Most of our first-time investors start with investing in a multifamily apartment complex opportunity. This is likely because it’s an easy concept to understand since most people have lived in an apartment complex at some point in their lives. But we’ve also generated phenomenal returns with our self-storage partner, and we’re seeing it become a more and more popular option.
So the question is, if you had to choose only one, which is the better investment between the two?
Here are a few advantages of self-storage
Self-storage is a very recession resilient asset class
Self-storage properties can generate solid returns during good times and bad. This was one of the few real estate asset classes that provided positive returns during the financial crisis of 2008.
In prior recessions, occupancies and rental rates were not drastically impacted. Interestingly, most facilities were able to maintain, or even increase, rental rates. Concessions (incentives to drive rental rates) were not prevalent across the industry.
The demand for self-storage units is only increasing
Self-storage demand is driven by life transitions – job change, moving houses, divorce, marriage – and small business operations needing extra warehouse space. This means self-storage properties in high population growth markets, or even high rates of unemployment, can both do really well. A job loss can lead to moving houses, or even needing to move in with family or friends, which means individuals will be looking for a place to store all of their stuff during the transitory period.
Evictions are relatively easy
There’s no guesswork as to what happens when a renter misses a payment, as the process is clearly defined in the rental contract. And because it’s not someone’s living space, the regulatory hurdles are minimal compared to housing units.
A common example is friendly reminders going out as soon as payment is past due, then reminders each week, until the unit is 30 days past due. At that point if the renter hasn’t responded, the eviction process begins.
Just like you’ve seen on TV, this is when the auctioning begins. Locks are cut, the auction winner claims the contents of the unit on the same day, and the next day the unit is available to re-lease. Much simpler than evicting a non-compliant renter from an apartment.
The value-add potential is exciting
Despite the recent popularity of self-storage properties, this segment is still very fragmented. There are thousands of small operators still running their businesses on paper and chasing down checks each month. There is a lot of potential value-add opportunity simply from implementing modern technologies – like automatic online payments, easy anytime access to the property, and communication platforms – that can minimize expenses and optimize operations. Also, many of these operators have not increased their rental rates to match current market rates.
The ability for potential renters to lease a unit, access it, and pay for it all without requiring interaction with the operator team can lead to huge demand increases and correlated increases in net operating income.
Potential to increase rents on a monthly basis
Unlike multifamily where lease rates are generally locked in for a year, or retail and office where the lease is set for multiple years, self-storage units are rented on a monthly basis. That means the operator can increase rents in real time as market demand shifts. This is particularly attractive in high inflation environments like we’ve seen in 2022. This also allows the operator to maintain optimal occupancy rates…the goal isn’t 100% occupancy, which means rents are too low. There should always be a few units in play each month to gauge the current market responsiveness.
The challenges with self-storage
In multifamily, it’s easy to find highly specialized and qualified third party management providers that provide service at scale. This is really hard to find for self-storage management, which means that the operator is going to have to get their hands dirty to manage the day-to-day operations at the property. It’s tough to delegate.
This may change as the industry continues to consolidate and become more sophisticated. But until then, owning self-storage properties most likely means direct management. So when evaluating a potential passive investment with a self-storage syndicator, you have to really vet their operating experience as well.
With that in mind, we expect our operator partners to focus on their chosen asset class. We’re not going to be excited about a multifamily sponsor coming to us with a self-storage deal. They’re different enough that we’d be uncomfortable with their ability to perform well in both classes.
Where we sit as passive investors, we have the advantage of diversifying among several asset classes, putting our dollars to work with various specialist teams. We want the operators to focus. We want our investments to be diversified.
Alright, we started with the question “if you had to choose just one, which is the better alternative,” and then we didn’t answer it. Like so many things, it depends. We’ve partnered with fantastic operators and have delivered phenomenal returns to our investors in both asset classes. And again, with the goal of a bit of diversification which we make easy through our multiple offerings, there’s no reason to select just one.
So what’s next:
If you’re interested in either of these assets, be sure to add your email address to our Investor Club email list so you can see our upcoming investment opportunities. You’ll be able to learn how they’re structured, how they’re similar and different, and then raise your hand when you see an opportunity that gets you excited.