I was asked to write an article on self storage as an investment vehicle to fund one’s retirement.

I almost turned down the assignment because I have such a strong opinion about the retirement and wealth advisors industry.

I need to say I am not an investment advisor. I don’t want to be one. Everything I say is my opinion, and my opinion only. This is not meant to be definitive investment advice. It is my hope this article will spur you to research and explore retirement strategies that could work for you and to take control of your financial future.

I believe it is important to take charge of one’s finances, and I think the investment world and area of financial investing is over complicated to give the impression that an investment advisor or a retirement advisor is really needed to maximize your financial position.

That is far from the truth, in my opinion.

The investment industry is the only industry where the person you give your money to, in most cases (I’ll explain the exception), has no fiduciary responsibility to you.

That’s right, zero.

They will make fees based on the amount of money you give them, regardless of their performance, and they have no legal responsibility to look out for your best interest.

No, this does not mean every investment advisor who is 100% fee based is out to get you. It just means they legally do not have a fiduciary responsibility to look out for you.

Unless they are a flat fee based “fiduciary.”

If I was ever going to turn my money over to someone to invest, which I never will, the fiduciary is the only one I would ever consider.

The real problems I have with the industry are the fees and their impact on the money you spend your life earning.

The impact of excessive mutual-fund fees and investment advisory fees can be devastating. Jack Bogle, founder of mutual-fund giant The Vanguard Group, during an interview with Tony Robins as he was writing his book “Unshakeable,” spelled it out clearly.

“Let’s assume the stock market gives a 7% return over 50 years,” he began. At that rate, because of the power of compounding, “each dollar goes up to 30 dollars.” But the average fund charges you about 2% per year in costs, which drops your average annual return to 5%. At that rate, “you get 10 dollars. So, 10 dollars versus 30 dollars. You put up 100% of the capital, you took 100% of the risk, and you got 33% of the return!”

Now add on top of that the fees your investment advisor charges.

It’s not just that many actively managed funds overcharge their customers. It’s that their long-term performance rarely, if ever, beats the S & P. You would be way better off, in my opinion, just investing in S & P Index funds.

Don’t take my word for it. S&P Dow Jones Indices publishes an annual report that spotlights how well these active managers perform against an appropriate benchmark index. At the end of 2016, for example, eight of every 10 U.S. stock fund managers failed to beat the broad U.S. market over the previous 15 years. Keep in mind, these funds can be 10 to 30 times more expensive than a simple, tax-efficient index fund that effectively matches the market.

But enough of my ranting. Let’s compare three investment vehicles, giving your money to an advisor and paying the fees, investing in the S & P Index Fund, and a fictitious self storage project. I could use a real one, but I want to use today’s high construction cost, which will lower the overall return from some I have done.

I love self storage as an alternative investment vehicle because of the following reasons:

• Self storage has proven itself to be recession resistant in the past. This does not mean it will in the future, but it definitely increases its performance odds in downtimes over the “market.”

• It is easier to increase income over any other income-producing real estate investment I have seen.

• The ongoing capital requirements to sustain the investment and keep cashflows are going are minimal. Remember, the self storage asset is, in essence, a steel wall and a concrete floor generating apartment-like rents. Institutional lenders we have used require us to have reserve funds, and they themselves administering those funds only require a .12 cent to .15 cent per year fund.

• Once a project is stabilized (i.e., 85% to 90% occupied), it is rare, if ever, they become unprofitable. I have never seen it happen and know no one who has. It is bound to have happened somewhere. However, I have never heard of it.

Let’s take three possible retirement scenarios and make a simple comparison. Remember, I am not an investment advisor. This is just the drill I did as I decided to use self storage as my retirement funding source.

In all three comparisons, one is putting in $651,250 in a retirement vehicle, getting ten years of cash flow generated by the full yield, then getting your initial investment back and any profits, as in the case of self storage. I chose this amount because $651,250 represents the 25% down payment on the self storage scenario I am going to show, so we can compare all three scenarios and get a somewhat valid comparison.

Also note, self storage requires specialized knowledge, which is not hard to obtain. In my numbers, there is plenty of room in the operating expenses for third-party management. But still, note it will require more direct participation on your part than just turning your money over to someone or buying index funds.

I did it this way so we could actually compare the financial calculations of IRR (internal rate of return). IRR is a way financial people compare returns when comparing one investment type with another, like self storage against mutual; funds (which is where many wealth advisories place your money along with bonds).

The three ways I chose to compare are (1) a wealth advisory that takes your $651,250 and yields an average net 7% cash flow to you. I chose this to give them the benefit of the doubt, because I have never had or known of an investment advisory quote an average 7% income yield to me. This 7% is net of advisors fees and mutual fund fees (good luck in getting that).

The cash flows could look like this:

Time Period:	Cash Flows
0 (when it starts)	-$651,250	(negative because you are putting the money in)
1	$45,588
2	$45,588
3	$45,588
4	$45,588
5	$45,588
6	$45,588
7	$45,588
8	$45,588
9	$45,588
10	$696,838

In year ten, you get your 7% cash flow plus your initial investment back.

If these were your cash flows, your initial $651,250 would have an internal rate of return of 7%. Or said another way, the $651,250 averaged 7% per year over the ten years it was invested in this investment vehicle.

The only advantage is you would really have to do nothing and hope the investment advisor didn’t lose any of your initial investment.

Let’s say you decided to invest yourself in a low-fee S & P index fund. There is no fund manager buying and selling stocks. You own the S & P. In reality, as stated, this index fund outperforms most mutual fund managers and advisors who buy and sell your money into mutual funds.

From 1985 to 2015, the S & P index fund averaged 10.3% per year. Over the last decade, with the economy expanding through most of it, the S & P averaged 14.7% per year. I doubt if the next ten years will offer this high an average return, but let’s use it in our comparison.

So in scenario two, you take $651,250 and put it in an index fund that averages a 14.7% return per year. Here could be your cash flows.

Time Period:	Cash Flows
0 (when it starts)	-$651,250	(negative because you are putting the money in)
1	$95,734
2	$95,734
3	$95,734
4	$95,734
5	$95,734
6	$95,734
7	$95,734
8	$95,734
9	$95,734
10	$746,984

In this scenario, you truly do nothing. Your internal rate of return is 14.7%.

In reality, your cash flows would vary, even if the average was 7% per year as in scenario one, or 14.7% per year as above. The earlier the money comes in, the better its impact on the IRR. But for our calculations, we are using the average per year.

Now let’s look at a self storage scenario.

In this case, I assume you buy or build a small 35,000-square-foot facility. If you were building, I am using $400,000 for the land and a cost of $63 per square foot for constructing a drive-up facility. If you were buying, it is $74.43 per square foot. When construction is complete, but lease up is beginning.

I can build this today or get close in many markets.

It will take a while to build or lease up to an average occupancy of 88%. When you get there, your numbers can look like this:

Size:	35,000 square feet
Land Cost:	$400,000
Construction Cost:	$2,205,000
Total cost of Project:	$2,605,000
Income Per Square Foot:	Let’s say an average of $13.25
Operating Expenses:	Let’s say 40%
When you are stabilized, it can look like this:
Gross Potential Income:	$463,750
Stabilized Occupancy:	88%
Net Income:	$408,100
Operating Expenses:	$163,240
Net Operating Income (NOI):	$244,860
Value at a 7% CAP:	$3,498,000

If you built a 35,000 square-foot facility, leased it up to 88% occupancy, received $13,25 per square foot in income, and spent 40% on operating expenses, you would have an asset worth $3,498,000.

Now we are not using all our cash to do this. The cost to buy or build this is $2,605,000. So a 25% cash down payment to finance this is the $651,250 we use in our other scenarios.

One of the benefits of self storage is that our income usually rises yearly. I don’t have industry numbers over the last decade, but in our portfolio, we averaged over 6% per year from 2012 to 2019. Our operating expenses rose under 3%. So, we had an average NOI increase in the 3% range.

However, for this example, let’s say our income is rising at only 3.0%, and operating expenses remain at 40% of income.

Let’s also say that our loan is a standard 20-year bank loan at 5% interest. On a loan of $1,953,700 (75% loan-to-cost) our annual debt service would be $154,727.

I am also assuming you have an average of only 35% occupancy in year one. In year two, 70% and years three and on 88% occupancy.

So, our cash flows could look like this:

Time Period:	Occupancy:	Income:	Expenses:	NOI:	Loan Pmt:	Net Cash Flow:
0	0%	$0	$0	$0	$0	-651,250
1	35%	$163,313	$64,925	$97,388	$154,727	-$57,339
2	70%	$334,364	$133,746	$200,618	$154,727	$45,891
3	88%	$445,942	$178,377	$265,565	$154,727	$112,838
4	88%	$459,320	$183,728	$275,592	$154,727	$120,865
5	88%	$473,100	$189,240	$283,860	$154,727	$129,133
6	88%	$487,293	$194,917	$292,376	$154,727	$137,649
7	88%	$501,912	$200,765	$301,147	$154,727	$146,420
8	88%	$516,969	$206,788	$310,181	$154,727	$155,454
9	88%	$532,478	$212,991	$319,487	$154,727	$164,760
10	88%	$548,453	$219,381	$329,072	$154,727	$4,114,894

Year 10 net cash flow includes 12 months of operating net cash flow of $174,344 plus the net sales proceeds of selling the facility on a 7% CAP rate.

Those calculations are as follows:

NOI Year 10:	$329,072
Value at a 7% CAP:	$4,701,023
5% Cost of Sale:	-$2,235,051
Loan Pay Off:	$525,423
Net Cash Proceeds:	$3.940,549
Yr 10 Cash Flow:	$3,940,549 + $173,344 = $4,114,894

Now, if you take the internal rate of these cash flows, it calculates to 25.9%.

That would be over 10% higher net yield in a ten-year holding period, assuming you net over 14.7% IRR in a low-fee index fund and lost not one cent of your initial investment.

But it takes something.

You have got to learn a business.

But is it worth it?

Only you can decide.

I woke up in my 50s and realized if I was going to create a retirement, I had to act and act now.

Gratefully today, I work because I want to, and storage created that for myself and my family.

See you on the golf course.