Recently I visited a self-storage facility with my brother-in-law to pick up a few of his belongings. The storage facility was located in Palmdale, Ca, as I looked around the establishment, I quickly noticed the simplicity of the business and the low operating cost. Having some apartment ownership experience, I decided to research self-storage facility investing so I can add this asset class to our portfolio.

Turns out, I couldn’t quite find a guide on the steps and actions I needed to take in order to buy a facility. So, I decided to form my own collection of research to guide others with the process of acquiring a self-storage facility.

What I discovered was that the majority of my friends who buy commercial property mainly focus on apartment buildings, but there’s an untapped market that many investors don’t consider. When one industry becomes saturated you have to explore other options that have room for growth.

Self Storage Facilities! According to sparefoot.com, there are 49,000 self-storage facilities in the U.S on land and commercial land parcels. And luckily for investors, only 18% of the industry is operated by the six largest publicly trades companies for REITs.

This puts investors at a superior advantage because there’s far less competition in comparison to the apartment sector. Although you are up against some big-name companies, like Uhaul, Public Storage, Extra space storage, and so on. There is still a large portion of the industry that is structured as a mom and pops operation, which puts us at an advantage. Because with the addition of a few business operation adjustments, the value of a storage facility can double in no time.

The Perks of Owning a Self Storage Facility

Although self-storage like apartment investing falls under commercial property, the asset classes have different ways in which there operated.

Self-Storage Faciliteis have very little operation cost due to faiclity design and customer base.

What does that mean exactly? I’ll explain. Self-Storage is very unique in the way that the units provided to the customer don’t have appliances, toilets, hard-wood floors, and granite countertops. The options provided to the customer are a difference in the size of the storage unit and an option of a climate-controlled environment. There lies the beauty with this investment; there are no overnight calls when the toilet gets clogged or remodeling every two years when tenants decide to leave.

Low operating costs equate to increased NOI.

My Uncle owned a storage unit for 15 years and would visit on average 2-3 times a month. Now compare this to an apartment unit where the tenant is there every single day. Just by the nature of the business self-storage would have a lower operating cost because of the business design, I mean it’s just a square with concrete or metal walls. And when it comes time to place a new tenant, all that’s needed is a good sweep and at most a thorough cleaning.

Below is a list of 10 reasons why should invest in Self-Storage:

• Low operating cost
• Unsaturated market
• Reits only own 18% of the market
• Lower barrier to entry than Apartments
• Recession proof
• Fast way to build your realestate portfolio
• Technology alone can manage the entire business
• Alot of mom and pops still own self-storage
• Off-market deals are easier to find
• Self-Storage Facilities perform well in every market cycle

Step-by-Step: How To Buy a Storage Facility

1. Educate Yourself

Learning from others gives the beginner an unfair advantage, let’s say you’re trying to purchase 5 storage facilities. Avoiding all the mishaps that a beginner would normally face can be avoided by simply learning from the mistakes of others.

And how do you pinpoint these mistakes? Educating yourself, but not only does acquiring knowledge about the topic help you reach your goals faster. It provides you with a firm foundation for real estate investing in your related field.

The first step you must make before you even lay eyes on a real estate deal is to immerse yourself in the material. One of the easiest ways to access a mentor is to read material that they’ve written about the subject. For instance, you like apartment inventing read Grant Cardone’s book How To Create Wealth Investing In Real Estate. This is the best way to learn the investing strategies directly from the source of one of America’s top Investors.

The other option for learning about real estate investing is from online resources such as BiggerPockets, this is one of my favorite online platforms that offer a vast amount of information related to real investing, ranging from residential homes to storage facilities.

Bigger pockets are one of my favorites because the platform offers investment calculators, live forums, seminars, and the list go on. However, YouTube has been my number 1 source for real estate advice, because it gives you a front-row seat from the top investors in the market. And I also like podcast because it gives you the ability to listen and perform other tasks simultaneously, (Win-Win Right).

2. Set Your Goals

The first sailing trip me and my father took was from Marina Del Rey to Catalina Island, and the tools we used to reach our destination were a compass and a map. This metaphor applies to life as well, in order to accomplish your dreams you must have a goal something to reach for. Without the destination or the map, you’ll never arrive.

Therefore, create a goal for yourself: the size of the property, layout of the property, unit count, and so on. Thinking in this manner will narrow your focus and help you find a storage facility that aligns with your goals.

Next, create your vision, how many properties would you like to own and why? Ultimately find out what your end goal is, for instance, my wife and I are planning to get to a point where our passive income exceeds the income from our 9-5 jobs. Which in turn gives us an option of going to work daily because we choose to and because we have to.

3. Set Your Budget

Having an idea of how much property you are able to buy, can help with your search analysis for a self-storage facility. The criteria for owning a commercial property are as follows: experience, buyer credibility, net worth, net liquidity. and the downpayment.

Self-storage leasing contracts are typically one month, this asset class is a greater risk than an apartment that has a minimum lease term of one year. Because of the volatility of the investment banks require a minimum downpayment of 30%. Therefore, you as the buyer must have the downpayment + closing cost + net liquidity on hand to purchase a commercial property.

Anecdotally speaking let’s say you’re interested in a storage facility that is selling for 500,000, the amount on hand needed to close the deal would be 250,000.

Downpayment Breakdown

So you see knowing exactly how much you have to spend will give you an idea of how many units you can afford. Remember when it comes to buying commercial property finding the capital is not the problem, finding the deal is the hard part.

Through my experience, I’ve seen time and time again where investors are able to fund deals without using all of their own capital. Working alone can only get you so far, but when you work as a team you can bring the deal, while your partner can bring the funding and experience.

When it comes to Realestate Investing creativity will triumph over your limitations.

4. Choose a Market

Choosing the right market will put you in a better position for property longevity. Looking for criteria like population, job growth, and path of progress, Will ensure that the storage facility will attract a certain client base, appreciate in value and maintain a consistent occupancy level.

• Population

Google provides an ample amount of information about population growth metrics. More people moving to a city is an indicator of future growth and development. The increase in population equates to higher storage rents due to the demand. This makes for a great investment, buying in a city where people are moving to and not away from.

• Moderate Cap Rates

The term caprates is simply a fancy word for return on investment. However, the return in lamen terms is the amount you would receive on the property if it were paid for in cash. It’s all used by the bank as a factor to value your property over time.

If you want solid cash flow, focus on finding caprates that are 5% are above. Any higher may be risky depending on the class of property within your submarket, and the economic stability of the city.

• Economic health of Local Employers

The health of the local employers in the area is vital for the success of the property. Without stable economic employers, the economy would not be able to sustain itself. And it takes more than just one major company in a city; because if that company suddenly decides to relocate or close the doors entirely then there goes the steady stream of income for your facility.

Take Detroit, Michigan for instance in 2008, 11 factories closed and shut down 40% of its 6,000 dealers, affecting thousands of people working in the car-related field. These times were known as the Great Recession, and the aftermath wreaked havoc on an already declining city. Paying the monthly amount on storage becomes less important as owners began to see a decline in tenants and price.

That’s why it’s vital for the success of your business to have a variety of employers within the vacitinity of where your property is located.

• Crime and Safety Data

Providing a safe space for your customers to store their belongings is very important. Who wants to be looking over their shoulder every time they visit their unit? So, checking the crime and safety data on the city that your potential property is located in is important. Not only will give you an idea of how safe the location is, but it will also give you a snapshot of what type of customers you’d have.

5. Talk To a Realestate Broker

A real estate broker is your first line of defense when it comes to finding a property and being a step ahead of your competition. Oftentimes brokers will be well connected with sellers, and they’ll know exactly what type of property you’re looking for that fits your needs.

This puts you in a powerful position because if the property is brought to you before being available to the market, it gives you a competitive advantage. Often times when a property is brought to the market it becomes a bidding war and you run the risk of paying more for the property than what it’s worth.

So, find a good Realestate Broker and they’ll save you more than money (THEY’LL SAVE YOU YOUR TIME).

6. Start Looking For Properties

Now the search begins, looking for properties was always the fun part for me, you may have to analyze 100 deals in order to find one worth looking into.

It’s almost like looking for a needle in the haystack. There are several platforms covered in more detail below that can help ease the search. Your broker can help you find properties that meet your criteria. And another important element is networking, you never know who you may come across that might be interested in selling their property or know someone who is about to sell.

Finding a property relies heavily on the analysis, but sometimes by walking the property, and trusting your gut can help create a vision for the investment and help you determine if it’s an overall good buy.

7. Choose a Property and Make an Offer

After you’ve analyzed several properties and found one that makes sense, the negotiation process begins. Send the seller an LOI (letter of intent) a written agreement indicating how much you’re offering for the property and terms assuring the seller that you can indeed close on the loan.

It makes a soft nonbinding offer to the seller on their property, the offer also outlines the overall process, and any contingencies that accompany your offer, and details everything you expect within the first 60 days of closing, including a list of documents needed by the seller in order to perform your due diligence.

It puts you and the seller on the same page leaning towards potentially doing the deal. Therefore, when it comes time to perform a building inspection, pull a title report, and request financials. They won’t be surprised about these contingencies when it comes to securing the deal.

Keep in mind the LOI is also time-sensitive, it’s usually good for 48 to 72 hours.

Performing the proper analysis of the deal will better prepare you when it comes time to submit the LOI. For instance, let’s say the property is in need of a new roof and the parking area must be re-paved. All discrepancies found with the property can be brought to their attention re-inforcing how you arrived at the price offered for the property.

After the offer is accepted, the business plan can be implemented and the fun begins!

8. Perform an Inspection

As investors, we tend to wear many hats, but some things are best left to the professionals. At this point in the process, you’ve reviewed the property to the best of your ability, and hiring professionals can help you find things that only a trained eye can see.

You’ll want to hire a general inspector, they’ll be able to check all building systems ensuring they are code compliant. At times a general inspector may feel the need to bring in specialists if needed, bringing in another specialist would be in areas such as foundation problems, electrical problems, plumbing issues, structural problems, safety-related issues, roofing etc.

By no means am I telling you to hire an expert for every area of the property. But if there is an area of concern, then hiring a specialist is well worth it.

Also if you haven’t already, ensure the building does not have lead and asbestos-related issues. Those two carcinogens are often found in U.S buildings. To ensure the safety of you and your tenants, make sure the materials are not present.

9. Grow Your Business

After the property is stabilized and the business plan is in place. If the property is valued at an amount over the price you acquired if for. Then a refinance or sale of the property may work in your favor.

Either way the cash received from the re-fi would be the down-payment on a new facility, further adding to your portfolio, net proceeds from the sale, or the sale of the property avoiding capital gains tax, through what is known as a 1031 exchange.

Growing your business and ultimately your real estate portfolio will bring you closer to accomplishing your goal of financial freedom!

After your first property is acquired and being successfully managed, you’ll feel an eagerness to continue buying more. Remember, why YOU started as I mentioned above, your vision is vital to your success; what was your original goal? Provide for your family, retire your parents, retire early, fire your boss, the why is what will keep you pursuing your vision.

It doesn’t matter if you need 10 units, 20 units, or even 100 what matters is staying on course through the ups and downs and not losing track of why you started all of this in the first place.

All of the criteria mentioned above are not determining factors for the success of your property. However, with all of the metrics in place, your chances of succeeding are much greater.

How To Find Storage Facilitys For Sale

Many people are worried about how they will finance their investment property. Honestly, that should be the least of your worries, the hardest part during the process is finding the deal. And after you land the right deal, finding the resources to close will be one of the easiest steps. Here are the best ways to find the deal:

1. Scouting the nieghboorhood

One of my favorite strategies is the simplest one, walking around the neighborhood of interest, mingling with the locals, and get a feel for the city. By doing so you never know what information people may be willing to share about the property owners in the area, in regards to selling. Rember those off-market deals are the ones you go after.

2. Loopnet

Loopnet is an online marketplace for commercial real estate, ranging from retail to storage facilities. They offer commercial property listings around the U.S and the platforms are geared to making a user-friendly platform for the seller or buyer.

Another plus is that LoopNet offers a variety of property classifications such as:

• Storage Facility
• Apartments
• Retail
• Office space
• Land
• Industrial
• Restarant
• Medical

I loved using this platform from a beginner’s standpoint because I was able to practice deal analysis before I even purchased one. And many of my friends have actually been able to find deals around the U.S simply by using this platform. If you haven’t used Loopnet, before trying it out and familiarize yourself with deal hunting, so when the time comes to purchase that Storage Facility, You’ll be ready.

3. Direct mail

Direct mail marketing has become a common practice but is still very effective. Sometimes a personalized well-written letter can gain the interest of a potential seller. My friend decided to wholesale real estate directly after graduating from college. He recently told me about three properties he acquired all from sending out one simple personalized letter.

So, this strategy definitely works, but the success is in the numbers.

4. Networking

Many people underestimate the power of a simple conversation relating to real estate aka Networking. When you talk about what you do (real estate investing) you never know how someone could help you along your journey.

Out of all of the techniques, this is by far my favorite method, by building friendships with like-minded people: brokers, real estate agents, and real estate investors. It helps you create a network of people to go to when you need help along your journey, be it finding a deal, funding a deal, or closing a deal. “Your network is your net worth” Robert G Allen.

How To Finance The Right Deal

Commercial loans are not a one size fits all plan, they vary greatly depending on what specific business strategy you have set in place for the property. Below we break down 7 different types of commercial loans and when they should be used.

Long-term fixed-interest commercial mortgage

This particular loan operates under similar guidelines to a typical residential home loan. In which there is a fixed interest rate with a set term of years to fully pay off the property. The main difference between the two is with a commercial mortgage there are shorter terms, typically 5- to -10 years. They also require a higher fico credit score of 700 or above, one year of commercial real estate experience, and a minimum operating occupancy of 51%.

Interest-only payment loan

Apartment owners who raise capital utilize the benefits of interest-only payments because they only plan on owning the property for 3 – 7 years. Interest payments also know as ballon payments allow the buyer to pay the interest on the loan only, with a balloon payment due at the end of the term.

Investors tend to use this loan when they intend on buying, rehabbing, increasing rents, and re-selling the property in a relatively short time horizon, therefore increasing their profits exponentially. Typically at the end of the term, the owners would either re-finance the property which will discuss next, or sell the property once the rents are increased and the property is stabilized.

Refinance Loan

You might see a lot of homeowners taking advantage of refinancing, to take advantage of the lower interest rates, lower their payments, and perform needed improvements. Well, commercial real estate works in a similar fashion. Commercial property owners often refinance to take advantage of lower interest rates, increase net operating income by adding on additional units or performing renovations.

And it could also help pay off a balloon payment from the interest-only payments we mentioned above.

Hard money loan

Most self-storage facility owners obtain long-term commercial loans, ranging from 3-10 years. There are times when the property can be turned around (generating a solid profit) in a couple of years.

A hard money loan might benefit you in this scenario; the loan term is 6 to 24 months and the interest are extremely high ranging between 10% and 18%. Instead of screening the borrower’s credit rating and experience, private investors will assume the risk based on the potential value of the property.

Hard money loans are popular in the fix and flip market, especially in a seller’s market.

Bridge loan

Hard money loans are similar to bridge loans but they have safer terms. The interest rates are much lower (4% to 6.5%) and the loan terms differ up to 3 years. The minimum credit score from a traditional bank required for approval is a 650 fico and banks require a 10 to 20% downpayment.

Investors who have a short-term strategy, or renovation, may prefer a bridge loan over a refinance which can be an extensive process.

Construction loan

Properties such as self-storage facilities, offices, retail, multi-family, industrial facilities, and restaurants can all be covered by construction loans. These loans cover the building structures, labor costs, and materials.

The undeveloped land and the building materials can be used as collateral for the construction loan. Construction loan terms range from 18 and 36 months and later change into a long-term loan.

Blanket Loan

Imagine owning 10 properties and having 10 different separate payments to make every month, sounds like a headache right? Well, blanket loans can reduce the hassle, they allow you to bundle all of the properties into one financing arrangement offering more flexibility.

If you decide to sell two properties penalties won’t be incurred and the profits from that sale can be invested elsewhere. Although the blanket loans sound very attractive they have their downsides as well. They have a completed loan structure process, are hard to get approved for, have large payments and the default penalties can be extremely high.

So, consider your options carefully before a loan structure is chosen, because there are no ONE SIZE FITS ALL.

In Conclusion

Self-storage facilities are a hidden gem, the market has yet to be saturated with (RIETS) and private investors. So, it gives us the opportunity to enter the market with less competition. While a large majority of commercial property owners focus on apartments, retail, office, etc a lower barrier to entry with self-storage. There’s no better time then (now) to get involved. With the rise of technology, the business can now be run from home.

This guide is a road map on your search to owning your own facility.