Self storage may not be the sexiest investment you've ever considered.
However, a self storage investment certainly is a good way to protect your hard-earned nest egg. It remains a stable option to weather the ups and downs of real estate investments and the wild swings of the stock market.
We'd like to offer you this guide covering everything you need to know about your self storage investment.
Why Invest in Self Storage?
Though it's a hidden gem in the real estate investment market, the self storage business generates more than $30 billion per year in income, U.S. News reported in January 2018 in The Smarter Investor. And with nearly 1 in 10 American households using self storage on a regular basis, it's a market that's not going to disappear or suffer cyclical ups and downs.
Consider these 3 reasons for investing in self storage:
- Volume: We just mentioned the $30+ billion a year in revenue, and that's spread throughout nearly 50,000 self-storage units spanning more than 2.5 billion square feet of space, all across the United States. From small towns to urban areas, Americans are paying an average of nearly $100 per month to store the stuff they don't want to get rid of. In addition, a growing number of small businesses find self storage a better option than working out of their garage or renting expensive warehouse space.
- Stability: All of those people storing all of that stuff have made self storage one of the most stable real estate investments over the past 50 years. Since 2012, the self storage industry has grown 7.7 percent annually. Self storage units also average 90 percent occupancy, while normally only requiring 45 percent occupancy to break even. This century's great recession proved that people, even when losing their homes, will invest money to keep their possessions. In turn, the self storage business fared well while residential and other commercial investments suffered dramatic downturns.
- Simplicity: Operating self storage facilities is infinitely easier than residential or commercial properties. With no plumbing and few mechanicals, the ongoing maintenance costs and headaches are greatly reduced. The overhead costs also are minimal as they require few staff, have low taxes and need only basic marketing. Though turnover is higher than in other real estate investments, the logistics of turning over units are simple and quick.
How to Get Started in Self Storage
Like all real estate investments, several options are open to you:
- Buy an Existing Business: With roughly 82 percent of the self storage businesses in this country in the hands of private owners, opportunities are available to purchase a business, but could be limited geographically. LoopNet, the largest commercial real estate website in the United States, lists only about 500 facilities for sale spread across the country. Owning the business outright will require you to serve as manager and marketer or hire someone to handle daily operations.
- Build a New Structure: Before making a decision to build, you'll want to conduct a feasibility study to determine whether there is a market available in the area where you are interested in investing. A feasibility study would cover zoning issues, competition, demographics and other factors to determine if a self storage business in a given area could be profitable. You'll also need to consider construction costs, which have risen recently with ongoing tariffs and reconstruction efforts on the East Coast from the recent hurricanes.
- Repurpose an Existing Business: Purchasing an existing warehouse or retail space and converting it into self storage will save money over a new construction. You'll still want to conduct a feasibility study to ensure it is a good use of that area and your dollars.
- Invest in a Self Storage Focused REIT: As of the beginning of 2018, only five REITs (real estate investment trusts) specialized in self storage. But this could be the simplest way to invest your money as others are left in charge of finding, building, remodeling and operating facilities. You still receive the tax advantages and enjoy a solid return on investment.
Tax Advantages of Self Storage
Investors in self storage can take advantage of many tax and other government programs to save money and enhance your ROI:
- Historical Tax Credits: If you are interested in rehabilitating a historic building, the Historic Tax Credit program allows you to claim 20 percent of eligible improvements against your federal tax liability, a direct savings that's even better than a tax deferral.
- Opportunity Zones: The 2017 Tax Cut and Jobs Act allowed states to create Opportunity Zones in urban and rural areas that create tax savings for those who invest in economically distressed areas. This program remains in a growth stage as states and municipalities still are applying for opportunity zone status. Initially, the program allows investors to defer capital gains until 2026 or they sell the property, whichever is sooner, and if the investor keeps the property for 10 years, they can increase the basis to the fair market value when they sell or exchange the property.
- 1031 Exchange: Through a 1031 Exchange, a real estate investor can defer capital gains taxes when they sell one property by reinvesting in a like property. For instance, if you plan to sell an apartment building, you can reinvest in a self storage facility REIT to move from active to passive investment and defer the gains tax until your income is lower, thereby lowering your final gains tax bill.
- PACE Financing: Though not a tax program, PACE financing is another government backed program that allows investors to obtain private financing with 0 percent down to make energy-efficiency improvements to your property. Because many consumers now expect climate-controlled self storage facilities, this is a great way to make improvements that save money without diluting your investment.
If you have more questions about investing in self storage or are ready to take advantage of this hidden gem in the real estate industry, contact our specialists and learn how easy Coda Management Group makes your self storage investment.
Historical Tax Credit: https://www.occ.gov/topics/community-affairs/.../fact.../fact-sheet-historic-tax-credits.pdf
Opportunity Zones: https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
1031 Exchange: https://www.irs.gov/newsroom/like-kind-exchanges-under-irc-code-section-1031
PACE financing: https://www.energy.gov/eere/slsc/property-assessed-clean-energy-programs
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