As I write this in Jan 2024, I get asked a lot “What and where are the best self-storage opportunities today.”
Another version of this question may be, “How in the world can I get into self-storage today with interest rates where they are now and construction costs so high?”
I’ll just share with you what and where I am focused on today, given the current realities.
What
For the most part, I am focused on expansions and conversions today.
Now, I am involved in a ground-up Boat and RV storage development project, but it is not for the faint of heart. Approvals are slow, construction is high, and financing is fun.
We have really had to work the project to have it come in where we need to for the returns needed.
But for most people I work with, and myself included, I like expansions and conversions.
And I like them in a particular order and a particular way of finding opportunities today.
Let me explain.
If you are new to the storage space or relatively new in the space, I would usually first work with you on finding expansion opportunities.
What I mean by that is finding existing mom-and-pop type storage, where one could add more storage, and the market would absorb it.
I like this because you have existing income when you buy; however, there are almost never enough returns to justify the “As Is” price. But after adding the additional space, I can get north of 12% to 15% cash on cash returns and well over 20% IRR (if these meticas don’t make sense, I have videos explaining them).
Now, I may have to analyze and run numbers on 10 to 20 expansion opportunities to find one that works, but they are out there.
If you want to see how I analyze them, you can click here and download an eBook, or click here and download a 2 video training series. The numbers may have changed, such as construction cost per square foot, but the order and method of analysis are the same.
Today, I feel this is the safest way for people to get in the business.
Although you may not get the returns you will get from new construction, you have a lot fewer moving pieces, and you have some income from the start to assist in loan payments and operating costs.
There are a lot of mom and pops out there. The last estimate I saw was approximately 60% of existing self-storage facilities.
So, there are a lot of potential deals to make.
I look for expansion land, or parking that could be converted into self-storage.
I will discuss conversions in a minute, but first…
Where
One of the big challenges we have today in underwriting and bank underwriting is due to the low street rates REITs use to get customers in.
I have an entire rant about it, how it affects us as small investors, and what I am doing to deal with it in Episode 398. Watch here it if interested.
So today, I will look at opportunities in markets where REIT presence is strong, knowing it is harder to underwrite, but I like being in MSAs where REITs are, but on the outskirts where they do not have a strong presence.
Tier two and three markets.
A perfect market is where REITs are close but not in the current trade area (3 to 5 miles radius in many cases). I know by the time I am ready to sell, they will most likely have a presence, and I have made a lot of money selling my projects to them over the years.
Now for conversions.
That is where we can take an existing building and convert it, or adaptive reuse, if you will, to self-storage.
I have perhaps made more money here than in anything else I’ve done.
I have talked a lot about conversions, and if you are interested in seeing an episode on one we did, click here.
I don’t want to rehash everything in this episode on them.
I will just say that I can usually get new income started much faster in conversions than expansions and ground-up construction. They are usually all or mostly climate-controlled spaces, so I get the maximum rent the market will offer, creating more value for the calories expended to do the project.
I also usually can lease part of the building out as I phase in storage, generating income as I do the project. I have only not done this one time.
Here is a pro tip.
I started by saying I would focus on expansions. That is what I do and coach people today to do.
However, let’s say we looked at an expansion that did not work, but I loved the market. The market had what I look for; population growth, rent and housing costs are more expensive per square foot than storage, job growth, storage rents are good, and market is not overbuilt.
When I find markets I like by looking at expansions, I then begin to look for conversion opportunities.
I will often find a broker who works in that market to help me. They get paid when they find something I buy, usually by the seller.
What I look for and what you look for may differ depending on your business strategy.
But for myself, I am looking for a final product of over 50,000 square feet of net rentable square feet when completed.
If you want to see the benchmark numbers I am using, download the eBook guide or video series mentioned above.
Some of the construction numbers may have changed, but the benchmark numbers of net rentable square feet, ceiling height, etc., are usually fixed.
Today, for conversion construction (not including building acquisition cost) in my preliminary proforma, I am using around $45 per square foot. For new construction in expansions, I am using $75 or so (does not include land cost).
Construction costs can vary a lot depending on where, how many square feet, etc. But these are the numbers we are getting as we do deals today. Some people I work with do better than we do, and some pay more. There are a lot of variables.
Conclusion
So, in today’s market, this is what I am focused on and what I recommend for most people.
Now, some I am working with start off by doing new construction, but that is because of their business strategy or because they have development experience already.
However, if you are starting off, these are my suggestions.
Whatever you do, if your goal is to be in self-storage, use this year to do so. It is the best move I have ever made, and some of the projects I did that made the most money for me were started in the 2008 through 2010 recession.
So, I am not averse to jumping in while most people are on the sidelines. Just be strategic, have a plan, and know your numbers.
If anyone is interested in working directly with me, click here and set up an exploratory call, or perhaps you would be more interested in considering joining a community of people who are getting in or in the business and are using these same strategies. Click here to find out more about that option.
Good luck, and let’s make this year (or whenever you see, read, or hear this) the year you start creating wealth or growing your wealth in the fantastic business of self-storage.
