I get asked this question a lot today about self storage. “Is it still a good investment for small investors?”

Or a question like, “Didn’t I miss when I should have gotten in 20 years ago?”

Well, let’s look.

Two Main Parts to The Question

There are two main aspects to the question I am hearing:

1.  Prices are so high today, and
2.  Oversupply (or there is so much storage already out there).

 Both are valid concerns.

Let’s look at the question of prices first.

Pick a date when you think you should have entered the self storage market business.

I purchased my first facility in 1999.

When I purchased the first one, there was no SBA financing. Bank loans were the only option for me, and many banks considered self storage a “special use” product. In other words, if I defaulted, the only thing the buildings could be used for was self storage.

That means higher interest rates if they would loan.

My first loan was for around 8.5%. Yes, I was able to purchase on close to a 10% CAP, based on 85% projected occupancy because I purchased it when it was 50% full, but I was able to get some good terms on a soft second mortgage, so I had less cash going into the deal.

That was about a point and a half spread between CAP rates and interest rates.

A little better than today.

For some reason, I hear “20 years ago” often as a time when many people say they were thinking about getting into the business.

Given I am writing this in 2022, let’s look at 2002.

Since it was 2010 before SBA started loaning on self storage, most of us small investors were still using conventional bank loans to get into the storage business in 2002.

Commercial interest rates were around 7.25% then. CAP rates were around 8.5% to 9%.

So historically, there has been about a point to two points difference between CAP rates and interest rates.

Negotiation has always been an important part of the deal because to get an existing asset cash flow anywhere near the returns we need as small investors need. From my experience, there needs to be about a 2.5% spread between interest rates and CAP rates using bank financing to get a decent return.

It was around 2012 when I was last able to buy an existing self storage project and use the spread between my cost of capital and the going-in CAP rate to create an acceptable return.

Since then, we have always had to do a major value-add play in the form of expansions to generate the required returns.

But we made great returns for ourselves and our investors.

Supply Question

It is hard to get specific on this because self storage is a localized product (see Episode 351).

Each self-storage facility or opportunity has its own trade area, generally 3 to 5 miles or closer. Sometimes drive times or some combination of the two.

Yes, 20 years ago, there were fewer oversupplied trade areas, but remember, fewer people used storage then than today.

Not only is the population growing (the major driver for self storage), but a larger percentage of the growing population is also using it.

To win as a small investor is to ensure that there is still unmet demand for storage in the trade area of the project you are considering. 

Fortunately, no other type of commercial real estate is as easy to determine supply/demand for a trade area as self storage is because it is such a localized product. That is where feasibility reports play such an important role for us as smaller investors.

Even though there are fewer trade areas with unmet demand, believe me, there are still plenty.

More due diligence has to go into figuring out the trade areas than 20 years ago, but that is just the way it is today.

The Next Decade

So, as you can see, I still say self storage is a good investment.

It is perhaps one of the best times to get in the business because of one feature today…the consolidation of the industry.

Ten years ago, REITs accounted for around 18% to 20% of the industry. Today that figure is around 32%.

It will continue to grow as the money keeps pouring into the space.

This allows small investors to purchase existing mom & pop facilities that REITs generally don’t consider and expand and bring up to the standards they would consider.

As small investors, we can command top dollar when we exit the deals.

This also works with construction. Building or converting an existing building to current self storage standards that institutional players would consider is how we have generated the returns we have over the past decade.

Once a self storage project is stabilized, it is the safest real estate asset one can be in. I say this because self storage is the lowest foreclosed-on asset class there is.

Cash flows are more predictable, and income can adjust whenever the Owner believes they can get more. There are no long-term leases keeping income down.

Especially important if inflation keeps rising. And remember, if we can move income to cover operating expenses, the positive spread of income growth over expense growth creates the long-term wealth we all seek.

A great feature for a small investor.

So, is now still a good time to get in the self storage game as a small investor?

You tell me.