Storage Investing: Top 5 Strategies

Apr 27, 2022

Self-Storage Investing

Self-storage business is not truly investing – we're buying businesses and we're operating. Now, there's five ways to do this. Five ways that you can go about it that will yield you a lot of income and build a lot of wealth. In self-storage, these five ways are very specific and very different.

5 Strategies

So, we're going to start out with number one…probably my favorite one because it's how I got started and I still do a lot of it today. The number one strategy is value-add and the reason why I love value-add is that you already have an existing asset with existing revenue that creates safety. It also builds immediate wealth and cashflow, but there's opportunity and lots of it. You can improve the revenue therefore improving your equity position and improving your cashflow. That way you can reinvest it back into other assets and keep growing your business.

There are two sides to value-add. The first side is operational. That means running the storage facility revenue management and employee management. The second side is capital expenditures. This means, “this thing's run down and I have to do a lot of work, but once that's done maybe I pave it, repaint it, fix doors, redo the office.”

Once that’s done, the value offering to future tenants has now changed and I can charge a higher price and make more money.

Number two. The second strategy for self-storage is an extremely powerful wealth creation strategy. Now, there is more risk involved in it and it takes a longer time. This is development. This is turning something that doesn't exist into a large cashflow asset. The cost difference of what it takes for you to build and the revenue that accrues from that building is the equity that you create from nothing.

I love that! I love the creation process of it, and I love the equity creation, because in development it can be very large. You can receive huge windfalls that can propel you to a whole other level. Now, there are some major downfalls with development. It takes years to do. There is no existing revenue to know exactly what the demand is.

So, with development it's important to understand three things:

  • Overall demand.
  • How much current demand is in that market.
  • How much that market can absorb of new storage.

 

Coming into it you, don't want to develop a storage facility. There was no demand and now you have vacancy, and nobody can fill it up. That would be a big problem.

The next thing you need to understand is how much revenue can be achieved from your units. So, after I build it, what different units can I sell and for at what price? What's the cumulative total of revenue?

The third one: conversions have been a big thing at self-storage. We started years ago. We're buying bankrupted Super Kmarts, retail centers, and including office buildings that went under during the COVID crisis. Right at the start when markets froze, we took advantage of the discrepancies in the market. The valuations that it put on these things, and we can turn that into a storage facility. So, the valuation of commercial real estate works like this: however, much money that it produces and I can buy it for and make a return that yields.

That's where you get the value with retail centers. Nobody wanted to get a $100,000 retail center because ShopKos and all the people that were going to use that space are going under. They've been completely disrupted. That means the value of it has gone way down…not because somebody doesn't want to use it, but because the use of it is not very high. So, you can put all sorts of different things but the yield from it, the revenue it can produce is really low. Nobody really knew what to do with them.

Now, we could buy them at what was a perceived much lower value. We got them and put storage units in, and the revenue associated with that asset was way higher. This spread at a ginormous spread, and we took advantage of that. It worked really well.

Now, the same thing with development comes in. With conversions you have to be very careful on demand, you have to be very careful about getting permits, cities allowing you to do this, understanding capital expenditures associated with h-vacs, roofs, and everything else that comes with buying an existing building. Inherently, a lot of risk but when done right, it can also produce a ton of value.

The fourth strategy is expansions. That's when you buy an already existing facility that already has assets, already has revenue, but has more room. A vacant land that you can build and expand. This is a wonderful hybrid between buying value-add and development.

This is how we got started in development. We didn't develop outright. We bought an existing asset that had cashflow. We improved the cashflow, the bank gave us more money to use on land and to build more storage units, thereby increasing it even more. Why is this one so powerful? It’s because your fixed expenses don't change, so everything that you expand on that goes straight to the top.

So, the expansion cost you have, but the expenses associated with operating it usually doesn't change. That means your margins get bigger and the value of the facility goes up…not just because of more revenue, but because the actual profit associated with the cost to drive that revenue is rising and it’s very powerful.

Alright, last, and probably least for me that's why I left it for last. It's not a bad strategy, maybe I’m just a little more risk tolerant, but that is: buy and hold. This is an incredible strategy for everybody that knows anything about real estate. You get cashflow, you're buying an existing asset that's in great condition, and have high revenues. As those revenues improve, not only is the revenue going up and you're making more money, the tenants are paying down your debt, you're getting depreciation, and you're getting tax advantages.

Risks to Understand

Just like you are with all the other strategies, you can't go wrong. Obviously, that's not true. You can go wrong and here's where you can go wrong. You need to look at demand associated with that asset, and you need to look at the price that you're buying it at. Now, I look for my margin of stupidity. You've probably heard me talk about this, but I need to be buying and I need to have some room to where things can go wrong. I’m accounting for my own stupidity. This is very important because I’m not perfect and I know I’m not the smartest person around. With that said, I have to build that in for buy and hold. That's really important. A lot of people today are buying as if nothing will go wrong and that is not reality. During 2008 we bought a lot of assets because a lot of people had priced and bought those assets as if the underlying revenue would never change for any reason and that turned out to be a horrible assumption. Don't make that mistake.

Those are the five strategies to get into self-storage, to get a lot of revenue, a lot of income and build wealth. Each one of them is unique. They all hold pros/cons, risks/benefits, and you need to analyze it. You may have certain strategies that fit best for your situation. You should exploit those strategies. When I started out, value-add was the best for me. I didn't have lots of time. I understood business, I didn't understand real estate. I didn't understand developing or anything else like that, so I needed something that was safe. I needed it to produce cashflow that would pay my bills, build profit, and then I needed to figure it out. I knew that through some simple things like marketing different business activities, like operations…that I understood. I could improve the overall revenue and increase the yield. So, it worked for me. We used it, we got into it, and we moved into those other strategies. So do what works best for you.

 

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