Self Storage Investing 101

What’s up everybody today we’re going over self storage investing 101. Now in this video we’re going to cover everything from obviously the industry but the assets themselves market feasibility. We’re going to look at operations to finances. So we’re going to cover a lot in this video and we’re going to have a lot of numbers as well. So make sure you pay attention and we’ll get through it all. But before we start please like subscribe and comment. As we know that’s the currency of YouTube so let’s appease the YouTube gods. Thanks everybody. Okay so let’s start off with the industry overall. This is self storage investing 101. The self storage industry has been around since basically the 70s. It really took hold in the 90s and really started to gain momentum in the 2000s particularly after 2008. Now it’s all the rage. Investors are all talking about it. They want to know what’s going on. I’ve been in this space since the early 2000s. That was a time that was much harder to get into self storage than now. Everything from financing to operations nobody wanted it. It was this weird asset class that a lot of people didn’t even know would stick around. After 2008 that all changed. But where is it at today and what’s it look like in the future. 2020 the industry was worth right about 48 billion dollars. That’s changed a lot just in the last two years. But it’s predicted that the industry will be worth around 65 billion in 2026. Now that’s a 5.4 percent compounded annual growth rate. Now there’s a few things that are interesting about that. First of all that is slower than I think was previous especially in the last couple of years. We’ve seen a lot larger growth than that. But I think it’s reasonable because self storage is turning into a maturity phase right. It’s coming out of adolescence. It’s now playing with the big boys. It’s seen as one of the main staples in real estate investing. A lot of people want to get into it. So we will see probably a more normal growth rate as opposed to this the steep hockey stick valuation and growth of the industry. With that said it offers a lot of opportunities now for people to get in because still this industry is got roughly around 50 plus thousand storage facilities in the United States. That’s a lot of storage. Now two billion square feet. So what is driving this right. What are the economics that drive it and also what hurts it. Let’s start off with what drives it. The things that are driving the overall storage industry. I really focus on four things. That’s population regulation cost and relocation. Those are the main four drivers in self storage. Let’s break into them. First of all population increase is a staple of all economic growth. It’s a big part particularly in real estate. That’s true amongst all asset classes. The next thing and in the United States our population is growing. This is a good thing. But the next thing is regulations. HOAs and cities have gotten much tighter on what you can build on your property what you can put on there everything from RVs campers. So there’s not just throwing a shop up right. You just can’t build something on your house expand your house throw a camper in the driveway. We don’t allow those things anymore. So as regulation is tightened people don’t have as much utilization of space on the property that they own. That’s a benefit for storage. It’s also a benefit when you’re talking about how you can run a business. You just can’t run it out of your house right. I just can’t be shipping products and I just can’t start a business up in my garage right. Apple wouldn’t be allowed today with the HOAs. Wouldn’t work out. So businesses also need a place to go. The next thing is cost. As we’ve seen a cost dive for consumer products meaning your dollar buys you way way more today than it did 30 years ago. The cost of real estate has skyrocketed. Because of this our same dollar we can buy way more but we just have less with the same dollar to buy to hold it. Once again this is the same for businesses. Businesses cost rent space ship out has gotten has become very very expensive. They need alternative sources and alternative methods. All though great for this industry. The next is relocation. Movement in general helps storage. A huge percentage of our renter base this is a short term thing. Short term rentals. This can be moving houses businesses etc. They need a place in transition to hold their stuff. So housing market and the churn of housing market when it does good storage does good. Alright so now what hurts self storage. Obviously there’s things that we don’t know. That’s true in every industry. I don’t know if what may come that may hurt self storage. But generally speaking over supply lack of demand which is the opposite of the things that we mentioned on what benefits. But also it can be the over building of the asset. In other words they’re just putting so much product on the market that it saturates the markets and revenues drop. Now we see this all the time. In fact I think self storage is much more prone to be over built than a lot of other industries. It generally though happens micro. It’s within a four or five mile radius that this happens. So it’s really important to understand demand. The next part is technology. Startups on demand storage. There may be different ways to store move items around that are coming up and we’ve seen it in the past that are trying to take over the self storage demographics and market. Now we’ve never seen anyone be really successful in this. We see on demand storage be much more successful in highly dense downtown areas but none of them have really taken over a large percentage of the market share. Consumers are still liking self storage. Okay now let’s talk about the assets themselves. Obviously self storage the roll up doors with indoor outdoor storage with climate controlled. We have other different methods that people utilize it but when we’re talking about storage we’re talking about people businesses putting their belongings and renting the space for holding their stuff. Now right now this is a fragmented industry still especially when compared to other real estate industries. That’s where the opportunity is. 52 percent of this industries are single owners and operators. They just own one facility. They’re the mom and pops of the world. 16.5 percent of all the assets are owned by what we call the top operators. The top hundred operators which I’m in. So I am a top operator. After that we go to 31 percent and that’s the REITs. These are the publicly traded big boys and they own roughly about 31 percent of the market. That means there’s huge inventory for you to get in and buy these assets and be successful in this industry. Okay now we’ve talked about the industry. How do I know if I should go in if I shouldn’t what I should buy. Let’s start with market feasibility. Remember when I talked to you about the things that hurt self storage. That is generally speaking over supply. This is why market feasibility is so important. When we’re looking at market feasibility we’re really trying to understand two components overall demand and then the next part is what is the demand. The utilization as I call it. So who’s renting why are they renting and what are they renting. Utilization and overall demand are very very important. When we look at demand we’re really talking about the current total square footage on the market. We’re looking at occupancies and rent raises increases to understand if a market and this is today plus future. So I’ll get to understanding future demand but today you can overlap the total number of units within a population and we can find out what the occupancy levels are. Is there demand is it growing. This also ties into market demographics is the population increasing. That’s all tied into future demand. But finding out today where demand is occupancy total square footage plus rates are rates increasing. Have they been increasing. Have they been stagnant. Are they dropping. Is there vacancy. Those are what you want to look at to understand today’s demand in that market. When we’re looking at the future demand there’s two things that are important. The first thing is market and demographics. Who’s moving there. Why are they moving there. Are they renting housing. All of that. We just need to understand what’s happening within the population. Understanding that also leads us then to understanding utilization. How are people utilizing the storage. This is really important when we talk about revenue management and I’ll get into that in a second. But understanding why people are renting who they are will understand how you price individual units. The pricing of units we view as product market fit. We are not selling a space right. We are selling a product to a customer and we need each different size and type indoor pull up climate controlled wine storage 10 by 20 5 by 5. They’re all different customers and we got to make sure that there’s a product market fit because that’ll tell us how much demand there will be moving forward and how much we can charge. Let me give you an example. Future demand if they’re building a lot of apartment buildings. Well in general that may mean future demand but also we have to understand that generally speaking the higher dense the area is the smaller the units that is in the higher demand. Five by fives are in high demand. Now when you move out into areas that are more rural or have more space it’s that’s not necessarily true. Five by fives are in really low demand and yet the big units are in high demand. You can see how if you mess this up you can really screw up your revenue projections and you can really screw up your underwriting. More on underwriting later. So the next part of understanding future demand. You need to understand what projects are being built and how they affect the market. What I mean if you are in a market that has 200,000 square feet of net rentable square storage that’s per capita. So we’re looking at how much square footage per capita is on the market. If there’s 200,000 square feet and somebody down the road is building 100,000 square feet that’s a 50 percent increase in overall market supply. 50 percent. Can that market hold that generate that? Odds are you don’t know. I don’t know. So I would be weary. I would want to make sure that a market could absorb all future and upcoming supply. All right. Now let’s talk about the underwriting and financing. Underwriting storages is a very unique set of skills because we look at those individual units as products. We’re trying to get market fit. They each have their own demand and two we don’t rent them all the same. And this is the basis that you need to understand in dynamic pricing. So when it comes to dynamic pricing there’s lots of software that you can use that track different pricing throughout the market. You don’t need to make it that complicated. Remember dynamic pricing just means you’re individually pricing units. Not all 10 by 10s are priced the same. That doesn’t make sense. If you have a hundred 10 by 10s open the first one that you fill up needs to be at a discount because there’s not demand. Now if out of the hundred 99 are filled up that that hundredth one should be at a much higher price than the first one. That’s dynamic pricing. You can do it on your own. We did. Right. And as people move out we’re playing with the street rate what is offering and we’re trying to move customers to that rate. The next thing to understand and the revenue model and pricing is understanding the asset. So when we’re talking about the product market fit. So is that asset being offered to the market. What we’re looking for is the top end charge and the low end charge. And then I divide up all the competitors based upon quality and offerings. And where do you fit. So if I buy a low offering maybe a gravel drive up with no security storage facility that I want to charge the same as a multi-story indoor climate controlled heavily guarded facility that’s probably really unreasonable. Nobody’s going to pay the same prices for those. So when you’re looking at pricing and revenue when you want to underwrite the facility to understand projections where it may be lacking where it can go. Make sure that you’re getting comparables. What’s the top end. What’s the low end. And where do you fit and where can you drive those revenues and offerings. The next thing we look at is seasonality. We have to remember in storage there’s generally speaking for most of the United States there’s a seasonality amongst renters. Spring to fall we have lots of renters and really attracts the movement of housing and the availability and ability to move into storage. Now there’s some areas where you have really high demand and you have really dense areas. They don’t have any seasonality at all. But understanding the revenue fluctuations when I’m underwriting I want to look back at that storage facility and I want to look at all the seasonality. What were the highs and lows of occupancies. Where did we have infill. The reason being is you want to adjust prices and you want to be ready for that and compensate for that when you’re really really full. You want to charge a really really high price. You may want to give discounts though in the off season. It’s also known that in the off season renters generally rent longer. So they’re a higher priced target. So you give them the discounts. Super high demand in the summer months they generally stay less. So you get less revenue from them. You want to charge a really high price but you probably don’t want to give discounts because you know they’re not going to be there. So it needs to be worth it to you and your business. Seasonality is important. Fees and upselling. Sign up fees. So when you come in what kind of fee structure is the storage offering. This can be a major generator of revenue. And I’m talking like sign up fees or processing fees. There’s a lot of different fees that you can charge. Is the storage facility you’re underwriting charging fees or are they not. How is that going to look and how is that going to be built in to your facility. Do they have high delinquencies and they’re not charging late fees. That’s a problem. You want to get rid of your delinquencies and you want to charge late fees for those that are delinquent. That is a really important incentive to incentivize people to rent from your storage. And it also helps you compensate for all the people that end up not paying you. Leave and you have to sell off the unit which you get pennies on the dollar. Contrary to storage wars we don’t make money when we sell people stuff. That’s actually a net loss almost 100% of the time. You have to charge fees to try to make up for it. Because what happens is when you sell that unit you can only collect the money that was owed. So if you sell a unit for $10,000 and they owed $1,000 to you, you can only collect $1,000. You can’t make a profit on that. Now vice versa. They owe $1,000 and you sell it for $20,000. You don’t get to make up for any of that. So you want to build in, make sure there’s fees, the right incentives and you want to be able to collect the revenue that you’re owed so you don’t lose out. Next thing is upsells. Boxes, trucks, insurance is a big one. Are they offering insurance? Do they have any upsells? Those are all lines of revenue you need to be looking at when underwriting to see how you can improve what needs to happen with that facility. The next thing we need to look at when underwriting is the expenses. Now this is an important one and this is one that we see people get wrong all the time. Because when they attribute the expense ratio to the facility, particularly in small markets and small facilities, they don’t attribute any labor. You may have the owner that does all the work. In fact, he may work three, four days a week, but then when he goes to sell it, he doesn’t include his own labor. That makes no sense at all unless he’s going to work for you for free. And that’s what I ask. You don’t include labor into the expenses. Are you going to work for me for free? If not, then we have to do it because all they’re doing is taking their labor in the form of profits, which you don’t get. That’s the wrong way to underwrite. Labor needs to be included. The other mistake that we view, that we see a lot in expenses is they don’t adjust at the new tax rate. This is a big one. A lot of people get hammered by this because what happens is they buy it. The cost basis that they’re buying it as much higher than when the other person either bought it or built it. The tax rate adjusts, but yet they sold it with the tax old tax rate. And that can be twice, three, four times as high. And all of a sudden the numbers were completely wrong. The next thing you need to understand when you’re dealing with your overall expense ratios and at total expenses is you want to get an actuality. So what is everything going to actually cost you to run? Not necessarily the current owner. Are you going to run this unmanned? Are you going to have a person on staff? If it’s unmanned, do you have call centers? Do you have third party vendors? Do you have someone coming on site, which we’re going to get into operations here in a minute, but all of those things needed to be added into your expense load and expense ratio and adjusted for your operations. Generally speaking on larger facilities, we see right around a 35% expense load for that facility. That’s not including debt. That’s purely operational to run it. We also attribute a 6% management fee is standard to that. So you can write that and underwrite that on big facilities, smaller facilities, it gets harder. But if you’re going to run an unmanned one, that doesn’t mean you should say, Oh, this is my expense ratio and it’s going to be unmanned. Yet you have all these expenses. So I’m going to cut your expense ratio in half. Now you want to take that there to giving their expense ratio. What it is, that’s what you’re buying at it. All improvements thereafter are your profit and therefore you to gain. I do not believe once you get into smaller facilities that it can really be done with an onsite manager. That staff just takes way too much of the expenses and it doesn’t leave it profitable for you. So you got to make sure your expense and operations are in line. Okay. There’s everything from advertising, promotions, banking fees, computers, softwares. We have subscriptions, insurance. You have meals, travel. You want to include all of this. What’s it going to take you to run it? But one of the most important things that needs to be included that a lot of people either miss or they don’t get it right is capital expenditures. Capital expenditures. A lot of people think, Oh, well it’s not as big in self storage. And I say, well, that doesn’t make any sense because you’re talking about, it’s not as big as far as the percentage goes. So what it actually costs is irrelevant. It only matters what it costs as a percentage of what you get the revenue. So in self storage, although we don’t have huge capital expenditures, we’re getting a lot less than somebody that’s renting an apartment for 1500 bucks and they’re renting a hundred dollar unit from you. So the expense load to repair roofs, the expense load to reduce cement, fix gates, gates are 30, $40,000. That may actually be a really high expense load onto that revenue. You’ve got to make sure you get that right. I do two things. First of all, when we’re underwriting for a storage facility, we always put in 2% that we are just allocating to our repairs and maintenance fund always. But up front, we have a third party give us a quote and an estimate and we have everything looked at. Obviously gates, gravels, doors, roofs, you got to have all that looked at and you’ve got to get an expense on what it would cost to fix anything that may be broken. That needs to be built in upfront. From there, the 2% is allocated to a savings account for repairs and maintenance in which it is reserved when those things come up. All right, operations. Now operations, the key to operations and understanding how you’re going to manage this. Is this going to be staffed? Is this going to be unstaffed? Okay. Now, a key part of operations is how it’s going to be operated. Who’s going to operate it? Is it going to be you? Are you having a third party manager? If it’s a third party that you’re just hiring out, paying them the 6% or 5% plus all their fees, everything, that’s just a walk away. Don’t worry about it. If you’re going to be operating it though, and you want to be paying yourself for those management fees, you need to understand how. Now, first of all, if it’s staff, how are you going to run the person? How are you going to hire them? You need to understand all the liens processes. So the lien processes that need to happen, you need to make sure that you have everything lined up. If it’s unmanned, the same thing, except we’re going to be looking when you manage a facility unmanned is much more heavy on tech. Now I kind of stumble around when I’m trying to say this because they’re both super reliant on tech. Tech is a huge part of storage now, and it’s one of the main advantages you have in operations when taking over a facility. The churn, revenue management, operating, lien sales, having people come in and out, how you process those people coming in and out, how you advertise and attract tenants. These are all major part of the operations. When we look at an unmanned facility, when we look at even a manned facility tech, we’re looking at different property management systems. You have things like SSM, you have tenant Inc, you have open tech, you have different like AI lien that can automate. They’re starting to automate the lien process. The big thing that you need to remember is how do we do payments, move ins, move outs, lock checks, lien sales on that facility. And how do we use technology to automate or speed that up? Now there’s no such thing as an automated facility. We have unmanned facilities, but that just means somebody comes around once a week and they check on things, they clean out units, because when you sell a unit or when somebody leaves, you got to clean it out, you got to get it ready for the next customer. All of this stuff that I’m talking about, a lot of this stuff is backend software. You also have the front end hardware. So gate access, gate control, door access, door control. Are you going to have an electronic system that does that? Or are you going to manually do it with a lock? How do you give the new customer a lock? These are all things in operations that you need to figure out and you need to understand. We work heavily with the advertising and the revenue management in conjunction. So we want to make sure we’re getting as many new customers as we can to fill up so we can keep driving those prices. You want to have a cloud-based signing like we do. So that way you can have offsite signups. So you can advertise, have them sign up all done offsite. And the tech allows you to, you can do it right within a property management system and your CRF. Those can all be done. Now, bigger facilities, that’s a different game. Bigger facilities, you need people on site. They have to run. I have a facility that would be considered fully automated, which means that somebody from another state can rent. They can move in, they can move out, they can do everything through the entire process and they never even have to talk to another person. With that said, we still have our call center. We still have multiple people on site because it’s a huge site and it cannot be unmanned. So you’re always playing this game with size, resources, and what is needed. I always look for in the expense and operations, the ROI. What am I going to get out of this? And when is it appropriate to hire somebody? It depends on when they can upsell, they can do things that will get us that revenue that will compensate them plus make it worth our time. Okay, last, I forgot to mention, I kind of want to mention about financing. Financing used to be much harder. Right now, you can get, most banks are really, really comfortable with storage. In fact, a lot of them call us up and say they want more. We use a lot of local banks, a lot of credit unions that understand the areas that we’re in. You can get really good financing. Generally speaking, you need to put 30% down, but there are also small business loans available. So you can get an SBA loan, you can do all these things. We use Live Oak Bank. They are just masters for people getting in and getting SBA loans done. Generally speaking, though, there’s a lot more options to financing. Now if you need money to put it down, you can do syndications. And if you need somebody else to sign on the bank note, you can give them part of the equity so they can sign on so you can get a loan. Now this is a very dynamic topic and in-depth and I’ll save the rest of it for another video because there’s so many ways that you can go with it. But those are our hints and suggestions. All right, everybody, I hope this was a good video. It was very in-depth and very thorough. If you liked it, once again, please like, subscribe, comment, and get out there and get some storage. Before you leave, if you want to learn more about self-storage, pick up the best-selling self-storage book. That’s me. It’s the Playbook to Self-Storage. You can pick it up on Amazon, link below. I go over case studies, actual deals done, how to market, how to run, how to find deals, and Annalynes Markets. Check it out.