors who prefer not to own and manage property may look into real estate investment trusts (REITs), companies that own, manage, or finance real estate that generates income, such as storage units.
Self-storage REITs offer investors portfolio diversification, liquidity, and the potential for high dividend yields.
What Are the Risks of Investing in Storage Units?
Although this type of property may provide a consistent stream of passive income, investors should be aware of several risks associated with investing in storage units.
The most common risk is that the tenant could default on their rent, leaving the storage owner responsible for the remaining balance.
An investor of a storage unit not located near a high-traffic or in-demand area could face challenges in finding renters. Units that already have a difficult time with occupancy can be challenging to sell if the self-storage market changes and demand decreases.
Additionally, there is always the potential for damage to the unit or its contents. While damage could result in losses for investors, insurance can usually cover it.
However, as long as investors know these risks and do their due diligence when selecting a storage unit, they can minimize their exposure and maximize their ROI.
How To Get Started Investing in Storage Units
Real estate investors interested in owning and renting storage units should become familiar with the industry and their target market.
Thorough research can help you decide which storage units suit your investment goals.
Carefully vet storage units or companies to ensure they are reputable and have a solid track record. Before you invest, inspect the property to ensure it’s in good condition and won’t need any significant repairs or renovations.
Secure financing through traditional means like a commercial loan from a bank or another financial institution, or choose a more straightforward, streamlined option, such as an online lending platform, which automates underwriting and offers competitive interest rates.
When the sale closes, find and screen tenants. Create a listing for your unit on a self-storage marketplace website. List the features and benefits of your storage units, such as climate control, security features, and easy access. Offer discounts for long-term rentals or referrals.
Afterward, you can contract a management company to take care of the essential maintenance and upkeep of the property. This includes ensuring that the property is in good repair, addressing any code violations, and keeping up with regular cleaning and landscaping.
What Factors Should You Consider When Purchasing a Storage Facility?
Location is crucial when it comes to investing in storage units. On average, the closer a storage unit is to a major city, the higher the demand and the more you can charge for a unit. Another reason location is vital is that it can impact your facility’s security.
Storage units located in safe, well-lit areas are less likely to be broken into than those hidden away or in unsafe neighborhoods. A well-protected storage unit can give customers peace of mind, knowing their belongings are safe.
Also, consider the unit size since the number of square feet may affect its value and how easy it is to rent out.
In addition, be aware of the competition in the area. If there are a lot of other storage units available nearby, it may be challenging to fill yours. When investing in storage units, these considerations can maximize your chances of success.
