Are Self-storage Units a Safe Investment?
Thirty years ago the self-storage sector came into its own as investors bought up attractive real estate investment trusts (REITs) that dominated the storage market.
Whenever inflation attacks the economy, storage units and precious metals tend to outperform the S&P, as home buyers search for smaller houses and are forced to rent extra space. Nowadays only about a half-dozen big REITs control the vast majority of the sector. With a fluid economic picture for early 2017, many alternative investors are rediscovering self-storage as a diversification option for their portfolios.
Easy to buy and sell
With returns in the 10-20 percent range, self-storage REITs are one of the unsung, unglamorous workhorses of many portfolios. Lacking the glitter and glow of precious metals and unit investment trusts (UITs) in oil wells, boring-by-design storage investment trusts are considered one of the conservative options in the alt-investment universe.
With plenty of highly liquid choices on tap, anyone can easily buy and sell storage REITs like PSA, CUBE, EXR, LSI, NSA and SELF, to name some of the better-known selections.
Things to know
What should every consumer know before acquiring self-storage units or storage REITs? Generally speaking, storage is a long-term investment that calls for patience and a fair amount of research up front.
- Time frame: Facilities take about six years before they hit their stride and begin producing regular profits. Those who buy into new self-storage properties balance the advantage of “getting in on the ground floor” with the fact that there could well be a longish wait for the first profitable year.
- Study location with marketing in mind: Experts suggest avoiding areas where the market is obviously saturated. Check out the number of facilities owned by competitors within a 6-mile radius to get an idea of profit potential.
- Consult an expert: Many licensed RE brokers specialize in storage units. As with most other kinds of alternative choices, it is wise to hire an expert before making a large financial commitment. Whether you are buying REITs or directly purchasing a storage facility, consulting a broker is essential.
- Don’t be swayed by high occupancy rates: In the self-storage sector, occupancy rates are a poor predictor of return on investment. Some unscrupulous sellers attempt to lure uninformed investors with sales pitches about high occupancy.
- Know how you want to get in: Direct purchase, REITs and ETFs are the three ways that investors add storage units to their portfolios, though REITs are by far the most commonly used of the trio because they carry less risk, less hassle and have more stable returns.
Self-storage REITs typically outperform the stock market, and are some of the most profitable of all REITs available to the average investor. When the economy tanks, home owners who endure foreclosure need a place for their belongings. Likewise, in good times, city-bound job seekers need a place to park their extra furniture until they can find larger living quarters. Oddly similar to gold and silver in important ways, storage space always seems to be in demand and probably always will be.
Alternative investors looking to diversify with a relatively stable, high-performing choice should consider storage unit investment trusts, ETFs or direct purchase of facilities.
Considered an asset class within the commercial real estate sector, storage properties are one of the current stars of the real estate investment world, boasting upward performance trends, ease of investment, and a simple way to diversify.
Note: The storage companies listed above were only used for purposes of reference and should not be taken as an endorsement or suggestion to buy.