Three Reasons To Invest In Self-Storage Commercial Properties
Changing from residential to commercial real estate investing can be scary. Especially if this is your first venture into the higher stakes, higher payoff realm of investing.
Investing in self-storage units is a great way to get your feet wet in commercial real estate. Here are three reasons why:
- Reduced maintenance and repairs. You don’t have tenants living on the property.
- Limited loss of rental and late fees. When the tenant doesn’t pay, you lock them out of their unit, and after 90 days, you can sell their personal property to pay back rent and late fees accumulated.
- Property Management doesn’t have to be a full-time staff. Hire only the people you need, for the time you need them.
Similarities Between Purchasing Residential and Commercial Investment Properties
You need to find out what the property is currently worth. Compare comps and know if the asking price is fair to you as the buyer and fair to the seller. Everyone in the transaction should feel they are getting a good deal on the purchase.
Next, you need an inspection of the property. You need to know what needs repairing and how much the necessary repairs cost to meet the property codes or your specific purpose for the property. Renting versus reselling dramatically affects how much you can invest in repairs.
You can recoup some repair costs by raising your rental rates, but repairs affect your profit margins when you resell the property.
You want to start with the exit in mind. You need to know how you will sell the investment and who will want to buy the property when you decide to sell.
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Differences Between Purchasing Residential and Commercial Investment Properties
Net operating income, capitalization, and valuation of the property play a significant and prominent role in understanding the current value of a commercial property. Underwriting in commercial real estate is more complex because it digs into a business’s financial stability.
Commercial underwriting, in essence, uses art and science to discover how the property’s income, expenses, and current market determine the selling price of the property.
The occupancy rate is also crucial in determining a property’s market value. You want to be at or slightly above the rest of the market occupancy rate.
Building a relationship with the competition is not necessary with residential investments but is vital to commercial real estate’s success, like self-storage units. Referrals and reciprocation are two of the most beneficial transactions you can make with your opposition in commercial real estate investing.
The Downside To Residential Real Estate Investments
In residential real estate, you borrow money to buy a property; then you lease to a tenant who pays down your basis, eventually paying off the property. Then you receive capital gains from the sale of the property and add it to the down payment of the next investment property.
Many investors begin with purchasing single-family homes to lease or rehab and resell for a profit, then reinvest the profits into another property. Eventually, they find themselves with a portfolio of 70 to 80 houses with no cash flow.
Economies of scale will not always fix the cash flow problem of owning many single-family homes or multi-family properties. The answer is buying low-maintenance, high-volume, passive-income commercial properties, like self-storage units.
There is no other financial investment where you can borrow money to buy a property that appreciates but can also be depreciated.
The Upside To Investing In Self-Storage Units
Some experts say investing in self-storage units is the best way to make a living and become successfully unemployed because investing in self-storage units is a commercial investment. Unlike investing in residential real estate, the process of ownership and management is much more straightforward, and financing focuses on the property more than the borrower.
Experienced buyers in residential property investments can use their skill sets to purchase and manage commercial real estate. Financing and underwriting are a little different, but your prior real estate experience will make the process easier.
You should create an organization once you own more than one storage unit because there is great potential to go nationwide. National options allow you to acquire and develop more properties and simultaneously sell off other properties at the top of their local market. Real estate investing is a revolving door of constantly buying low and selling high.
Steps To Purchase Storage Unit Real Estate Properties
The approach is the same for residential and commercial properties. Commercial property has a few more nuances that make the process of purchasing storage units slightly different once the process is started.
The last step is finding the properties and purchasing a storage unit. The first steps are to focus on building the business, exploring management options, and acquiring funding for the property.
Building A Real Estate Investment Business From The Backend
First, you need to build the business from the backend. Put all procedures and processes in place, but don’t get bogged down in the business setup formalities, like creating logos and websites.
Focus on the different needs of smaller and larger facilities. The larger the facility, the larger the quality of self-storage amenities you can provide. For example, larger facilities have moving truck rentals, concierge services, and boat and recreational vehicle storage options, requiring a more hands-on management staff.
Explore Management Possibilities for Local and Out-Of-State Properties
Ensure you can manage the property yourself or hire dependable management personnel to run the property’s day-to-day operations. The last thing you want to do is create another job for yourself.
Unlike residential investments, commercial storage units do not require a lot of overseeing. Today many individual units are leased online, by kiosks, or by installing a smartphone application. Most sites have keypad access with unique access codes per unit.
Self-storage units are metal boxes on concrete slabs; other than a few size differences; they are identical to the one next door. There is relatively little required maintenance and repair to the property. In most cases, no utilities or amenities are included in leasing individual units.
The key is to provide clean, safe, and secure locations for consumers to store their personal belongings during difficult times.
Many customers are going through one of the three main reasons to need a storage unit: the death of a loved one, a recent divorce, or downsizing for various reasons.
The goal of the storage unit property manager is to make the need to store personal belongings a less painful experience during a chaotic and stressful time in the customer’s life.
Being tactful, discreet, and empathetic to the consumer’s situation can go a long way in building and retaining a good relationship that can create income for your investment for years to come.
Management with great core values that align with the owner’s core values sends a clear message that your business has excellent customer service.
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Although a property management company is not usually necessary to oversee the daily operations of a self-storage facility, hiring a competent individual is a must. Requirements for an excellent storage unit manager are not clock watchers that are trading hours for dollars.
You want individuals who are:
- Sales oriented – Will obtain new clients while retaining current clients.
- ROI driven – Works to reduce expenses and increase income at all costs.
- Incentive based – Pay is commensurate with commissions and bonuses based on service performance.
- Flexible – Willing to work the hours you need and flexible to the business demands as they arise.
A great vetting source is inserting a little homework assignment within the application process. Within the first five minutes of an interview, you can weed out candidates wasting your time by asking if they completed the homework assignment. You want to hire someone with a higher level of capabilities which can handle higher responsibilities without your constant need to guide them.
Acquiring The Necessary Funding To Purchase Real Estate Investments
Make sure you can fund the property. Have all financial documents in order and all debt paid or covered by other revenue.
Commercial financing requires greater than 50% of the property value upfront on development projects. Acquisition of existing facilities needs 75-80% loan to value based on historical financials.
Partnerships, syndication, and joint ventures with developers provide great financing options because many small businesses cannot come up with cash to meet the large down payment required by commercial financers.
Do not limit the resources people bring to the table to put a deal together to just money and balance sheets. Resources in terms of their development and management insight can sometimes be a greater benefit than monetary resources. Investors bring resources of private equity to the table to obtain returns on their investment.
Methods of Financing Commercial Real Estate
Invest with these creative real estate investing strategies.
The Carlton Sheets Method promotes no money down to invest in properties.
The BRRRR Method recommends the investor to buy, rehab, rent, refinance, and repeat the process.
A partnership provides a percentage of capital and possible mentorship if you are new to owning commercial real estate.
Capital Stack uses many combinations of capital sources with varying amounts per source. Capital Stack includes the following components: senior debt, mezzanine debt, preferred equity, and common equity.
Property syndication is a significant investment. Real estate property syndication is making the impossible investment deal possible. A real estate syndication allows the average investor to participate in a large-scale real estate purchase. The minimum investment is usually $50,000.
Hard money lenders are great for new real estate investors who do not have a lot of collateral and experience in investment real estate. They approve most loans, but the price is a higher interest rate and points than you would receive with a traditional bank loan.
How To Find Good Storage Facility Real Estate
- Ask storage-unit brokers. Their job is to seek out properties and be the middleman in-between seller and buyer. They will know what is or will soon be on the commercial real estate market.
- Ask real estate agents. Their nets swing wide to cover a lot of different types of properties. It is best to seek a commercial agent that specializes in rental properties.
- Send direct marketing mailers to current owners of self-storage properties. Advertise “No Broker Necessary – Sell Direct” to entice owners to sell F.O.B.
- Create a conversation with your local competition managers. Do a market analysis/study. Build a report with them, and you will be the first person they call when ready to sell.
- Engage in cold calling. Remember to follow up because it takes more than one point of contact to bring awareness to a buyer.
- Network within the industry. Obtain memberships to storage associations in the state. Get to know and build relationships with other storage unit owners.
- Don’t make the mistake of applying only one outreach method. Try several different ways at a time to make the most impact and name recognition.
Meet Self-Storage Unit Expert Scott Myers
Scott Myers has been investing in self-storage units for many years. Scott’s mindset motto is to put good education and content about self-storage investing in the marketplace, and when the tide rises, it takes all boats with it.
On his website Self Storage Investing, he offers tools and free resources to those interested in investing in the storage unit market and joining the self-storage investment journey.