Self Storage Investing – By Scott Meyers, CSSM©

 

 

Self-Directed IRA’s 

 

In my Home Study System, I lay out several different ways to raise the cash for the down payment on your self storage facility.  But once again I will caution: I DO NOT RECOMMEND OR APPROVE OF 100% FINANCING, OR THE “NO MONEY DOWN” DEALS THAT YOU HAVE SEEN ON TV, OR HEARD OF BY OTHER AUTHORS AND SPEAKERS!  In the early stages of my real estate career, most of my single family houses and apartment complexes were purchased with no money down and my entire portfolio was approached a 95% Loan to value ratio at one point.  As a result, my cash flow was very tight, and when the rental market went sour after the events of 9/11, I came dangerously close to losing it all, and thought at one point that I may be heading for bankruptcy.  Fortunately, by the Grace of God, and by employing the techniques I have learned and outlined in my Home Study System, I was able to turn things around and I was given another chance to learn from my mistakes.  This is probably the biggest reason I have a passion for teaching others how to invest wisely, and how to avoid the mistakes that I, and so many others in this industry have made when it comes to over-leveraging their portfolio. 

That being said, I have done several deals that have proven to be very successful projects which were purchased with no money down.    The difference was that the deals were SO good, and the upside SO incredible, that I felt safe in leveraging them higher than my usual 80% threshold.  In addition, I have structured the financing of my down payment on several deals in various ways to avoid a large drag on the cash flow of the property after acquisition.  Furthermore, I do not recommend that your portfolio ever rise above a level of 80% Loan to Value, especially if you are making regular payments on any down payment capital that has been borrowed.

As you are already aware, there are several ways to raise cash for the down payment on your self storage deals.  One of my favorites, Self-Directed IRA’s, are a great vehicle for allowing me to invest the money in my IRA, tax free, in the business I love; Real Estate.  In addition, I can set the terms surrounding how the funds are to be borrowed from my IRA, allowing me the utmost flexibility.  I purposely structure the loan from my self directed IRA so that the interest accrues, and there are no monthly payments made until I sell a property, and ultimately pay back my IRA.  There are several companies that can act as the custodian of your self-directed IRA.  I suggest you talk to several before choosing one that meets your needs.  In addition,  there are several transactions that are prohibited, so be sure to ask your custodian about the current laws regarding the use of your Self-Directed IRA for the purpose of investing in your own properties. 

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage™.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing through his company SelfStorageInvesting.com.  To reach him, or to invite him to speak, call 877-366-5773; e-mail Scott@SelfStorageInvesting.com; visit www.SelfStorageInvesting.com  http://www.selfstorageinvesting.com/freeaudiocd.html

Opportunities in Records Storage

 

Records storage and management is becoming a very popular ancillary service in the Self Storage Business.  Many operators are discovering the benefit to their existing business of adding Records Management.  Although not a new concept, it is growing in popularity as our industry looks to draw a broader customer base and generate additional revenue streams, thereby, lowering overall risk. 

            For those of us already in the Storage Business, we already have two key ingredients for adding Records Management – an established base of customers who are potential candidates for Records Management, and an existing facility.  If our customers are satisfied with our current level of service for their storage needs, then it is likely that they will at least consider us for their Records Storage Needs.  With minimal time and capital investment, you can provide yet another service in an effort to becoming a one stop storage provider.

            Some high profile cases have been in the press in recent years with regard to confidential client records being mishandled, and in some cases, thrown in public dumpsters.  This has thrust the records management business into the spotlight.  Furthermore, with the recent passing of the HIPAA Guidelines, many companies are required to keep confidential client’s records in a secure place for up to 7 years.  It’s no wonder Records Management has become a fast growing and highly profitable business.

            One of the reasons it has become so profitable is due to the very nature of the real estate being used.  If a Doctor or Lawyer’s office is storing boxes and boxes, or several cabinets full of records in their Class A Office Space, it can be pretty costly.  So can you think of a less costly alternative location to store these records?  Yeah, our facilities!  In addition, a Records Storage Center with proper software and tracking mechanisms can manage the documents with a greater degree of accuracy than the current office staff. 

            So what’s the benefit to us?  Records management is perpetual.  Once a Records Client moves in, the account, and their space requirements, continue to grow.   Most industry statistics show that the average Records Management account grows at a rate of approximately 10-12 % per year.

            Another benefit is the fact that the customers are typically very loyal in nature, without much movement from one Records Management Company to another.  As long as the service level is there, and there are no mistakes or mishandling of confidential records, it’s unlikely the client will move to another vendor.   And the hassle for the client to switch vendors means a costly move, a disruption in service, and possibly incurring termination fees.

            Sound good Scott, but what about the liability?  Since the business is now run with some pretty high tech software, it’s a fairly simple business with minimal liability.  Operators are protected by using a standard industry agreement, which keeps financial exposure in check.    And one more benefit is that the Records Management business can be sold separately from the facility if you choose.  One of my associates who planned to sell his facility and Records Storage Business found that he had more to gain by selling the two independently. 

            A true Records Management business utilizes software that allows the operator to confidently handle the customer’s records in a safe and professional manner.  The software performs such functions such as letting the operator know when it is permissible to delete records or move them to archives, whether electronically or physically.  The software is truly the brains of the business.  It provides the barcoding and tracking of the data, invoicing, and providing internet access for wireless scanning.  It is also customizable and scalable to meet each individual owner’s needs. 

            So if you’re looking for yet another profit center to boost the overall NOI of your facility, Records Storage should be on your radar.  Check out the competition in your area to see how it measures up and do a little homework to uncover the hidden opportunities in your market.   

 

 Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage™.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing through his company SelfStorageInvesting.com.  To reach him, http://www.thecoachingclub.com/event-archives/brain-pick-a-pro/self-storage/scott-meyers/.  

Self Storage Investing – By Scott Meyers, CSSM©

My Five Principles to Success in Self Storage (or any business!)The central focus of my company, www.SelfStorageInvesting.com, is to arm the self-storage investor with the specific tools necessary to identify potential acquisition candidates, to acquire and manage those facilities once they have identified them, to implement sound techniques for creating value, and finally, to capture all of that value through various exit strategies. The process by which all of this can be accomplished rests on five keys that I feel are crucial to success. These keys do not deal with the mechanical processes involved in buying and selling self storage facilities, but are grounded in principles that are fundamental to life itself. These laws deal with the human psyche and govern our thoughts, which in turn, direct our actions. The failure to understand these keys, which have proven to provide the foundation for success, continually result in many investors’defeat.
Principle # 1 – Overcome Fear of Failure
Probably the greatest obstacle to getting started in any business venture is that demon we call FEAR. Just as we have to include risk in our equation of success, so must we include fear. This is not to say that we have to fail first to become successful, rather we must acknowledge that the possibility of failure exists. Failure is a natural part of learning, and as crazy as it sounds, I am extremely thankful for the MANY failures I have endured over my real estate investment career. It is a completely natural process, and just because you fail, doesn’t mean you are a failure. Unfortunately, however, I have seen many people that have been defeated by the fear of failure. Some don’t even make it to the failure stage because they were too afraid to try; they were afraid of failing. Some people fear the unknown because it represents areas beyond the boundaries of their comfort zone. Mostly, they fear what others may think of them! They fear ridicule by their friends, and even worse, ridicule by their own families. This fear has stopped more would be successful investors than all other factors or considerations combined.
Some friends act as an anchor placed around your shoulders, holding you firmly in place, keeping you from reaching your true potential. I have done my best to surround myself will people who act as buoys, who lift me up, rather than hold me down. I am more selective in whom I spend time with as I grow older, choosing to spend time with people who have a similar, positive approach they take to work while glorifying God with the time they spend on his earth. As your friends and your family witness your progress, eventually, their attitudes will change, and you may even discover that they will probably start coming to you for advice from time to time.
Principle # 2 – Setting Goals
A BHAG’s (or Big Hairy Audacious Goal) is defined by Jim Collins in his books “Good to Great” and “Built To Last”, as a huge and daunting goal-like a big mountain to climb. It is clear, compelling, and people “get it” right away. A BHAG serves as a unifying focal point of effort that keeps you striving toward a pre-defined finish line. I would compare it to the 1960s NASA moon mission where President Kennedy’s goal of reaching the moon captured the country’s imagination and grabbed people in the gut. Your BHAG should be quantifiable and possess some timeframe associated with it. Jim Collins went on to describe The Five Criteria of a good BHAG as follows:
1. Are set with understanding, not bravado.
2. Fit within the parameters of what you are deeply passionate about, what you can be the best in the world at, and what drives the economic engine of your company.
3. Have a long time frame-10 to 30 years.
4. Are clear, compelling and easy to grasp.
5. Directly reflect your core values and core purpose.
It is much easier to become a great organization than to remain a great organization over time. To remain great over time requires, staying focused on what you are deeply passionate about, what you do the best, and what is most profitable in your investing career. For me and my company, my clear and quantifiable BHAG is to reach 1,000,000 square feet within 5 years. This will allow my organization to be elevated to a place in the industry that opens up a whole new world of opportunities with regard to lending, vendor discounts, and status within the various trade associations. However, this is not at the expense of compromising my core values and purpose, which are intertwined with my BHAG and communicated to every member of my organization.
Principle #3 – Establishing Priorities
Setting Goals however, doesn’t do you or your organization any good without a game plan in place to achieve them. This starts with prioritizing your activities on a daily, weekly, monthly, and yearly basis to ultimately conquer your BHAG. John D. Rockefeller, The founder of Standard oil who went on to build one of our country’s most successful organizations, was a master at prioritizing the activities of his firm to ensure that it attained his goals. After studying his biography “Titan” by Ron Chernow, I was compelled to adopt his principles of prioritizing my activities by breaking them down into different levels. I have now established the top 5 priorities for the year and quarter and a clear top 1 priority along with an appropriate Theme. Beyond that, everyone in my organization has their own handful of priorities that align with my firm’s top priority. To reinforce this and to ensure we’re all rowing in the same direction, I review our company data on a daily and weekly basis to verify each team member’s performance. I also conduct weekly meetings to maintain alignment with our goals and to drive accountability. Remember, if it isn’t written down and measured, it doesn’t get done. These priorities change from year to year, but as an example, we recently set a priority to keep collections below 5% beyond 30 days across all our properties. The manager’s report on this weekly and at our meetings we strategize and share ideas and best practices that the managers have used to successfully reach their goals.
Principle # 4 – Perseverance
The will to persevere is not only crucial to one’s success in the real estate investment industry; it is crucial for success in all aspects of one’s life. The ability to endure whatever challenges life throws at you is essential for personal development and growth, and it is especially true for the attainment of wealth. If you wish to accumulate wealth, then you must be willing to dedicate a great deal of effort to that end. Creating wealth by building a self storage empire is just like any other skill you choose to master. It takes persistence, patience, and the will to persevere.
Think of a skill that you are particularly adept at. Whatever that skill is, if you are like most people, you have honed and developed that skill over the years and you now possess it as the result of your dedication and the will to excel in your chosen field. In other words, it wasn’t handed to you; nothing in life worth having is. A good illustration is that kid we all knew in school whose parents gave him or her everything they wanted. Remember the way they took care of what was handed to them? I remember a friend of mine who didn’t care if he broke his toys, left his bikes out in the yard, and eventually destroyed every car he ever owned because he knew it would always be replaced by his parents. Eventually, these kids grow into irresponsible adults who lack crucial skills necessary to not only navigate life, but rarely do they learn what it takes to accumulate wealth.
Perseverance is a conditioning process that is best learned in our youth. Perhaps, like me, you have been conditioned by your environment in your formative years. Family and friends have told you that “you cannot do it; you don’t have what it takes; that’s a risky idea; or I know someone who tried that and failed miserably”. This continual negative assault may have slowed or halted your progress. Perhaps some of your past attempts did fail, bruising your ego, and you began to believe what the naysayer’s were throwing at you. I know some people who were in this same situation, and to alleviate the pain, they just gave up. It was too hard for them to see through the darkness and trust that things were going to turn around, and that success was not as far away as they had thought. In order to persevere, you must recognize that the short term sacrifices you endure now will be well worth the long-term benefits you will eventually enjoy. After all, they say Thomas Edison experimented with over 6,000 different materials before he was able to find a suitable filament for the light bulb. And in the often quoted words of Winston Churchill to Great Britain when it seemed that all hope was lost and the Germans were invading his country and threatening to overthrow him, “Never, Ever Give in”!

Principle # 5 – Developing your Purpose
I firmly believe that it is just as important to know why you are going on this journey as it is to know where you are going on the journey. And on a more philosophical level, you may be asking yourself, what is my purpose in life? What exactly is it that I hope to achieve in this process of wealth accumulation, and what do I plan to do once I have achieved my goals? The answer will be different for everyone, and may take some genuine reflection and or prayer to find the answer. For me, my ultimate goal was to “build a business that would provide enough cash flow to meet my financial needs both today, and the future, and allow a great deal of free time to serve God, and be with my family without having to be overly active in the day to day operations of those businesses”. I have been extremely blessed to edge ever closer to achieving that goal and I am beginning to reap the rewards after many years of following my plan. One such benefits is having enough time to write this home study course in an effort to help others, and to give of myself as so many people have given to me.
The challenges of wealth accumulation challenges one to grow in ways you never thought possible. It provides a bridge to a higher plane in life by empowering you to reach your full potential. Wealth enables you to enrich the lives of those around you who may not be as fortunate for any number of reasons. I believe that purpose is much greater than to amass riches simply for the sake of serving myself. Once you are fortunate enough to have achieved your objectives, much happiness lies in the giving of yourself and of that which you have attained through your labors. I believe that God gives me what will flow through me and that if I honor him as the steward of the business which he has entrusted to me, then he will enrich me knowing that I will pass those blessings along to others. This sense of purpose gives me hope, everyday, for a higher quality of life, and hope to someday ease the pain of those with heavy burdens.
A sense of purpose can help us to defeat the demons we call Fear and Despair. A sense of purpose can act as a compass by showing us the way when we are confronted with these challenges and providing us direction. I refuse to settle for a life of mediocrity, or succumb to fear, or whatever enemy that happens to obstruct my path to success. And for those of you who believe that perhaps it is too late, I invite you to draw from Napoleon Hill’s classic book, Think and Grow Rich:
Seldom does an individual enter upon highly creative effort in any field of endeavor before the age of forty. The average man reaches the period of his greatest capacity to create between forty and sixty. These statements are based upon analysis of thousands of men and women who have carefully been observed. They should be encouraging to those who become frightened at the approach of “old age”, around the forty year mark. The years between forty and fifty are, as a rule, the most fruitful. Man should approach this age, not with fear and trembling, but with hope and eager anticipation. (Page 190)
If you are between 40 and 60, I am sure you take great comfort in Hill’s remarks. This represents a period of time when you can fully apply yourself. It is a time when you can embark on the greatest journey of your life – the pursuit of a higher quality of life through the accumulation of wealth.
The laws for success in the self storage industry have been outlined in the pages of this home study course. It describes the merits of numerous financial concepts and principles that, when properly applied, will enable you to attain your goal of accumulating wealth. In addition, it provides you with the precepts necessary to master the human psyche, that element of our being that gives us the strength to persevere and to conquer our fears, gives us the wisdom to accept responsibility for our actions, and gives us direction in our lives by providing us with a sense of purpose. It is the combination of these laws of success serve as the catalyst you can apply to propel yourself to heights you may have never before believed possible. And to quote Donald Trump in his book The Art of the Deal, “if I’m going to be thinking anyway, I might as well think Big”! I couldn’t agree more.

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage^TM. He is also the nation’s leading speaker and educator in the field of Self Storage Investing through his company SelfStorageInvesting.com. To reach him, or to invite him to speak, call 877-366-5773; e-mail Scott@SelfStorageInvesting.com; visit www.SelfStorageInvesting.com. http://www.selfstorageinvesting.com/freeaudiocd.html

Myths and Investment Opportunities in Self Storage

 

Like all other real estate investments, self storage shares the same attractive qualities as residential rentals, apartments, retail strip centers, office buildings, and industrial properties.  Those include leverage (borrowed money), tax advantages, passive income, personal control (being your own boss), and appreciation.  However, self storage offers a number of benefits that I feel make it such an attractive investment. Those include the following:

1. We are becoming a more transient society, moving around more and creating a greater need to store our stuff, thus the demand for self storage is increasing.
2. Americans tend to accumulate a great deal of possessions, and we don’t want to “weed out” those things we don’t use or are sentimental or have nostalgic value, which in turn, creates more demand.
3. Most new communities will not allow us to store our boats, jet skis, RV’s, or even multiple cars on the street or in front of our homes.
4. Many retirees downsize their homes which require additional storage space that their smaller homes don’t provide.
5. More and more Americans are buying second homes which increase the demand for storage space.
6. College students utilize storage space when moving back home for the summer. 
7. Many businesses are downsizing and operating out of smaller offices that necessitate a need for storage space.
8. Many small distributors will utilize self storage to operate their business from.
9. Pharmaceutical reps will use climate controlled storage for samples and inventory.
10. The eBay® phenomenon has created a huge demand for space.      
11. Other home based businesses are also creating demand for off-site storage.
12. Lower Development costs – self-storage facilities development costs are often 30 to 50 percent less than office, retail, and apartment buildings. 
13. Lower Operating Costs – Operating costs for self-storage facilities are substantially less than office, retail, and apartment buildings.  As a result, self storage owners are more isolated from large increases in utility and other variable costs that occur in the open market.
14. Lower development and operating costs make break-even occupancy ranges lower than other forms of real estate.
15. Occupancy is generally more stable and therefore predictable as there are typically a greater number of units in which to “spread the risk” than in other forms of real estate. 
16. Month-to-month leases mean that rental rates can be adjusted easily.  When occupancy increases, I will adjust rates to compensate for the demand.
17. Demand for self-storage is not dependent upon the economy.  When the economy is good, people buy more and store more.  When the economy slows, people downsize, and require a cheaper alternative to store their extra belongings.
18. Low management overhead as customers typically only need the manager to move in or move out, compared to office or apartment complexes that requires a high number of customer contacts and constant and ongoing interaction.
19. A well-run, stabilized self storage in a good location is very desirable to other investors and institutions, making self storage a very liquid investment. 
20.  It’s No Wonder Self Storage has the lowest loan default rate of all commercial real estate property types!

 

DEBUNKING THE MYTHS

Now that we’ve discussed all the reasons that make self storage a fantastic investment, we should take some time to break down a few of the myths that have been floating around with regard to the industry.  Like many other industries, self storage has been evolving for several decades now, and many of the general assumptions by outsiders surrounding this business simply do not apply.  Some of the common myths are as follows:

1.  “If you build it, they will come”.

 In the early years, this was somewhat true.  But in today’s competitive landscape an owner/investor must perform very careful analysis and/or feasibility studies to determine whether a potential development site or an existing facility is a wise investment.  In addition, there are many areas that are, or are becoming overbuilt, which drastically changes the projected lease up and overall occupancy potential for a facility.

1.  “Self-storage is an easy business”.

This may have been somewhat true in the past as well, but like any business, if it were easy, everybody would be doing it.  Far too many real estate investors treat their business as a hobby rather than what it truly is; an asset with many moving parts that must be managed from day to day as opposed to a stock or a mutual fund that you purchase and only infrequently check on its performance.  Today’s self storage arena is very competitive, and successful owners are always thinking of ways to increase income, decrease expenses, and strive for operational efficiencies across all facets of their operation.  

1. “All self storage properties are cash cows”

As we discussed earlier, self storage facilities have the lowest default rate of all property types, but it doesn’t mean that owners don’t default and that many others are struggling.  Generally this is due to poor planning before acquiring or developing a facility.  An owner/investor must perform thorough due diligence when it comes to competition, population growth, land costs, construction costs, market rental rates, and the management of the facility before purchasing or developing a facility.  If you do not have the time nor the expertise, a feasibility study should be conducted by an experienced individual within the industry to avoid buyers or developers remorse.

1. “this is a cheap business to get into”

Again, this may have been somewhat true in the past, but not any longer.  Today’s customer is demanding a higher quality facility than what the industry provided in the beginning.  Today’s facilities possess a higher quality construction, are fully paved, fully fenced with security gates, typically have state of the art digital video surveillance and recording systems, and are considerably larger than in the past, which necessitates an office with a part-time or full-time manager.  Land costs are higher as most developers prefer to locate in high traffic locations as opposed to the hard to find or industrial park sites of yesteryear.  In addition, construction materials have been on the rise recently due to fast developing foreign nations which affect development costs, and good existing facilities are being sold at record high prices as the word is out on what a great investment self storage has become. 

 

 Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage^TM.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing through his company SelfStorageInvesting.com.  To reach him, or to invite him to speak, call 877-366-5773; e-mail Scott@SelfStorageInvesting.com; visit www.SelfStorageInvesting.com.  http://www.selfstorageinvesting.com/freeaudiocd.html

Self Storage Association Definition: Self Storage facilities are real property designed and used for the purpose of renting or leasing individual storage spaces to tenants who are to have access to such space for the purpose of storing and removing personal property. They offer rental on a month-to-month basis of individual spaces where customers provide their own lock and have sole access to their space. Today’s typical storage facility may comprise several one or two-story buildings on two to 6 acres of land, or a multiple-story building, containing a carefully designed unit mix of spaces.  The units typically range in size from 5X5 to 10X30 feet with 30,000 to 120,000 total rentable square feet of space.  Self storage facilities frequently feature large roll-up doors and drive up access to outside spaces and offer outside parking for storage of boats and recreational vehicles, which often can’t be stored in residential communities.  Today’s facilities normally have the following features:

• Contain 10,000 to over 100,000 rentable sq. ft.
• Offer a wide range of unit sizes
• Are well lighted
• Are paved vs. graveled
• Have storage units divided by steel, movable panels
• May have some or all of their spaces climate controlled
• Contain high-tech security systems, including electronic access, cameras, and digital video recording.
• Have perimeters that are walled or fenced with Security Gates
• May or may not have a resident manager
• Have single or multi-story buildings
• Provide carts and Dollies for use by its customers
• May contain movable storage modules
• Sell storage and moving related supplies
• Provide ancillary retail services and products.

From the real estate perspective, self storage:

• Meets the needs of several consumer groups (residential & commercial)
• Uses simplified structures
• Makes efficient use of land, especially odd shaped parcels in less desirable locations
• Has short construction time, thereby providing little traffic disruption
• Uses very little energy!

HISTORY

The conventional concept of personal storage began in England when British banks were asked to safeguard valuables for clients embarking on extended voyages.  Overcrowded vaults quickly forced them to seek storage lofts from drayage companies (the first moving companies).  The first mini-warehouses for household and personal items were built.  The two story structures were built with packing on the lower floor and private storage rooms on the second.  Except for expansion into multi-story buildings, things remained the same for decades, until the 1950’s when costs rose.  This led to construction of palletized warehouses which were designed to handle crated customer goods that could be stacked three levels high.

Access to household/personal goods was restricted and it was expensive, since customers had to make appointments to obtain items and pay each time for the service (stored property could only be reached by forklifts which were operated by staff) and business hours were limited and normally did not include weekends.

Initial development of self storage facilities in the US occurred primarily in the Western United States and the Sunbelt states.  Contributing factors were: a transient population moving to new jobs and better climate, retirement condominiums, apartment and townhouse residences, slab construction, etc.

Many facilities were developed prior to 1979, with 1978 generally acknowledged as one of the greatest growth years in the industry.  As the decade of the 1980’s began, increased self storage construction activity occurred along the Eastern coast of the United States, with increased interest in Canada, Europe, Australia and other countries of the free world.

SELF STORAGE TENANTS

It’s been said that self storage is used by people and businesses in transition, but that’s only part of the picture.  Self storage is used by a wide range of consumers with different needs that may include:

• Homeowners and businesses in need of temporary space for overflow of property or inventory
• Those in the process of relocating
• Property stored in relation to an estate in transition due to death, litigation, restoration, etc.
• Businesses in need of space for general control of inventory, records, supplies and equipment
• Businesses that are expanding or contracting
• Businesses storing seasonal displays
• College students storing books, desks, etc. during summer
• Military personnel in need of low cost space or are on temporary duty
• Seasonal visitors with household items and sports equipment

The advantage of using rental storage space is increased flexibility, low cost, convenience, and value.

Self storage space is generally rented on a month-to-month basis and does not commit customers to long term leases.  Tenants may typically leave whenever they want and rent only the space they need.  A recent study shows that the average length of tenancy for a typical customer is 11 months, and 24 months for the average commercial tenant. The cost of self storage space is lower than office or retail space, saving users money.  On average, self storage is roughly 60% less than the cost of most office on a per square foot basis. Self storage users can often find facilities in their local area and they receive additional service value because self storage managers are trained to counsel consumers on how to store items more efficiently in less space, thereby reducing the cost.

Self storage is a useful management resource for small businesses, since businesses can easily obtain more space as they grow without committing to expensive long term leases.  Furthermore, it provides businesses with a means to cut costs, should they need to downsize.  Self storage is also useful for college students and seasonal visitors who may rent space for a season, and for military personnel who go on temporary tours of duty, but intend to return to the area, and for those who can’t afford to rent more living space.

TODAY’S MARKET

Estimates of the overall number of self storage facilities operating in the United States varies greatly but most industry veterans estimate that there are somewhere between 45,000 and 50,000 facilities as of the date this home study course went to press.

As the population becomes more familiar with self storage, the demand for off-site storage has expanded to accommodate the growing needs of the business community by storing files, medical records, excess inventory, equipment, etc.  In some areas business storage accounts for 30% or more of the total tenancy of a facility.  Easy access, convenient office hours, short term rental agreements, and no long term commitment to pay for space which may not be needed in the future, make the self storage facility extremely attractive to the retail customer, contractor, home based businesses, manufacturer’s, and pharmaceutical representatives, etc.

The industry still remains relatively unsophisticated and highly fragmented.  Today, roughly 75-80% of all self-storage facilities are owned by small independent “mom and pop” operators. In addition, there is a considerable amount of medium to large players undergoing consolidation, although it is becoming more difficult for the larger buyers to accomplish since most owners realize what a great low maintenance high-cash business it is, and therefore are reluctant to sell.  As a result, the top 50 companies control approximately 25 percent of the square footage in the industry.

As demand for space has grown and the self storage industry has evolved, consumers have become more familiar with the property type (92% of the households in the U.S. were familiar with the concept, according to a survey sponsored by the Self Storage Association in 1989).  Inasmuch, local and regional competition ranges from a handful of properties to scores in a given trade area.  Accordingly, customers may choose where they will store and from many different options, with unit size and the choice of climate or non-climate controlled space being the base options.  Today consumers have the ability to compare and choose from among a variety of self storage property styles and customer services to meet specific storage needs.

Competition in the self storage market is increasing.  Maximum success for investors/operators depends on the ability to meet customer needs with convenience and value.

To satisfy customers, today’s self storage must look to locate in retail corridors, light commercial or even high density residential neighborhoods, in addition to traditional industrial and heavy commercial areas.  Newer facilities emphasize architectural aesthetics in construction and are designed to blend in with the retail or residential nature of the areas they serve.  Landscaping has also become a prime consideration, as well as the interaction of storage development with adjacent planned tracts of offices, retail stores and business parks, in order that incubator space is available to support public planning.  All of this is done with the aim of creating a clean, stable, secure upscale image that supports the perception, and the reality of trust among current and prospective customers.

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage™.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing

Like all other real estate investments, self storage shares the same attractive qualities as residential rentals, apartments, retail strip centers, office buildings, and industrial properties.  Those include leverage (borrowed money), tax advantages, passive income, personal control (being your own boss), and appreciation. However, self storage offers a number of benefits that I feel make it such an attractive investment. Those include the following:

1. We are becoming a more transient society, moving around more and creating a greater need to store our stuff, thus the demand for self storage is increasing.
2. Americans tend to accumulate a great deal of possessions, and we don’t want to “weed out” those things we don’t use or are sentimental or have nostalgic value, which in turn, creates more demand.
3. Most new communities will not allow us to store our boats, jet skis, RV’s, or even multiple cars on the street or in front of our homes.
4. Many retirees downsize their homes which require additional storage space that their smaller homes don’t provide.
5. More and more Americans are buying second homes which increase the demand for storage space.
6. College students utilize storage space when moving back home for the summer.
7. Many businesses are downsizing and operating out of smaller offices that necessitate a need for storage space.
8. Many small distributors will utilize self storage to operate their business from.
9. Pharmaceutical reps will use climate controlled storage for samples and inventory.
10. The eBay® phenomenon has created a huge demand for space.
11. Other home based businesses are also creating demand for off-site storage.
12. Lower Development costs – self-storage facilities development costs are often 30 to 50 percent less than office, retail, and apartment buildings.
13. Lower Operating Costs – Operating costs for self-storage facilities are substantially less than office, retail, and apartment buildings.  As a result, self storage owners are more isolated from large increases in utility and other variable costs that occur in the open market.
14. Lower development and operating costs make break-even occupancy ranges lower than other forms of real estate.
15. Occupancy is generally more stable and therefore predictable as there are typically a greater number of units in which to “spread the risk” than in other forms of real estate.
16. Month-to-month leases mean that rental rates can be adjusted easily.  When occupancy increases, I will adjust rates to compensate for the demand.
17. Demand for self-storage is not dependent upon the economy.  When the economy is good, people buy more and store more.  When the economy slows, people downsize, and require a cheaper alternative to store their extra belongings.
18. Low management overhead as customers typically only need the manager to move in or move out, compared to office or apartment complexes that requires a high number of customer contacts and constant and ongoing interaction.
19. A well-run, stabilized self storage in a good location is very desirable to other investors and institutions, making self storage a very liquid investment.
20. It’s No Wonder Self Storage has the lowest loan default rate of all commercial real estate property types!

DEBUNKING THE MYTHS

Now that we’ve discussed all the reasons that make self storage a fantastic investment, we should take some time to break down a few of the myths that have been floating around with regard to the industry.  Like many other industries, self storage has been evolving for several decades now, and many of the general assumptions by outsiders surrounding this business simply do not apply.  Some of the common myths are as follows:

1. “If you build it, they will come”.

In the early years, this was somewhat true.  But in today’s competitive landscape an owner/investor must perform very careful analysis and/or feasibility studies to determine whether a potential development site or an existing facility is a wise investment.  In addition, there are many areas that are, or are becoming overbuilt, which drastically changes the projected lease up and overall occupancy potential for a facility.

1. “Self-storage is an easy business”.

This may have been somewhat true in the past as well, but like any business, if it were easy, everybody would be doing it.  Far too many real estate investors treat their business as a hobby rather than what it truly is; an asset with many moving parts that must be managed from day to day as opposed to a stock or a mutual fund that you purchase and only infrequently check on its performance.  Today’s self storage arena is very competitive, and successful owners are always thinking of ways to increase income, decrease expenses, and strive for operational efficiencies across all facets of their operation.

1. “All self storage properties are cash cows”

As we discussed earlier, self storage facilities have the lowest default rate of all property types, but it doesn’t mean that owners don’t default and that many others are struggling.  Generally this is due to poor planning before acquiring or developing a facility.  An owner/investor must perform thorough due diligence when it comes to competition, population growth, land costs, construction costs, market rental rates, and the management of the facility before purchasing or developing a facility.  If you do not have the time nor the expertise, a feasibility study should be conducted by an experienced individual within the industry to avoid buyers or developers remorse.

1. “this is a cheap business to get into”

Again, this may have been somewhat true in the past, but not any longer.  Today’s customer is demanding a higher quality facility than what the industry provided in the beginning.  Today’s facilities possess a higher quality construction, are fully paved, fully fenced with security gates, typically have state of the art digital video surveillance and recording systems, and are considerably larger than in the past, which necessitates an office with a part-time or full-time manager.  Land costs are higher as most developers prefer to locate in high traffic locations as opposed to the hard to find or industrial park sites of yesteryear.  In addition, construction materials have been on the rise recently due to fast developing foreign nations which affect development costs, and good existing facilities are being sold at record high prices as the word is out on what a great investment self storage has become.

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage^TM.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing.

INVESTORS in self-storage stocks finally have some gains to stow away.

The four real estate investment trusts that together own and operate about 12 percent of the facilities nationwide – most of the other properties are mom-and-pop operations – has soared about 31 percent, on average, this year through Thursday, after finishing 2007 with a nearly 25 percent loss.

This year’s returns far surpass those of all other property REIT categories as well as the broader stock market. Equity REITs are up around 10 percent so far, on average, while the Standard & Poor’s 500-stock index is off about 5 percent.

Why is self-storage suddenly in favor?

Some investors believe that these dividend-paying companies will benefit from the housing crisis. They expect that the ranks of renters will swell as more people leave foreclosed homes or postpone buying their first homes because of tighter credit and falling values, and that those people will need repositories for their excess bric-a-brac.

Industry analysts agree that the sector is likely to hold up well through these economic woes. “It is recession resistant,” said Michael Knott, a senior analyst at Green Street Advisors, the investment research firm. “More economic distress causes people to rent more, and, in fact, one of the storage companies said recently that Detroit was one of the best markets.”

Indeed, Detroit had the highest foreclosure rate among the nation’s 100 largest metropolitan areas last year, with nearly 5 percent of its households in some stage of foreclosure, according to RealtyTrac.com, the online foreclosure listing service. RealtyTrac put the average nationwide rate at 1.03 percent as of Dec. 31, up from 0.58 percent at the end of 2006. Also high on the list were Las Vegas, Miami and Denver, along with several boom-and-bust cities in California.

But housing is only part of the story in self-storage, analysts point out. “It correlates to transition,” said Michael J. Salinsky, a REIT analyst at RBC Capital Markets.

Demand for storage space is often precipitated by life’s passages – marriage, divorce, retirement, enlistment in the military. In addition, use by small businesses has been growing, particularly by those that operate online. “Small businesses need off-site storage, for upsizing and downsizing,” Mr. Salinsky said, “and so do people working from their homes.”

In the last decade, he said, self-storage revenues have grown 4.4 percent a year, on average, compared with average growth of 3 percent a year for most other commercial real estate sectors.

This steady cash flow, which seems to transcend both good and bad economic times, is attractive to investors. During economic downturns, many investors look for such reliable income, engaging in a “flight to safety.”

“This is a cash-flow-driven business that has a low break-even point – expenses are low even if occupancy rates are not high,” said R. Christian Sonne, the managing director of the self-storage industry group at Cushman & Wakefield, which provides various consulting services for the sector.

A concrete-and-steel storage facility is typically far less expensive to build and to operate than, say, an office building or shopping center. There are, of course, the standard expenses associated with real estate, like utility costs, property taxes, insurance and payroll, but not too much more.

And after “a huge building boom in the early 2000s,” Mr. Sonne said, the development pipeline has been slowing of late, which is also reflected in the newfound resilience of the self-storage sector.

“The barriers to entry are becoming more difficult,” Mr. Sonne explained.

For one thing, financing for new structures is harder to get, he said, while zoning is stricter in many communities, which seem to prefer property types that might generate more jobs and tax revenue.

Still, plenty of storage space already exists. By the Self Storage Association’s estimate, there are around 51,500 primary facilities nationwide, as well as another 8,400 mini-storage places, or, as the association broke it down, almost seven square feet of rentable space for every person in the United States. A vast majority of this $220 billion industry, however, is made up of small businesses, making it the most fragmented among commercial property types.

Perhaps because of that fragmentation, “this is probably one of the sectors that is least understood,” said David Harris, a REIT analyst at Lehman Brothers.

Mr. Salinsky agreed, though he added that “in storage, you have to be a very dynamic operation to get the returns out of the property.” And that might include offering customer incentives like $1 rents for the first month and ancillary services like moving supplies and truck rentals. (A 10-by-10-foot space rents for less than $100 a month, on average, according to Mr. Sonne.)

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage^TM.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing.

*Excerpts found in The New York Times on April 27, 2008

Now for many people, the thought of creating a business plan is akin to the fear of public speaking.  However, it does not have to be such an unpleasant task, especially since we already have the information.   Our personal financial statement, the project due diligence and the market analysis comprise just about all of the information needed.  All we need to do is to organize this information into a coherent document.  Our business plan is an opportunity to present ourselves and the deal in the best possible light.  It is designed to give the lender an in-depth look at yourself as a borrower including your past successes, the reasons why this project is so strong, and the reasons it will succeed in this market. This will all be supported by facts from your research and due diligence.

Reasons for a Business Plan

A written business plan speaks louder than any thing you say or do when applying for the loan.  In addition, a written plan may be the only information the loan committee or board can refer to when looking at your deal.  The business plan speaks for you when you are not present. It is extremely important to create a professional, organized, document proving that you have done your homework and can manage the risk that is inherent in all facilities.

There are several software packages and numerous resources available to assist you in preparing a business plan.   Some are very good, but few are tailored specifically to real estate.  I suggest you follow the format I have provided in this home study course for several reasons.  Most business plan templates are just that; templates.  They are designed using generic terms for operating a multitude of small businesses.  However, a business plan and subsequent loan request for real estate requires many different elements.  You may find that the effort involved in adapting a template is more work than writing a plan from scratch following the model I have presented.

In addition, I recommend writing your own plan because of the knowledge you will gain in the process of doing so.  By assembling the information again and presenting it in a clear format, you gain an even better understanding of the project that allows you to explain it in detail when the time arrives.  This creates a perception of confidence in the lender’s eyes during conversations regarding you and the facility, and anything that reduces risk on the lender’s part is a positive step in the right direction.  Lenders see hundreds of proposals each year; some are good, others are not.  A thorough plan makes their job much easier when pitching your deal to the board.  I strive to ensure that my business plan and loan proposal are one of, if not the best proposals they will ever see.  Some of the smaller community banks I have relationships with only approve so many loans per year, and I want to make sure that my proposals make it to the top of the list in the month that the committee or board meets to review and approve requests.  And so far, I haven’t lost yet!

I must remind myself that perception is a reality for the lenders.  They do everything possible to avoid risk, but they know that every deal involves a certain amount.  Their approach is to look at every deal as if it was a loser and must be proven to be a winner.  My Personal financial statement is designed to project stability, and my loan proposal is presented in the exact same manner.  A good loan proposal will convey the message that I have the necessary resources and abilities to succeed in the project being proposed.  This is critical to obtaining loan approval and funding for the facility.

Elements of a Business Plan

The ability to professionally package and present my proposals, I believe, has been a major advantage in getting my deals funded.  My plans spell out very succinctly what I am going to do, when I am going to do it, and how I plan to do it. In my opinion, there are seven critical elements that should be included in any business plan and subsequently, your loan application:

7 Essential Elements of a Loan Application

1. Projected Financial Statement

2.  Amount of Funds Requested

3.  Requested loan terms and Length

4.  Source of Repayment and collateralization

5.  History of and nature of the Business

6.  Repayment of the loan (including plan B should things go awry)

7.  Timeframe for approval

I try to summarize those first 7 questions on the first 2 pages of my business plan to make it easy for the lender to get a quick snapshot of what I’m attempting to achieve.  Remember, you are relying on your loan officer to present this request for you to the loan committee, so make it as all-inclusive, yet as simple as possible for him to do in your absence.    Your ability to prepare your loan officer for this task will be the key element in gaining loan approval for your new facility.

Do not, I repeat, DO NOT send him or her in to the committee or the board with a disorganized, unprofessional mess of papers, and don’t leave it up to him or her to explain why you should be approved for the loan.  I spell this out myself in my business plan which highlights my experience, past successes, and my confidence in the project being proposed.  They should come to the conclusion that if they don’t fund this loan for me, then the competition certainly will.

Plan Format

My plan is written as a combination business plan and loan application that focuses primarily on the subject property I want to acquire.  It includes a summary of my past experience and successes, my present portfolio of real estate, and pertinent financial data, but the primary focus is on the deal.

The reasoning behind my format is that a self storage facility is not a business that requires many employees, vast amounts of inventory, or major amounts of machinery to manufacture, distribute, or sell a product.  With self storage, the emphasis is on the care of a single asset, and the plan is a representation of my ideas for the efficient and effective management of the facility.  I’m not downplaying my ability as a borrower, but in commercial real estate, the lender tends to look more to the performance of the asset than the borrower.

Below is a sample outline of a loan proposal and business plan.  A good plan is professional, grammatically correct, free from spelling errors, logically organized, and most importantly, thorough.  We will discuss these elements in the pages that follow.

1. Summary Page

a.       Borrower name and the entity that will hold title to the facility

b.      Property Legal Description

c.       Purpose of the loan

d.      Loan amount and terms requested

e.       Loan Ratio, or Loan To Value (LTV) requested

f.        Collateral and source(s) of repayment

g.       Financial Summary

2. Market Summary and Analysis

a.       Area map including facility, and photos of the facility

b.      Demographics: Population, growth, employment, & income

c.       Market Trends

3. Neighborhood Analysis

a.       Location Description in relation to customer base

b.      Market position

c.       Competition

4. Property Description

a.       Site plan and analysis

b.      Aerial and or Satellite Photo (GoogleEarth.com)

c.       Property Photos

d.      Property Description and Rent Roll

e.       Improvement plans

f.        Management Summary

g.       Marketing Plan

5. Financial Data

a.       3-year historical financial performance (if possible)

b.      3-year projection of operations

c.       Basis for these assumptions

d.      Source and use of Funds requested

6. Borrower data

a.       Ownership structure and Entity

b.      Background and experience of principal

c.       Personal Financial Statement of borrower

7. Exhibits

a.       Building and site plans

b.      Survey

c.       Sample Lease

I prefer to copy the package on 3-ring paper, and include in a binder with tabs for reference.  Any one of the large office supply stores can assist you with this document at minimal cost.  Remember, our goal is to have our loan proposal moved to the top of the heap when all the loans are proposed at the monthly loan committee meeting, and ultimately, given preferential consideration for being so professional and complete. Make it generic in nature, but include a formal cover to the bank and lender you are making the request to.  There have been a few occasions where the lender wasn’t able to fund the loan for some reason, in which case I would retrieve the package and forward it to another bank to start the process over.

In Summary, when I have taken the time to prepare a thorough business plan and loan request, it has been given the attention and priority it deserves.  And subsequently, I have had a great deal of success in getting my deals funded, and grow my business in ways others have failed.

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage^TM.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing.

Most types of investments won’t allow the use of high leverage using the securities themselves as collateral.  This makes real estate investing somewhat unique in its use of financing.  The use of leverage in real estate investments is a proven method to accelerate returns and create wealth.  But one must be careful not to over-leverage.  As we examine a few of the various types and sources of financing available for self storage facilities, I will also point out the dangers that can result from over-leverage and pitfalls of various financing structures.

There is a wide array of financing vehicles available from an assortment of institutions and intermediaries.  What was once a short order menu in the financing arena is now a smorgasbord of products that can be mixed and matched to accommodate almost any project.  There are trillions of dollars in real estate mortgages issued each year in the United States alone.  It has been estimated by the US Congressional Budget Office that approximately 76% of the nation’s wealth is in some form of real estate ownership or securities backed by real estate.  That dwarfs the investment in all other industry sectors combined.

In the past twenty five years, the financial industry has rolled out a myriad of mortgage products designed to make real estate ownership available to all segments of the population, and in recent years, it has repealed a few.

FUNDING SOURCES

Seller Financing

A common and often times preferred source for financing self storage facilities is some form of seller-held financing.  There are many advantages to using seller financing to fund a portion or perhaps 100% of your investment.  Typically this includes no points, no fees, no appraisal, no survey, and no need to educate the lender about the facility.  In addition, I can negotiate directly with the seller (financier) to structure a loan that is attractive enough to convince them to hold some or all of the financing.  The most common use of this technique, and one I try to utilize on each and every one of my deals, is to get the seller to hold back a second mortgage to fill the gap between the sales price and the first lien being provided by the lender.

Seller financing can be either short or long term, interest only or amortizing, with or without a balloon.  In many cases, seller carry backs can be sold on the private market to create cash at closing to the seller if the structure and terms of the note are marketable with standard commercial terms.

Private Lenders

Wealthy individuals, or what many in the industry call “Country Club Money”, are often used as sources of financing, but may be hard to come by.  Low interest rates as of late have caused many wealthy individuals to consider lending money for real estate simply because the returns are much higher than CDs or bonds and the debt is secured by a tangible asset, the facility.  The total loan amount will vary based upon the individual and his or her wherewithal.  Typically, interest rates can range from 6% to 20% depending on the deal, current market rates, timeframe, risk, amount, etc.  There is no governmental or regulatory oversight of private lending so rates and terms are negotiable between the parties involved in the transaction.  As with seller financing, the terms are generally more flexible than other lending sources and may not require extensive third party documentation and fees, and are relatively quick to close.  Most private lenders prefer a short time frame to be paid back, typically one to three years, with the loan being amortized or interest-only with provisions for rate adjustments if interest rates begin to rise.

Mortgage Bankers

Mortgage Bankers are mentioned frequently throughout my home study system, “The Complete Guide to Finding, Evaluating, and Purchasing Self Storage Facilities”, as this is my preferred funding source.   It is important though to remember that a mortgage banker is not synonymous with a mortgage broker.  The simplest way to describe the difference is that a mortgage broker works with multiple banks, and the mortgage banker works solely for the bank in which they are employed.  The benefit to a mortgage banker is that they typically possess years of experience and education required to represent a firm as a mortgage banker.  In comparison, a mortgage broker can get started with no experience whatsoever.

The mortgage banker may have outside relationships with additional sources of funds such as life insurance companies, pension funds, and private investors, and may bring them in to participate on a loan to complete the deal, but this is the exception not the norm.

In practice, both the mortgage banker and the broker fill the same role to the borrower.  They specialize in mortgages and only mortgages.  The mortgage banker has a small advantage in being able to warehouse a loan, meaning they can close the loan by advancing the banks own funds, and wait for the security of the facility until a later date.  This can make all the difference in funding a particular loan for your time sensitive deals.   Once you have proven yourself to these banks, you will have access to some of the most flexible financing available anywhere.

There are literally Dozens of ways to structure the financing on your Self Storage Facility that we could discuss, but I’ll just cut to the quick and present the way I have structured nearly all my deals, which is a combination of the 3 ways I just presented.  Lenders Love Self Storage, and given the system I have created to find the real sweet deals, my banks have no problem approving an 80% LTV Loan.  I will then combine that with the aid of either a seller Carrying Back the remaining 20%, thereby making 2 payments to him, or by partnering with some of the “Country Club Money” we discussed earlier in this article.  However, I will caution: I DO NOT RECOMMEND OR APPROVE OF 100% FINANCING, OR THE “NO MONEY DOWN” DEALS THAT YOU HAVE SEEN ON TV, OR PREACHED BY OTHER GURUS! That being said, I have done several deals that have proven to be very successful projects which were purchased with no money down.   The difference was that the deals were SO good, and the upside SO incredible, that I felt safe in leveraging them higher than my usual 80% threshold

The investor that can put deals together by marrying a good loan with their community lender, structuring a 2^nd loan from the seller, or from wealthy individuals can win in today’s turbulent credit markets.  But remember, the deal must be bought well enough that the cash flow must support both loan payments and still provide a decent return to the investor.  And trust me, they’re out there!  I’ve made a fortune by following those simple guidelines, and you can too!

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage^TM.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing

Like all other real estate investments, self storage shares the same attractive qualities as residential rentals, apartments, retail strip centers, office buildings, and industrial properties.  Those include leverage (borrowed money), tax advantages, passive income, personal control (being your own boss), and appreciation. However, self storage offers a number of benefits that I feel make it such an attractive investment. Those include the following:

1. We are becoming a more transient society, moving around more and creating a greater need to store our stuff, thus the demand for self storage is increasing.
2. Americans tend to accumulate a great deal of possessions, and we don’t want to “weed out” those things we don’t use or are sentimental or have nostalgic value, which in turn, creates more demand.
3. Most new communities will not allow us to store our boats, jet skis, RV’s, or even multiple cars on the street or in front of our homes.
4. Many retirees downsize their homes which require additional storage space that their smaller homes don’t provide.
5. More and more Americans are buying second homes which increase the demand for storage space.
6. College students utilize storage space when moving back home for the summer.
7. Many businesses are downsizing and operating out of smaller offices that necessitate a need for storage space.
8. Many small distributors will utilize self storage to operate their business from.
9. Pharmaceutical reps will use climate controlled storage for samples and inventory.
10. The eBay® phenomenon has created a huge demand for space.
11. Other home based businesses are also creating demand for off-site storage.
12. Lower Development costs – self-storage facilities development costs are often 30 to 50 percent less than office, retail, and apartment buildings.
13. Lower Operating Costs – Operating costs for self-storage facilities are substantially less than office, retail, and apartment buildings.  As a result, self storage owners are more isolated from large increases in utility and other variable costs that occur in the open market.
14. Lower development and operating costs make break-even occupancy ranges lower than other forms of real estate.
15. Occupancy is generally more stable and therefore predictable as there are typically a greater number of units in which to “spread the risk” than in other forms of real estate.
16. Month-to-month leases mean that rental rates can be adjusted easily.  When occupancy increases, I will adjust rates to compensate for the demand.
17. Demand for self-storage is not dependent upon the economy.  When the economy is good, people buy more and store more.  When the economy slows, people downsize, and require a cheaper alternative to store their extra belongings.
18. Low management overhead as customers typically only need the manager to move in or move out, compared to office or apartment complexes that requires a high number of customer contacts and constant and ongoing interaction.
19. A well-run, stabilized self storage in a good location is very desirable to other investors and institutions, making self storage a very liquid investment.
20. It’s No Wonder Self Storage has the lowest loan default rate of all commercial real estate property types!

DEBUNKING THE MYTHS

Now that we’ve discussed all the reasons that make self storage a fantastic investment, we should take some time to break down a few of the myths that have been floating around with regard to the industry.  Like many other industries, self storage has been evolving for several decades now, and many of the general assumptions by outsiders surrounding this business simply do not apply.  Some of the common myths are as follows:

1. “If you build it, they will come”.

In the early years, this was somewhat true.  But in today’s competitive landscape an owner/investor must perform very careful analysis and/or feasibility studies to determine whether a potential development site or an existing facility is a wise investment.  In addition, there are many areas that are, or are becoming overbuilt, which drastically changes the projected lease up and overall occupancy potential for a facility.

1. “Self-storage is an easy business”.

This may have been somewhat true in the past as well, but like any business, if it were easy, everybody would be doing it.  Far too many real estate investors treat their business as a hobby rather than what it truly is; an asset with many moving parts that must be managed from day to day as opposed to a stock or a mutual fund that you purchase and only infrequently check on its performance.  Today’s self storage arena is very competitive, and successful owners are always thinking of ways to increase income, decrease expenses, and strive for operational efficiencies across all facets of their operation.

1. “All self storage properties are cash cows”

As we discussed earlier, self storage facilities have the lowest default rate of all property types, but it doesn’t mean that owners don’t default and that many others are struggling.  Generally this is due to poor planning before acquiring or developing a facility.  An owner/investor must perform thorough due diligence when it comes to competition, population growth, land costs, construction costs, market rental rates, and the management of the facility before purchasing or developing a facility.  If you do not have the time nor the expertise, a feasibility study should be conducted by an experienced individual within the industry to avoid buyers or developers remorse.

1. “this is a cheap business to get into”

Again, this may have been somewhat true in the past, but not any longer.  Today’s customer is demanding a higher quality facility than what the industry provided in the beginning.  Today’s facilities possess a higher quality construction, are fully paved, fully fenced with security gates, typically have state of the art digital video surveillance and recording systems, and are considerably larger than in the past, which necessitates an office with a part-time or full-time manager.  Land costs are higher as most developers prefer to locate in high traffic locations as opposed to the hard to find or industrial park sites of yesteryear.  In addition, construction materials have been on the rise recently due to fast developing foreign nations which affect development costs, and good existing facilities are being sold at record high prices as the word is out on what a great investment self storage has become.

The Future of Self Storage

As we look to the future of self storage, it’s very clear that the future looks bright.  There are a few trends afoot backed by solid industry data that justify my positive outlook on this high growth industry.  These trends are as follows:

Increasing Demand

The U.S. Population is predicted to reach 400 million by the year 2050.  All indicators show that Americans continue to be a highly mobile society with a high propensity to accumulate “stuff”.  This means that as of the time of this publication, we stand to add 150 million potential customers to our prospect list who are searching for somewhere to store their belongings.

High Tech Facilities

As our customers become more selective in where to store their belongings, owners of older facilities will need to make necessary improvements to remain competitive.  This will ultimately result in more sophisticated and higher tech facilities offering more user friendly layouts, larger offices, flexible unit mixes, kiosks, high security, and more climate control units.  In addition, we can expect to see self storage investors competing for the premier parcels located in the high traffic retail areas of town.  As a result, municipalities are beginning to require that these facilities have a retail component in order to increase the amount of sales tax generated and paid to those local governments.  They are also requiring that the facilities have a certain “look and feel” that blend in with the surrounding businesses.  Nicer fencing, or split block security walls, paved drives, certain architectural features, and an attractive landscape package will be mandatory and made part of the architectural permit prior to construction, and strictly monitored for compliance.

More Products and Services

As self storage moves closer to Main Street, we will begin to see an increase in the number of customized services available for its customers.  We have already seen some partnerships being formed that provide complementary products and services.  Of course the most common example is truck rental, but we are now seeing pack and ship businesses, EBAY® add-it stores, Kinko’s®, or co-locating with retail stores such as Starbucks® or Subway® on the ground floor with storage above in multi-story facilities.

Focus on Customer Service

As more and more people frequent our self storage facilities, they will begin to expect more from our facilities and the face behind the counter.  These sophisticated customers are demanding excellence and consumer loyalty will quickly go out the door, along with their stuff, if they have a bad experience.  Conversely, when customers are satisfied with the service they receive, they will stay, and hopefully will tell their friends about the good experience they have had.  This provides an excellent opportunity for us to exceed their expectations, and provide a substantially better experience than our less educated, less professional competitors in our chosen markets.  My goal is to be my customer’s LAST storage provider by never giving them a reason to look anywhere else, for any reason!

Industry Consolidation

As the larger public companies and REIT’s are pressured by Wall Street to produce results, we will surely see more consolidation of the mid to large size companies.  Those same mid to large companies can’t meet their growth deadlines by developing their own facilities from the ground up. The 3 years it takes to choose a plot of land, apply for zoning, permits, and then build and stabilize a property simply isn’t fast enough for them to meet their goals.  Don’t misunderstand me however, the mid to large companies ARE still active developers, but their appetite for growth will fuel a surge in acquisitions and mergers for years to come.

Increased Competition

As all eyes are now on Self Storage, we are sure to see a number of new entrants into this facet of commercial real estate.  Unfortunately, this will lead to overbuilding in some areas as many newer developers will ignore the feasibility criteria for developing a facility in a given market.  Therefore, it will be imperative for owners and developers to work more efficiently to attract and retain customers in this new environment.

Increase in Value

In the future, the upward value trend in self storage will continue for a number of reasons: Predictably low interest rates will push cap rates low, and net larger profits for those who choose to sell.  For that reason, self storage continues to rise in popularity as one of the commercial real estate assets of choice, and will ultimately attract more investors.  There are still a number of individuals and investment firms that are stinging from the recent stock market corrections.  These investors are now searching for a more stable investment that they can “touch and feel” as opposed to investing in a company that they have never heard of, run by people they have never met, in an industry they know nothing about.  There is a lot of money chasing a few deals.  Many investors have created a great deal of value in their existing portfolios, and they are selling off these properties and are looking for places to spend their 1031 tax deferred exchange dollars without paying taxes.  Self storage has continued to be a great investment to exchange into and more and more investors are choosing to park their dollars here before their tax deferred status expires.

As the saying goes, the only thing we know for sure is that things are going to change.  I do subscribe to that line of thinking, but I also believe that self storage will remain a reasonably predictable, stable, low maintenance, high cash flow investment for professional investors for years to come.

Scott Meyers, CSSM© is the President and Owner of Indianapolis Based Alcatraz Storage^TM.  He is also the nation’s leading speaker and educator in the field of Self Storage Investing