Having a steady flow of passive income sounds nice right? Not only will you depend less on your paycheck, but you’ll also be more financially secure in times of market volatility. Aside from that, you can also leave your 9-to-5 job which will allow you to have time to spend with your friends and family.
Creating a sustainable passive income stream is one of the best ways to achieve financial independence. A lot of people invest in stocks, bonds, and other financial instruments, but those who want to avoid risk invest in the real estate market. Investing in this market makes sense since it can generate more quarterly income, and self storage investing is fast becoming the top choice.
What Is A “Good” Investment?
Almost all investment options that are introduced by brokers and other people in the financial industry are always described as “good.” But how do you know that an investment option is fit for you? Here’s how:
Plan For the Long Haul
One of the quickest ways to differentiate a good investment option from a scam is the promise of quick returns. You should always remember that investments rarely ever lead to massive profits in the short-term. Most investments only see decent growth spread over a long period.
So, you need to invest in an industry with a good growth outlook in the next few years. A report by Mordor Intelligence found that the self-storage market was worth $87.65 billion in 2019, and they estimate that this valuation will grow to $155.62 billion by 2025.
It Aligns With Your Financial Goals
Borrowing is never a requirement whenever you invest. You need to see how an investment will fit into your current financial plans and budget. But there are always some situations where you’ll need to borrow to fund your investments. So, you’ll need to dive deeper into your investment option and see if it’s worth it to buy into it or not.
You also need to craft a financial plan and set how much you want to earn in x months or years. After you invest, you also need to see if your investment’s growth will meet your goals and if it is still profitable.
Since self storage investing does not require massive capital or very technical knowledge, it’s one of the top choices of first-time investors.
It’s Not High-Risk
There are a lot of investment options that come with varying degrees of risk. But if you don’t want to deal with uncertainty, choosing those that offer some sense of protection from market volatility will certainly lessen your anxiety. Investing need not be stressful.
So, investing in self-storage properties is the best choice for you if you are a risk-averse investor since they can still generate steady income in times of financial crises. In 2020, after the effects of the pandemic have caused a lot of businesses to close down, the delinquency rate for loans made by self-storage facilities was significantly less than other sectors of the real estate industry.
How To Start Building A Self Storage Business
As mentioned above, the self-storage market is less susceptible to recessions. The demand for space for self-storage businesses is growing despite the financial troubles that customers are facing. The national street rates of standard, non-climate controlled self-storage units had a year-on-year growth of 2.7% in October 2020, according to Yardi Matrix.
Look At The Cash Flow
Self-storage is ruled by cash flow, and it should be the main driver of your investment decision. So, you need to look at three years of cash flow at the minimum and compare it to the current rental rates. You need to look for a pattern like if it’s rising or declining and find the reason.
By having more insight into the property’s cash flow, you can use it as your signal to be more bullish or cautious in investing. If you see that the income is rising steadily, you may need to be more aggressive in your pricing.
Monitor the “Economic Occupancy”
Compared to other sectors in the real estate industry, there are two types of occupancies in self-storage properties: physical and economic occupancy. Although a certain self-storage facility currently has 85% physical occupancy, its economic occupancy might only be at 60%. This can happen because of discounts on rent and other incentives given to renters.
Assess The Location of the Property
Even though your self-storage facility is in an oversupplied market, you can still make money if you buy it at a reasonable price. But if you are in an underserved market, you can be a lot more aggressive in your investment strategy.
A lot of people also look up “self storage units near me” to find a facility in their area. So, this is one of the best ways to examine your competition. It can also be a good way to grow your business by incorporating strategies like digital marketing or SEO.
Know Your Competition
Investing into a market that is mostly served by independent operators is very different compared to areas dominated by well-funded REITs and the major players in the industry. You should also consider the changes in the market when you own the facility. In particular, you need to learn about the acquisition trends in your area, who are entering or leaving your market as this can give you a lot of insight. This is still a requirement even if you’re planning on managing a self storage facility that you’re going to purchase.
If you plan on seeking financing for your investment, you need to be prepared for strict underwriting from the lender. For example, you can plan on becoming more aggressive on your pricing since you want to have some “sweat equity” that can be used for operations and maintenance. But if you want to finance your investment through loans, the lender might ask you to maintain cash reserves to cover the costs for maintenance.
Since there’s still a lot of things that you need to know that aren’t included in this list, you should reach out to the experts if you plan on making an Investment In Storage Units – Self Storage Investing.
Self storage investing is one of the best ways to create passive income as it offers stable cash flow, property appreciation, and resistance to recessions. Aside from that, self-storage facilities are also fit for long-term investment strategies. Since the self-storage industry is still experiencing rapid growth and is currently in the process of consolidation, there are a lot of opportunities that you can seize. By doing so, you’re one step closer to become more financially independent.