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Subject:  Self Storage as an Investment Date:  5/15/2003  12:51 AM
Author:  golfwaymore Number:  107191 of 843978

Contrary to the opinion of many on REHP, I am not anti-real estate. As stated many times, the bulk of my net worth is tied to real estate. In fact, I'm not anti-anything when considering various asset classes. As I've said in jest many times, were investing in brothels legal, I'd probably be the first to pony up. <grin>

When considering investments into real estate, one soon realizes that unlike many other investment classes, it is a very diverse and even divergent group of opportunities. When someone says “we're invested in real estate”, 99% of the population instantly assumes that person is referring to residential rental property. Unfortunately, this ignores the other gazillion non-residential and even non-rental real estate investment types with differing risks and rewards. All real estate holdings aren't “rental houses” and all baseball teams aren't The Bad News Bears. <grin>

These comments should not be taken to mean that incredible returns cannot be achieved by skilled residential real estate investors; it just means that they don't work easily for ME.

I have three areas of real estate that I favor because (1) the amount of “work” involved is negligible which means it works for a retiree's lifestyle (2) the barriers to entry are high because at least two of them require substantial capital, and all them require expertise (3) the downside risks and volatility are markedly diminished than that of equities, and (4) the returns consistently beat the S&P historically as a minimum, and in some cases by 3X~4X.

The areas that fit these criteria, at least for me, are (1) foreclosure investing, (2) highly collateralized debt instruments, and (3) Self Storage Facilities, which incidentally don't require substantial capital.

So without further ado, the latter is the investment opportunity I'd like to explore in this post.

Who Rents Self Storage Space?

Simply put, EVERYBODY. I can honestly say that my facility has a cross section of folks from every extreme of income and society. Storage space is needed by people who just downsized their homes, just moved into a larger home, have nowhere to store their boats and RV's, who are remodeling a room or two, putting away their lawnmowers & garden equipment for the winter, wish to store an extra, inoperable, or classic vehicle, and small time entrepreneurs needing a place to stash inventory.

This is favorable, and important, because literally, EVERYONE can be a potential customer - no one is ruled out. I've lived in a 1000 sq ft home, and now a 3000 sq ft home; I've yet to have enough storage space at my residence. <grin>

How To Do a Market Study for Your Area

If you are already a renter of a storage unit, then you already know most of what there is to know about this operation. When you access your space, you see the amount of traffic and you're somewhat familiar with the vacancy rates, if there is vacancy at all.

Prior to constructing my own units, I rented two large spaces from the only “big player” in town for more than two years. When I began contemplating making an investment into my own complex, I really was only concerned with vacancy rates and if I could be price competitive with “big player”. Having both of these values would allow me to make cash flow projections and evaluate the investment as a whole, and obtaining this information is surprisingly easy.

To ascertain vacancy, I simply began riding through the complex [where I rented space] 2 to 3 times per week. Almost all complexes I've seen are “provide your own lock”, so very simply, if the door has a lock, it's a rented space, if it doesn't, it's empty. As for price, it's as simple as calling around and getting the various prices for corresponding spaces over the phone.

From a former life, I had some experience in the construction costs involved in “warehouse type” structures. My “research” on vacancy indicated that most complexes stayed virtually full and many space sizes had waiting lists. So with my competitor's pricing, my estimated construction costs, and anticipated vacancy rates, I was able to draft a crude spreadsheet to calculate cash flows and returns. I also made that available to REHP readers and emailed it to several of you at that time.

Market Consideration: Is There Room for Another Player?

This is the only area on evaluating this investment that I see as subjective. You will just have to use your better judgment, calculations, and “go with your gut”.

I can tell you that at least for my area, closer examination of the market showed that there was more room for players than perceived. First glance shows storage units in this area are EVERYWHERE. But the details show that there are basically two types of self-storage complexes, and between the two is a mighty gulf.

On one hand you have the small timers, these are guys who've converted sheds, shacks, barns, and otherwise existing structures on their property into storage space. They're cheap, they're old, they have no security, they're nasty, they're “word of mouth” outfits, and for every legit/professional operation, there are 100 of these small timers.

On the other hand, when I began to look for new, clean, secure, organized, more professional complexes, I only found 2 in my area, of which, one was where I was renting. My gut told me that the capital required [significant to Billy Bob, but not to those FIRE'd], not market demand, was what made this situation what it was. This convinced me that the barriers were at least substantial to most, and it meant that the storage landscape in my area, as I saw it, only had 2 players, not 200.

Are There Operational Advantages of Other Types of Rental?

In my mind, this is the defining difference between Self Storage and any other type of rental real estate. Without question, these dynamics were the most convincing factors in my decision. It seems to me that Self Storage Rental has all the upside aspects of any rental property, i.g. cash flow, tax advantages; but isn't subject to the downsides and negatives of residential and most commercial rental property.

Just to name a few:

1. No one LIVES there, so complaints are rare
2. There are no utilities, no leaky faucets, lawns to mow, or plugged toilets.
3. The buildings are metal and concrete slab, hard to damage, cheap to repair.
4. Monthly rents are low per customer, and most anyone can “pay the rent”
5. Eviction laws favor the owner, not the tenant

So What is the Return?

Following are the #'s from my investment. Naturally, YMMV.

Land Costs [Previously Owned]: $21,600

Construction Costs for 49 Units: $83,400

Total Capital Costs: $105,000

Current Monthly Rents [After 6 Months Average]: $3150

Average Monthly Expense [Tax, Insurance, Power (lights)]: $180

Annualized Gross Rents [Based on Current]: $37,800

Annualized Expense [Based on Current]: $2,160

Monthly Net Income [Based on Current]: $2,970

Annualized Net Income [Based on Current]: $35,640

Occupancy [Based on Current]: 91.9%

Annualized ROI [Based on Current]: 33.94%

The numbers above ignore the following:

Depreciation deductions, unforeseen maintenance, lawsuits, legal fees, price wars, etc… These are rough numbers and there is give and take both pro and con.

Additionally, I have enough land to double the amount of storage space. With each addition, and assuming occupancy rates remain similar, my return should increase as the fixed land cost is spread across a larger income stream.

Location: Does It Matter?

Yes and No. I think it depends entirely on what type of complex one wishes to construct.

I previously mentioned the “two types” of operations in this area. The more legit, professionally operated complexes are in higher traffic, non-rural locations. Conversely, the small players seem to have their units anywhere and everywhere.

My complex is on a state highway that has a traffic count of 17,000 vehicles on a daily basis, per G.D.O.T. That's a busy little road for this area.

While traffic count is certainly worth something, I believe that above all things, being in close proximity to apartment complexes, subdivisions, and residential areas of any type is of the greatest benefit to a storage complex. If that happens to be in a rural area, so beit, and bully for you, as the land will be much more affordable.

One “sweet spot” that someone may be able to capitalize on is to keep an eye out for property that has no sewer service and will not meet “perk” requirements for a septic system. Surprisingly, a lot of folks see this property as “useless” since it can't be built upon, so it can be purchased for pennies on the dollar. Find such a piece of property located close to residential concentrations and you've likely got a goldmine.

Types of Land: Does It Matter?

Yes, it matters. Simply put, flatter is better, provided there are no risks of flooding or drainage being diverted to your “flat” property. I had 11' of fall from the top of my property to the road frontage. The moving of the dirt and compaction of soil for building pads cost me an additional $8500.

Also, unwooded property would be preferable to me. Anyone who has ever dug and poured concrete footings where trees once were can attest to the PITA that roots are when beginning a construction. Best case is flat, no trees.

Power Lines and Property Set-Backs

Be aware of your county or city ordinances WRT the required set back of your structure from each property line. Additionally, there are typically set back requirements from any existing power lines that may cross the property. The set back for both of these in my area is 15'. Knowing this up front is important, as it IS possible to get knee deep into construction only to have a building inspector point this out to you, several thousand dollars later.

D.O.T. and Entrance Considerations

If your property will be located on a state or federal highway, you should contact either the State or Federal D.O.T. as a courteousy to learn if your drive entrance must meet certain specifications, or if it can be equivalent to a residential drive [low or no cost].

Frankly, this was one surprise and unplanned expense on my construction. I did, as I recommended, contact GDOT in advance, and they advised that a graveled residential entrance would suffice, as storage buildings aren't high traffic facilities. Simple enough, and very cheap, I was thrilled.

About 6 weeks after my buildings were complete and rented, the GDOT contacted me demanding that I install a commercial entrance. I had no choice, but naturally, had questions as to the change of heart. A meeting on site with the GDOT engineer revealed [off the record] that the only competitor in town had complained about my entrance because they, unlike me, had been required to install a commercial drive and I had not.

Commercial entrances aren't cheap, for one meeting our state's specifications, it runs around $5000~$7500. In addition to this, there is a cash flow issue as the state requires that you post a $25,000 bond while your entrance is constructed. For those unfamiliar with bond issues, it is so that if you “muck it up”, the state can come in and “do it right” at your expense.

If your facility will be located on anything besides a county road, entrances are important. Traffic, line of sight, and several other factors will impact what is required for your entrance.

Zoning Considerations

There is no need to go into significant detail on this.

If your area has zoning ordinances, you must learn if your property, or prospective property is zoned accordingly for a self-storage site. A call to the Building Inspector or Land Use department will likely give a quick answer.

Drive/Parking Lots: To Pave or Not to Pave

The drive and all drivable areas of my complex are graveled. I have seen storage complexes in Atlanta and less rural areas than mine that are paved. But in a rural area, I'm not sure why paving ads any value that a customer would appreciate and would be willing to pay for. To pave my complex would cost somewhere in the neighborhood of $40,000. That's a lot of money, not very well spent IMO, and it's a substantial hit to ROI.

Properly applied gravel will eventually become as smooth and durable as pavement. Soil that is soft, muddy, or even compacted or “hard ground” should first be graveled with large stones, such as a #3 or #4 stone [baseball size]. With traffic, these stones will mar into the mud and provide a bedrock base for decades to come. After those larger stones have settled, future maintenance applications every couple of years of “Crusher Run” [small/fine gravel] will fill in the gaps and make for a very smooth, very hard, and inexpensive driving surface.

Drive and Mobility Considerations

The drive entrance to your complex should be a minimum of 40'. Additionally, I suggest that 30' of space exist between storage buildings, and 20' on each end. This will allow cars to pass freely and move to and fro even if other cars are parked and accessing their spaces.

Type of Building Materials: Block, Metal, What's Best?

I frequently see storage buildings constructed of block walls and shingled roofs. Unless someone owns a block or shingle business, I have no idea why this type of structure would be selected for a self-storage complex.

My complexes are constructed with metal walls and metal roofs, which is 1/3rd, the cost of the above. The metal is durable, and has a warranty of 50 years, which should be contrasted with the 20 years that a shingled roof provides. Additionally, it is maintenance free requiring no paint or upkeep. And regarding durability, should a tenant poke a hole in an exterior wall, replacement metal sheets are cheap, and take only a few minutes to replace.

How to Find a Contractor

Had I done this several years ago, I would have likely built the structures myself. They come in from the metal manufacturer as a kit, and they are surprisingly easy to put together. Being in retirement though, combined with the fact that I was unfamiliar with storage buildings specifically, I felt it was best to use a contractor.

I was fortunate enough to find a contractor who was part time retired after 38 years of working as job foreman for a local commercial construction company. This is a beautiful thing, because he has none of the overhead, and so I didn't have to pay for any of the overhead for my construction. My retired contractor was basically half price when compared to the quotes from the commercial outfits in my area. Additionally, he had a wealth of experience that I drew upon throughout the entire construction, and since he basically didn't need the money, I felt he was someone I could trust.

As to how one goes about finding a semi-retired contractor, I'm not sure. I met mine while I was renting storage space from my [now] competitor and we took it from there. Ask around, I'll bet someone near you knows of someone like this. Retired people typically associate with other retired people, ask a few of them and see what turns up; it could mean a doubling of your ROI.

Charge Rates and Construction Costs

An easy estimate for what you will spend on your structures, if built in the same manner as mine is around $6 per square foot. Several factors can cause this to fluctuate a buck or two in either direction, but $6 per foot is close enough for any calculations you need to do. You can likely plan on collecting around $10 per foot in rents, with no allowance for expense, vacancy, taxes, or insurance.

My contractor gave me a choice of paying him and his crew by the hour or paying him a turnkey package price. He also added, as I already well knew, that if he quoted a turnkey price, there would be quite a bit of padding in the quote, as mistakes happen, even with 38 years of experience.

I checked a few references on how “busy” he and his crew kept themselves and decided to go the hourly rate. It was literally as simple as picking up a time sheet from him once per week and cutting them a check. He was responsible for all worker's comp and payroll issues. Never once did I catch the crew wasting time on my watch, and when I expand, I will deal with them on this same hourly basis. Materials were invoiced to me, so there was no contractor's markup at play, it was a good deal.

To Climate Control or Not?

I'll admit that before, and even now, I'm intrigued by the premium rents collected by storage units that are climate controlled. But try as I have, I've done extensive market research in this area and I cannot build a model where the payback equals that, or even comes close to that of non-climate controlled space.

I have toured the facilities of would be competitors, and put together cash flow models and I'm confident that I know within a couple of points how much money they're making [or losing]. With climate control, vacancy rates are drastically higher, and operating costs can be erratic due to weather and utility costs. Climate control may work in your area, but not here, even in the humid South where you would imagine folks would spring for the extra fee.

My spaces have no heating, no cooling, no power, and no water. There's not that much that can go wrong. Pretty simple.

What Size Spaces Should I Construct?

I believe I have hit the sweet spot on space sizes. I have never once had to tell a customer that I don't have the size that fits their needs. Following are my recommended spaces:

6'X10' About the size of a walk in closet

10'X12' The size of a VERY small bedroom

12'X20' The size of a single car garage

12'X30' Approaching the size of a tractor trailer

Additionally, my recommendation is to go with roll up doors that are as wide as possible for the wall you are installing the entrance on. Your customers will appreciate it.

Design Consideration: Eve Heights

The standard eve heights of storage spaces are 8 feet, which is the height I chose for my first row of buildings. After completing the first row, I wondered if the costs were significant to increase the eve height to 12 feet. Before starting the second row, we calculated the added costs and found that they were negligible; a slight bit more in material and no added labor.

This is a judgment call because it may certainly mean that a customer may not have to rent a bigger space because you've provided ample cubic feet for their needs. I, however, happen to like the added eve heights and feel they are a unique feature that my competitors don't have, for essentially the same price. My second and third rows were constructed with higher eve heights.

Design Consideration: Turn Down Footings

Those familiar with construction may know what a “turn down footing” is. For those that don't, storage spaces [and most metal buildings] are built on a slab that is poured at the same time as the footing using form boards placed perpendicular to the ground to shape the slab side walls.

My contractor and I had an idea that if we could find a way make a step up just beyond each space entry, it would prevent blowing rains from entering the spaces and would likely make a lot of customers happy. We accomplished this by placing 2X10's running parallel to the ground on top of the form boards used for the slab sidewalls.

If you don't follow this, the result is a 1.5 inch step up occurring 10” inside the perimeter of the slab, which accomplishes the shut off for “rain proofing”. Of all my customers, I would estimate 50% have commented favorably on this feature. None of my competitors have this, to my knowledge.

Design Consideration: Insulation

Non-climate controlled storage buildings do not need insulation along the metal walls. However, it is my strong recommendation that you install insulation along all ceilings, as it will prevent condensation from forming on the ceiling and eventually dripping into the rented space.

Hanging of the Doors

Storage spaces have roll up metal doors. They roll and unroll based on a coil spring in the assembly that can be adjusted. Temperatures effect this coil spring so if your doors are being hung and adjusted in the winter, have them adjusted a bit tighter than “acceptable” as they will loosen significantly in the summer time with the expansion of the spring. Obviously, vice versa if you are building in the summer months.

Lighting of the Complex

I intentionally lit my complex up to such a bright level that airplanes could easily confuse it with a landing strip. <grin> Seriously, I recalled the poor lighting from the spaces that I previously rented [from my competitor]. I remember going in there many mornings in the pitch black dark to get my boat, and while hooking up, thinking anyone could walk up and knock me in the head with little concern for being seen. I didn't like it, and I imagine women customers simply wouldn't stand for it.

Almost every customer has complimented me on the complex lights and it makes them feel “safe”. It's a $500 ad that your customers will love, do it.

Security Gate, Or Not?

It took me a while to make this decision.

Automated security gates are pricey, around $6K, so it's no small decision. As I mentioned earlier, there are two types of complexes, and a mighty gulf between. The complexes that I have seen that are legitimate all have security gates, the ones that aren't, don't.

My market research into complexes in my area had indicated that in the rare cases of vandalism and burglaries, 99% of them were “inside jobs”, meaning one tenant, with access to the complex, broke into the space of another tenant of the complex.

My security gate has a keypad at the entry where tenants enter a PIN for automatic opening. It is also wired to a printer in my “shop” which keeps a record of what PINs have been entered and at what time.

Bottom line is, because of this, a security gate will likely not prevent a single burglary incident, but your customers don't know this, and I'm pretty sure this will be a consideration of theirs in selecting to rent from you.

It's an intangible, but I decided to opt for the gate.

Do I Need a Security Fence?

As with the security gate mentioned above, a security fence is something that customers will ask about, but it doesn't really provide any security.

My legitimate competitor has a chain link fence around the entire perimeter of their complex. Six-foot chain link fence with 3-strand barbed wire on top is around $7 per linear foot, and would have added $7,000 to my construction costs, which I considered excessive and not a good value.

I opted instead for “poles and cables” around the perimeter of the property. The poles are 4” steel pipe, painted “Safety Yellow”, with 3/8” galvanized steel cable strung taughtly between them. The poles and cable will prevent a non-tenant from driving up to a space and conveniently loading up. They will not prevent from someone hell bent on getting something if they're willing to carry it a distance, but neither would an expensive chain link fence. Total cost, $900.

Camera Surveillance

I've seen complexes in the city that have camera surveillance for security. I opted not to do this because my competitors don't have it. At some point in the future, I may add “dummy cameras” if customers begin asking.

Operating Capital