I thought Kris had scheduled an investor call. He booked a call on my investor calendar, and I started our call with that assumption.
I had written a popular book on value-add multifamily investing, and I was screening investors for ever-elusive apartment deals. So I assumed this call would be one of those.
Kris started by telling me about his history in multifamily investing in upstate New York. He was certainly no newbie. Then he transitioned.
“Would you like to hear about investing in self-storage?”
I paused… “No,” I thought.
“Yes,” I said. (I’m a pretty polite guy – most of the time.)
Kris launched into a story about his transition from the highly overheated multifamily world to a full-time role raising capital for self-storage.
I had no interest in self-storage but had to admit he had a point about the extreme difficulty of finding economic apartment deals (yes, even back then). I was listening.
Then Kris almost made me laugh aloud…
“The value-add opportunities in self-storage are enticing.”
“What?!” I thought. “Value-adds? I don’t get it.”
Of course, I was picturing four pieces of sheet metal, a floor, and a door. Plus, a handful of rivets. I imagined a tenant vacating…an hourly employee with a broom…and a new tenant moving in. But what value-adds?
Where are the value-adds? What about the new…
…cabinets and countertops?
…toilets and sinks?
…paint and lighting?
…fake hardwood flooring?
Do you see why I was tempted to laugh?
A new beginning
This call launched me into a new phase of my investing career. (Who’s laughing now?)
I learned that self-storage is a wonderful commercial investment opportunity with remarkable value-add opportunities. And because of its largely fragmented nature, self-storage has downside risk protection and profit potential most apartment investors could only dream of right now.
So what are some potential value-adds in self-storage?
10 Self-Storage Value-adds
Right seller. This may not seem like a value-add. But there are about 53,000 self-storage facilities in the U.S. That’s about the same as McDonald’s, Starbucks, and Subways combined. Mom-and-pops own about half of these.
Most of these owners don’t have the knowledge, desire, or resources to make upgrades to increase income and create appreciation. A great operator can pay them a fair price, meaningfully increase income, and dramatically multiply the return on equity for investors using safe leverage.
Ancillary retail sales. Self-storage is a real estate investment and a retail operation. Operators who sell locks, boxes, tape, and scissors can increase income and attract more tenants.
Insurance. Tenant insurance is an often-overlooked value-add opportunity for operators. Insurance providers offer profit-sharing plans that can add up to about $5 per month per tenant to revenues.
This may not sound like much but do the math for 500 units. $5 * 500 * 12 months = $30,000 annually. That is enough to pay a staffer. Or, if it drops to bottom-line income, it can add about a half-million dollars to the asset’s value at a 6% cap rate ($30,000 ÷ .06 = $500,000). No spare change!
Truck rentals. Contracting with U-Haul to lease trucks out of your facility can add a few thousand to your monthly revenue. A friend of mine has a Florida location that generates $5,000 in U-Haul commissions monthly. There’s some hassle involved for staff, but $5,000 per month could translate to about a million dollars in asset value. This is a significant value-add and requires no brick-and-mortar improvements by the owner.
Boat and RV storage. Many facilities include extra land not utilized by the previous owner. The current popularity of recreational ownership has created a shortage in storage locations. Many neighborhoods don’t allow boat and RV storage, and this could be your opportunity. Incrementally adding gravel or paved storage areas can provide a major value-add.
Additional indoor storage. Many older facilities have little to no climate-controlled storage. Yet, the demand for this has continually increased. Since the land is already paid for and the facility is already being marketed, many operators profit from adding more climate-controlled storage. Some tired old facilities are now dwarfed by beautiful multi-story buildings added near the entrance.
Increased rates. This may sound simplistic but consider this. Many mom-and-pop storage facilities offer rates that are far below market. They don’t have the marketing, systems, or desire to increase rates to keep up with the market. They might rather just stay full. This is a significant value-add opportunity for strong operators. And it can be even better…
Active rate management. Top operators manage rates like hotels and airlines. My firm invests with an operator that changes rates by competitive intel, unit size, day of the week, and more.
Resize units to meet demand. There is often a meaningful difference in demand for various unit sizes. Since units can often be resized by popping out rivets and moving a piece of sheet metal, you’d think this would be common practice among operators. It’s not – at least among mom-and-pops. This is an opportunity for a great operator to step in and make some nice added profit, creating value for investors.
Right buyer. We started with the right seller and will end with the next buyer. Operators who put together a portfolio of similar, well-run assets and sell to an institutional investor or large national player can attain significantly higher valuations and returns for investors.
The power of a dollar
Why is all of this so important? We all know the value of residential real estate is based on comparable properties. Not so with self-storage and other commercial properties. The value is calculated by a simple but powerful math formula.
Value = Net Operating Income ÷ Cap Rate
This means a great operator can add meaningful value by “forcing appreciation” in a self-storage project. And when utilizing safe leverage, this value increase flows to the equity investors. The bankers don’t get a share in this upside.
This concept, coupled with the value-add strategies discussed above, is why many of the self-storage projects our firm invests in have enjoyed high double-digit returns over the past several years.
I’ll never forget that providentially “random” call from Kris. It was the first step in a major shift in our company’s focus, and eventually led me to write my third book on real estate investing. It’s called Storing Up Profits – Capitalize on America’s Obsession with STUFF by Investing in Self-Storage. It is available at BiggerPockets Publishing starting November 18, 2021. You can pre-order it today.
After a stint at Ford Motor Company, Paul co-founded a staffing firm where he was a two-time finalist for Michigan Entrepreneur of the Year. After selling to a publicly traded firm, Paul began investing in real estate, founded multiple investment and development companies, appeared on HGTV, and completed investments and exits.
He has contributed to Fox Business and The Real Estate Guys Radio and is a regular contributor to BiggerPockets, producing ongoing live video and blog content. Paul also co-hosted a wealth-building podcast called How to Lose Money, and he’s been a featured guest on 200+ podcasts. Paul is the author of The Perfect Investment – Create Enduring Wealth from the Historic Shift to Multifamily Housing as well as the forthcoming Storing Up Profits – Capitalize on America’s Obsession with Stuff by Investing in Self-Storage. Paul is the Founder and Managing Partner of Wellings Capital, a real estate private equity firm. Wellings Capital designates a portion of its profits to thwart human trafficking and rescue its victims.
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