Investing in storage units has become an increasingly popular real estate investment option in recent years. With the rise of e-commerce and downsizing trends, demand for extra storage space is growing. Storage units can provide stable income streams and capital appreciation potential for investors. However, investing in storage units also carries risks and requires proper research and planning. This article will provide key considerations for assessing if storage units are a good investment, including cash flow potential, location factors, financing, and risks involved.
Analyze potential cash flow from renting storage units
When evaluating potential cash flow, look at rental rates and occupancy rates in the area to estimate potential rental income. Operating expenses like property taxes, insurance, maintenance and management costs should also be estimated. The net operating income needs to exceed any debt financing costs. Average rents and occupancies can vary greatly by location so research competitive facilities in the specific market.
Choose location based on demand drivers
Proximity to highways, residential areas and business parks with limited storage can increase demand. Areas with high costs of living and smaller housing units tend to have stronger needs for extra storage space. Growth markets with expanding populations are ideal. Avoid saturated markets unless the asset is distressed and can be purchased below replacement cost.
Determine optimal financing strategy
Storage units tend to be eligible for commercial real estate loans at 60-80% loan-to-value ratios. Interest rates are usually lower for storage compared to other commercial assets. Seek long-term fixed rate financing to lock in low interest costs. Significant capital is required to purchase a storage facility outright in cash.
Consider risks such as oversupply and competition
While storage demand is increasing, new supply is also being added in many markets. Check permitting activity for new self-storage projects in the area. In some cases, older facilities with functional obsolescence can be acquired at favorable valuations before being upgraded. Changing consumer preferences can also impact demand over time so monitor renter demographics.
In summary, investing in storage units can generate stable cash flows if purchased at the right valuation in high-demand markets. Conduct thorough due diligence on projected returns and risks prior to acquisition. Unit mix, tenant retention strategies and ancillary revenue opportunities should also be evaluated.