Self-Storage Investing with Scott Meyers
In Episode #46 of the Morales Show, I talked to self-storage investor and educator Scott Meyers about how to get started on self-storage investing. Meyer, a long-time real estate investor who began his career buying, rehabbing, and renting single-family homes -- eventually expanding to over 75 properties -- summarized the appeal of working with unique asset classes like self-storage in one pithy quote: “Renting real estate would be great if it weren’t for the tenants!”
If you have been having tenant troubles, maybe it’s time to get started with self-storage investing. Read on for a summary or watch the full episode for even more of Meyers’ fascinating insights into this unique asset class.
How Is Self-Storage Investing Different From Other Asset Classes?
In terms of real estate, there are only two asset classes that you can invest in which do not require that you deal with tenants in the traditional way: parking and self-storage. Whereas in habitation real estate, a tenant who is behind on their rent can destroy their home or just live in it for free while the eviction process winds its way through the courts, in these storage-based asset classes, missed rent allows you to lock tenants out after 6 days and the legal right to sell their things after 90 days in order to recoup costs. The fact that a tenant’s use of your space provides collateral against the lack of payment makes these investments much more cash-flow stable than the habitation rental market.
There is also another unique upside: turnover costs in self-storage are negligible, dramatically lowering your need to kowtow to tenants in order to keep those costs low. As Meyers explained, it was costing him $1300 per turnover for each of his apartments, including cleaning, repairs, and lost rent. Now that he’s made the switch to self-storage investing, Meyers’ staff just take a leaf blower to a rental unit’s concrete slab and the turnover is complete in no more than an hour!
How to Get Started in Self-Storage Investing
While Meyers got his start in self-storage after selling off his rental properties and finding an undervalued self-storage property via a direct-to-owner deal, he gave me a lot of advice that is applicable to anyone who is wondering how to get started in self-storage investing, whether they are real estate veterans or just starting out.
The Best Self-Storage Investments are Value-Add Properties
In the self-storage business, there are tons of mom and pop properties that are not maximizing their value. Maybe they aren’t making the most use of their land, have unnecessarily high management costs, or have high vacancy rates due to a lack of marketing prowess on the part of the owners. Meyers told me that these kinds of properties are fantastic value-add opportunities with simple fixes.
When he completes the deal on a property, he buys any adjacent land and builds more storage units on it, sets up automated kiosk systems to dramatically reduce management costs, and sets up a website (which many of these mom and pop outfits do not have!) with a full-court marketing press to ensure maximum tenancy. With all that value add, he can continue to run the business for a steady cashflow, or he can turn around and sell it for sometimes twice or more what he paid for the property.
Which Markets are Best for Self-Storage Investing?
When considering a property, Meyers suggested calculating a supply index for the local area. This involves some competitive research, calculating the square footage of your prospective property and any competing self-storage facilities within a 3-mile radius of your prospective site and the estimated population of that area. The magic number, where supply meets demand, is between 6.5 and 7.5 square feet per person. For any property to be a good bet, the local supply you calculate should be under 6.5 -- the lower the better!
One great tip from Meyers was that you can sometimes make a self-storage deal in an area that is currently oversupplied in terms of square-footage, but is expected to rapidly grow in population. For expanding metro-areas, there can be excellent profits to be made by getting in just ahead of the wave and having supply ready to meet demand when it arrives.
If you are considering a value-add play that includes new-build units on adjacent lots, you will also need to ensure that local zoning laws either permit that construction or are easily changed. Since zoning varies wildly between every town and city, Meyers said he just talks to the local zoning board and they are always willing to walk him through the local process and explain whether it will be difficult to be granted an exemption or to change that area’s zoning permanently.
Underwriting a Self-Storage Investment Deal
In this episode, we got a little mathy, with Scott Meyers explaining to me the ins and outs of underwriting a self-storage real estate investment deal. While you can get all the details by watching the episode, the quick summary is that, as a rule of thumb, any new build you’ll need to do will be $40-45 per square foot for a simple all-metal, single-story building, while higher-end, climate-controlled facilities will cost you between $55-90 per square foot.
To underwrite that kind of construction, there are plenty of financial options to dedicated investors who can crunch the numbers and demonstrate the financial viability of the deal:
- Look at rental rates in the current market for each size unit and calculate the average rental rate per square foot
- Look at the size of the prospective facility to estimate your square footage and estimate the number of units it holds
- Calculate your potential income: Number of Units * Average Rental Rate per Square Foot * 85% Occupancy = Potential Income
- Then, subtract 28-35% for operating expenses, taxes, and insurance, and that gives you your estimated profit.
With these kinds of numbers, it’s easy to go to the Small Business Association (SBA) to get a loan, since self-storage real estate is treated as a business. They offer 7A and 504 loans which reach 85% LTV at 4-4.5% interest rates for only 15% down. Plus, since self-storage investments have the lowest loan default rate of all real estate, plenty of community banks, credit unions, and savings & loans companies will be willing to help you out for around 25% down. It’s a recession and inflation resistant real estate asset class, meaning investors absolutely love it.
My time talking to Scott Meyers convinced me that, for anyone looking to get into real estate, there is no better place to start than self-storage investing. If you have any questions, Meyers has a coaching program that includes home study systems and software, DIY education, and someone watching over your shoulder to point out your blind spots. At higher levels, Meyers’ students have even partnered with him and his teams on some fantastic deals.
Visit https://selfstorageinvesting.com to join, or, if you’re looking to add self-storage to your portfolio, head over to https://passivestorageinvesting.com.
