What is the typical cap rate for self-storage?

The typical cap rate for self-storage facilities ranges from 6% to 9%, but can be higher or lower depending on a number of factors such as location, competition, and the overall health of the self-storage market. The cap rate is a measure of the rate of return on investment that an owner can expect from a self-storage facility and is calculated as the net operating income divided by the purchase price. A higher cap rate indicates a higher return on investment, and a lower cap rate indicates a lower return. Factors that can impact the cap rate for self-storage facilities include the local real estate market, competition, occupancy rates, rental rates, and operating expenses. It is important to note that the cap rate is just one metric used to measure the financial performance of a self-storage facility, and a more comprehensive analysis should consider factors such as cash flow, occupancy rates, and rental rates.

What is the typical net operating income for self-storage?

The typical net operating income (NOI) for self-storage facilities varies widely depending on a number of factors such as location, competition, occupancy rates, rental rates, and operating expenses. On average, the NOI for self-storage facilities ranges from $7 to $25 per square foot, but can be higher or lower depending on market conditions. The NOI is calculated as the gross operating income minus the operating expenses and is a measure of the profitability of a self-storage facility. A higher NOI indicates a more profitable facility, and a lower NOI indicates a less profitable facility. Factors that can impact the NOI for self-storage facilities include occupancy rates, rental rates, operating expenses, competition, and local economic conditions.

According to the 2022 Self-Storage Expense Guidebook by MiniCo Insurance Agency, the national average net operating income was $8 per square foot.

How does self-storage compare to other real estate investments?

Self-storage can be compared to other real estate investments in terms of investment return, risk, and stability.

Investment return: On an individual facility level, self-storage has historically provided solid returns for investors, with returns typically ranging from 6% to 9% based on the cap rate. However, returns will vary based on location, competition, occupancy rates, and operating expenses. On a macro economics level, self storage has the highest return on investment in comparison to any other real estate asset class. From 1994-2017, storage returned an annual average of 17.43%. Based on that annual average, $100,000 invested in 1994 would be over $4,000,000 today.

Risk: On an individual facility level, the level of risk for self-storage is relatively low compared to other types of real estate investments. The demand for self-storage is generally stable and not tied to the performance of the broader economy. Additionally, self-storage tenants typically sign lease agreements, which provides a steady stream of rental income. However, as with any real estate investment, the value of the property can be impacted by economic downturns, changes in competition, or local zoning regulations. On a macro level, from 2007-2009, self-storage dropped -3.8% in comparison to the S&P’s -22.0%. This was the smallest drop of any real estate asset class. Self storage had some of its best performing years during the COVID-19 Pandemic when some other real estate asset classes performed poorly. According to Trepp, a Commercial Mortgage Backed Securities research firm, of the 1,700 CMBS loans made to self storage in the first 3 quarters of 2020 only 3 were delinquent– that is a 0.17% delinquency rate . During the same time multi-family was defaulting at a rate 1,800% higher or 18x that of self storage.

Stability: Self-storage is considered a stable real estate investment due to the consistent demand for storage space. Even during economic downturns, the demand for self-storage typically remains strong as people downsize or move to new locations. The stable demand and predictable rental income make self-storage a relatively stable investment compared to other types of real estate.

Overall, self-storage can be a solid real estate investment for those looking for a lower-risk, stable investment with solid returns. However, as with any investment, it is important to thoroughly research the market, competition, and local economic conditions before making a decision.

What are the legal requirements for self-storage facilities?

The legal requirements for self-storage facilities can vary depending on the jurisdiction in which the facility is located. However, some common legal requirements include:

Zoning: Self-storage facilities are typically classified as commercial operations and must comply with local zoning regulations.

Building Codes: Self-storage facilities must comply with local building codes, including requirements for fire safety, accessibility, and structural integrity.

Business Licenses: Some self-storage facilities must obtain a business license in order to operate legally.

Insurance: Self-storage facilities must carry liability insurance to protect against damage to stored property or injury to customers. Much of the liability lies with the renters in regards to their belongings as the leases can limit the value of items stored and require renters insurance.

Consumer Protection Laws: Self-storage facilities must comply with consumer protection laws, including rules regarding the terms of rental agreements, security deposits, and notice requirements for eviction.

Data Protection: Self-storage facilities may be subject to data protection laws, such as the General Data Protection Regulation (GDPR) in the European Union.

Environmental Regulations: Self-storage facilities may be subject to environmental regulations, such as rules regarding hazardous waste disposal and energy efficiency.

It is important for self-storage facilities to be aware of and comply with all relevant legal requirements in their jurisdiction, in order to avoid legal and financial liabilities. In addition, facilities should have written policies and procedures in place to ensure that they are operating in a compliant and responsible manner.

What are the most important factors in buying a self-storage facility?

The most important factors in buying a self-storage facility are:

Location: The location of the self-storage facility is critical in determining its success. Factors to consider include population density, economic conditions, competition, and accessibility.

Occupancy and Rent Rates: The occupancy and rent rates of the facility will have a direct impact on its revenue and profitability. It's important to research the current and projected market conditions to determine the potential for growth.

Operating Costs: The operating costs for a self-storage facility include utilities, insurance, maintenance, marketing, and management. It's important to have a clear understanding of the operating costs before purchasing a facility, to ensure that the revenue from the facility will be sufficient to cover these costs and generate a profit.

Physical Condition: The physical condition of the self-storage facility is also an important factor to consider when buying. Factors to consider include the condition of the buildings and grounds, security features, and any necessary repairs or upgrades that may be required.

Legal and Regulatory Environment: The legal and regulatory environment of the self-storage industry can vary widely by location. It's important to research and understand any local zoning, permitting, and licensing requirements before buying a facility.

Management Team: The management team is critical to the success of the self-storage facility. It's important to have a clear understanding of the management structure, experience, and skills of the current management team, or to consider hiring a management company if necessary.

Financing Options: The financing options for a self-storage facility can vary widely depending on the type of facility, its size, location, and financial condition. It's important to research and understand the financing options available and to work with a lender that has experience in the self-storage industry.

What is the difference between Reg D 506(b) and 506(c) syndications?

Reg D 506(b) and Reg D 506(c) are two different exemptions from SEC registration requirements for private offerings. The main difference between the two is the method of marketing and advertising the investment to potential investors.

Reg D 506(b): Reg D 506(b) allows companies to offer and sell securities to an unlimited number of accredited investors and up to 35 non-accredited investors, but with some restrictions on advertising and general solicitation. In other words, under 506(b), companies cannot use publicly accessible means (e.g. advertisements, public websites) to advertise their investment offerings, but they can approach potential investors through personal and other non-public means.

Reg D 506(c): Reg D 506(c) allows companies to engage in general solicitation and advertising of their investment offerings, but requires that all investors be accredited. In other words, companies can use publicly accessible means to advertise their investment offerings, but they must take reasonable steps to verify that all investors are accredited before accepting their investment.

In general, Reg D 506(c) is considered a more flexible option for companies looking to raise capital, as it allows for a wider range of potential investors and greater marketing and advertising flexibility. However, the requirement to verify that all investors are accredited can add additional administrative costs and responsibilities to the investment process.

What is the difference between internal rate of return and cash return on investment?

Internal Rate of Return (IRR) and Cash Return on Investment (ROI) are two commonly used financial metrics for evaluating real estate investments, but they measure different aspects of investment performance.

Internal Rate of Return (IRR): IRR is a measure of the profitability of an investment and is expressed as a percentage. It calculates the rate at which an investment’s expected cash flows equal its initial investment. IRR takes into account the timing and magnitude of all expected cash flows, both positive (e.g. rental income) and negative (e.g. operating expenses), to arrive at a single, annualized rate of return.

Cash Return on Investment (ROI): ROI is a measure of how much money an investment has earned relative to its cost. It is expressed as a percentage and is calculated by dividing the investment’s net cash flows by its initial cost. ROI measures only the amount of cash generated by an investment and does not take into account the timing of cash flows.

In conclusion, IRR provides a comprehensive measure of the investment’s performance over time, including the reinvestment of cash flows, while ROI provides a simple and straightforward measure of the investment’s cash return. Both metrics are useful for evaluating real estate investments, but the choice of which metric to use will depend on the specific investment goals and circumstances of the investor.