Have you ever dreamed of owning a piece of the booming self-storage industry but think it’s out of reach? Think again! This episode of the StorageNerds podcast blasts open the vault on seven ways to invest in self-storage. Stacy provides insights on how to navigate into those different ways of self-storage investing. Join Stacy Rossetti and learn to tap into the different ways to invest and self-storage today.
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Seven Ways To Invest In Self-Storage
Self-Storage Is A Work
I want to get into all the different ways that you can invest in self-storage and I’m going to explain what I do now. When I started out, I’ve been investing in real estate since about 2011 on the upturn of the bubble. It was right on the upturn of the bubbles when I came in and it was like gold. What I did is I wanted to get into real estate investing so I started flipping. From 2011 to 2015 or 2016, I flipped 100 houses and that’s how I got into real estate investing. It was like learning how to flip houses and getting this idea of how this investing works. I’m in storage. I would never do flipping houses because it’s way too much work compared to storage. Storage is also work but it’s not as stressful as flipping houses.
I had this mindset because I flipped all these houses that the type of facilities I would be open to buying are going to be horrible ones. There’s not a lot of these anymore. When I got into storage investing, there were a lot of severely mismanaged facilities out there. Not a lot of those right now. A lot of the severely mismanaged have been bought up and they’ve become income-producing property.
Most types of facilities that you hear about are mismanaged facilities and income-producing or they sometimes say cashflowing. You can look at a house and you can tell if it’s mismanaged. You can’t look at a storage facility and tell if it’s mismanaged. The only way that you can know if a facility is mismanaged is by looking at its numbers.
Remember, I told you that commercial real estate is based on the numbers. Every once in a while, you can find a super rundown storage facility. We have bought several abandoned storage facilities. In the very first facility that we ever bought, there were over 1,000 tires around the whole property and there was trash. It was a dumping ground and a storage facility. Once in a while and you’ll find bad storage facilities that look like crap. This doesn’t happen a lot. All the facilities that we put offers in, they all look nice.
The only way to know a mismanaged facility is by looking at its numbers. Commercial real estate is based on the numbers Share on XYou have to get the numbers. The mismanaged facility, all that means is that it is not up to let’s say 80% to 90% full for your vacancy. That’s what a mismanaged facility is. It’s less than 80% full. Your goal for an income-producing property, depending on the location, is going to be between 80% and 90% full. In a primary market, in a secondary market and then what we call a tertiary market, which is another word for country, it’s all going to be based on this.
You’re going to have 80% full in the primary market, 85% in the secondary market and then maybe 90% full in a tertiary. Obviously, these numbers change based on the market. Right now, this is where we’re at. During COVID, primary market was 90%-plus, 95% full. I was listening to a webinar in storage. They were saying that the REITs were reporting like 90% to 95% capacity and had never ever happened because when the REITs in these primary markets, they run their numbers, they’re running them at 80%. That’s what they’re running them.
If they’re 80% full, they’re happy because in the primary market, there are a lot of turnovers. People aren’t staying for a long amount of time. People are in and out for short periods. The further out from these metropolitan areas, the longer the people stay and the higher the occupancy is. You know that if you are going to be buying an income-producing property, you are going to be looking at how full is this property. That’s one of the main things. In a mismanaged facility, it’s not full. It’s typically less than 75% vacancy. We’ve got abandoned facilities, 25% full, 50% full, 75% full or less. It’s like 75% or full. These types of properties, I would say from like 60% to 80% full. It’s like this gray area. Is it a mismanaged facility or is it an income-producing property?
It’s this gray area. You want to keep that in mind. This is what’s happening because of COVID because we’re finding properties that would, that are maybe 60%, 70% or 80% full. They’re producing income but they’re not producing the amount of income that it should be producing. How much income should a property be producing? How do you figure out how much income a property should be producing? What you do is you get your unit mix, you have 10 by 10s, 10 by 20, 10 by 30s, whatever sizes, it’s okay. You start looking at your competitive analysis. The competitive analysis is what’s going to show you what your prices should be. What is the market calling for in this area? Are they below market price? Are they at market price or is there a way to increase your prices?
When you think of prices, you’re going to think of in terms of what’s your standard rate and then what’s your website rate and then what if they call in, what’s that rate? You could have the same rate across the board. You’re like, “No matter what, my rate is $65 for a 10 by 10. That’s it.” You could call in. It depends. For us, if they go through our website, they’re going to get a different price as if they call in or we have a marketing price. We do ads on Google. We do all this different stuff to get promos and to get tenants in and stuff and that could be a different price than if they call in or if they’re going through their website.
You have to know that when you’re talking to owners, this is what you’re going to have to figure out. Across the board, are your prices the same or do you have different prices based on when somebody calls in? You gather all this information from the owner and then you also gather that same information from the competitors and then you look apples to apples.
If your facility has like 10 by 10s and 10 by 20s and you look at a competitor and it’s got like 5 by 5 to 5 by 10s, there’s no reason for you to look at that facility. That is not competition because that’s different sizes. You want to find competitors that are within a certain mile radius and you want to see what they’re charging. Depending on the location, it’ll be anywhere from a 1-mile radius to a 3-mile radius to a 5-mile radius and maybe even up to a 10 if it’s super country.
Mismanaged Or Income-Producing Facility
You’re looking at all the storage facilities in the area, you’re looking at what they’re charging and then you’re deciding on what rate you are going to be charged. Once you figure out what rate you are going to be charging, you are going to be able to find out if that facility is a mismanaged facility or an income-producing property.
We see all different types of facilities out there, but right now there are a lot of facilities that are less than 75% full but they have a lot of prices that are low. You could raise the rates or they’re at industry standard. All the competitors have the same price but for some reason, they’re only 75% full. Knowing what the competitors are going to be able to charge and what you are charging and looking at that and reevaluating the industry gives you a very good idea of how you’re going to be able to run your facility.
Many facilities are less than 75% full. Share on XFor instance, if I find a facility that’s 75% full and it’s the same price as everybody else in the industry, then my question is can I raise rates? Am I going to be able to fill this property or is that area oversaturated? Is 75% where the market should be for that area? Knowing these two situations here and understanding these two situations are going to help you determine what an offer you’re going to put in. Mismanaged facilities and income-producing properties.
Income-producing properties are cashflowing but is it at the vacancy it should be? Cashflowing plus vacancy. What are the questions here? It’s not full and it’s not at the price it should be. That’s the difference between an income-producing property and a mismanaged. With a mismanaged facility, just so you know, mismanaged facilities are very hard to fund. Of all of the facilities out there, this is the hardest one to fund. I see this over and over in my students. They will find a property that is 75% full but it’s not at the rates it should be. It’s not producing what it should be. The banks are not funding these types of deals and especially in a deal that’s like $1 million or less.
If you have an income-producing property, income-producing property means that the owner can show you the P&L, the balance sheet, tax returns, they can show you your occupancy, they can show you the management summary, anything that you need, they can show this all to you. You take all that information to the bank. Just because you have that information doesn’t mean that the bank is going to fund it. There’s a high down payment and then there’s an interest rate that’s super high and so maybe the numbers don’t work.
We are seeing this over and over and over again that there are a plethora of income-producing properties. They were mismanaged facilities. The last couple of years, all these mismanaged facilities got snatched up and the owners got them to like 50%, 60%, 70% full, they’re ready to sell. Right now, the banks will not fund them because the numbers are so tight because of the finances. You have to be aware of that as well too. That’s happening in the industry and it will be like that for quite a while. Income-producing properties.
Mismanaged facilities, banks will not fund. Income-producing properties, banks will fund if there’s a spread, if there’s cashflow. There’s a lot of factors that go into determining if you’re going to be able to buy one or the other. If you find a mismanaged facility that’s 25% full or 50% full and the owner’s not managing it properly, then what you’re going to have to do is you’re going to have to find your own funding. You’re going to have to get out there. You’re going to pay cash for it or you’re going to have to do some create and deal structure.
Owner Financing
A lot of times, this will be owner financing, but the owner financing is when the seller is the bank and the seller is open to doing the sell. You say, “The bank’s not going to finance this. If you finance it, I’ll buy it,” but the bank’s not going to finance it because they’re saying that the numbers are not correct. We do a lot of creative deal structures on our deals. Several students closing on owner finance deals and my deal analyzer teaches you and shows you how to run the numbers so you can make these types of offers.
If you’re only making a cash offer or an offer where you can go and get the bank financing, what’s happening is that those numbers are not working. Income-producing properties where you’re saying, “It’s making $100,000 but the bank only wants you to pay $700,000 or maybe $800,000 and the owner’s not going to sell it for $800,000. They want $1 million. I
T’s like how can we work this deal? How can we close this deal? That’s the difference between the mismanaged and the income-producing properties. Mismanaged is very hard to fund. You have to get out there and raise the money. All of the sixteen facilities that I bought myself are all mismanaged facilities. That means that I had to go out and raise the money to buy every single one.
I think that in terms of fundraising, that is a lot of work in itself. Even if it’s $200,000 or $500,000 or $2 million. On the income-producing, if there’s enough spread, there’s a bank out there that will fund these deals. What we’re seeing right now in the market is that these types of deals, which are mismanaged facilities, you are going to have to get out there and you’re going to have to raise the money. The good thing is that people are trying to figure out where to put their money right now. If you are okay with asking people for money, say, “I want to buy this storage facility. I don’t have enough money to buy this. Would you be interested in partnering with me on this deal?” I think it’s a good deal.
A lot of people are trying to figure out how to place their money, but don’t be shying away from a mismanaged facility. Just know that if you are not raising money, you will not be able to find these deals. These deals right here, these mismanaged facilities, they have a lot of upside. That’s why I love them. It’s a lot of work for about 18 months to 2 years of owning that property. It’s like blood, sweat and tears and then after that, you have all this upside and then you get to sell it and there’s this huge spread so you get the money on the back. That’s the most important thing about storage. There’s not a lot of cashflow.
People are like, “I want to quit my day job.” It’s like it takes a lot of properties to quit your day job. If you’re making $5,000 or $10,000 a month, then that’s a lot of money. That’s a lot of net profit right there that you’re going to have to earn. What’s good about storage is the back-end appreciation. On a mismanaged facility, we don’t make a lot of money on our properties because we’re always trying to get them leased up and fixed up and get them cleaned up and stuff. Once we do that, then we know that there’s a huge appreciation.
We don't make much money on our properties because we try to get them leased and fixed up. Once we do that, we know there's a huge appreciation. Share on XFor instance, we bought a facility in Georgia. It was a fire-damaged facility and a tenant was living in that facility and they ended up burning the facility down. The insurance didn’t pay the owner. The owner was stuck. He had no money to fix the facility. He ended up selling it to us. It was a 20,000-square-foot facility on 6 acres. That was a very nice property in a very good location in Georgia. He ended up selling that property to us for $350,000.
We went in there and renovated and we spent several hundred thousand dollars renovating it and fixing it up. We’re in the process of leasing it up. The facility itself, we’ll be able to sell when it’s leased up at 80% at $2 million. We will make $1.5 million on that facility. It was a lot of work on the front end. How did we pay for that? There’s no bank that’s going to pay for this. There’s no bank that’s going to fund that deal. We had to go out and raise the money to purchase the facility. We had to go out and raise the money to do the renovations and that’s how we bought the deal.
On the income-producing side, for this right here, you have to know that you are going to need properties that have a lot of spread right now. Banks are super conservative and they don’t want to blend on risky endeavors. Due to that, it’s very hard for a billion-dollar or less properties to get finance. It’s not impossible. You get a good deal on and get a good price then the banks are open to it as long as there’s a spread. That spread is called the debt service ratio. If there’s a spread, then the banks will be open to it. We are typically not seeing a lot of spread on million-dollar-less properties and we’re only seeing very little spread on $1 million to $2 million properties.
Where you do see a lot of spread is obviously in the bigger deals. I used to say the sweet spot was like $1 million to $2 million, but I feel like the sweet spot right now is like a $2 million to $3 million property. I had a student that bought a facility for $2.5 million. He got an SBA loan on it so he only had to put 10% down. It was $250,000 and he got 8% interest. It was a fixed rate, a good deal. He got it appraised. It was appraised at $4.5 million and because of that appraisal, banks were okay with lending the money to him. That happens a lot in a $2 million or a $3 million property.
You might not be able to get an SBA loan on that deal. You might have to do a conventional deal. Conventional deals are 30% down. You have to keep in mind that SBA is a little bit harder right now to get. However, he had good credit and he had about done some real estate track actions and he was an accountant. He had money and stuff so the bank was okay with lending him money. That spread, I’m seeing is $2 million-plus. I’m giving you an idea of how the industry is working. That is income-producing versus mismanaged. That’s what you’re going to hear about. What you’re thinking about is these two types of deals when you think of storage investing. That’s an overview of the difference between income-producing and mismanaged.
Construction Versus Conversion
Let’s talk about new construction versus conversions. We bought a conversion and an owner had a building. He converted it into storage. There are 150 doors and then there’s some commercial space. A conversion is like a climate-controlled facility. New construction is from the ground up. I’m sure there’s somebody reading this right now who’s like, “I have a piece of land and I think it would be perfect for a storage facility.” If you’re that person, you can say yes in the check.
This is where you’re going to have to buy the land if you don’t own it already and you’re going to have to get all the zoning done, make sure it’s zoned property, get the permitting done and then you’re going to have to build it. Let’s do the grading and then you’re going to have to do the retention bonds. Don’t forget about that. That’s a big thing right now. You’re going to have to do the foundation and then you’re going to have to build it.
You’re going to have to lease it up. This phase right here is like 18 to 24 months. All this phase right here is also going to be around 18 to 36 months. It takes a long time to build a storage facility. It takes a long time to go out there, look for the land, get it rezoned, and make sure you have to go to neighborhood associations or whatever it is. That’s new construction. Right now, it’s a little bit harder to do new construction. The question is, can I make money from new construction?
I see a lot of people going out and building and then they’re trying to sell it. They’re trying to sell it to the price that’s supposed to be made if it was leased up. It’s not leased up. I see a lot of people right here doing all this and then trying to sell the property without it being leased up, which is possible. You get all the way to here and then you can be like, “I don’t want to be a storage facility owner. I’m going to sell as is.”
The lease-up is where you are going to have to manage this thing and get out there and do all the marketing and everything you got to do, which takes a lot of work and effort. In both scenarios, I see this. On top of that, what I want to write here is what’s called entitlements, which is another way of doing it entitlements is getting everything ready. Getting it ready up to permitting.
All of this, buy land, get it zoned, get outside, it goes to permitting. Get it permitted. All this is included. That’s called entitlements. There are several different ways for you to do new construction. You could do the first part of pre-development. You could do the second part, you could do the development part or you could do the actual ownership or you could do all of them together. You can separate that out.
I have a student who only does entitlements. That’s it. That’s her thing. She gets everything ready and then she lists it on Crexi and then some big player will come in and buy everything and be ready to build day one. That is how it works. That’s her thing. I have several students that right now are building new construction.
We’ve renovated that facility that was burnt down and then now we’re in the process of leasing up. It’s the same thing because that thing was more like new construction. You have the conversion and the conversions is where you’re going out and buying like a Kmart or something like this and you’re converting it into storage.
All of this right here, this zoning permitting and then actually building it, the building is all the same. It’s all included in this. You still have to do all that in order to do a conversion or you can buy the conversion at the end. You can do the lease. We did that. We bought the conversion and conversion and now we’re leasing it up. Somebody went through the process of doing all this in order to build that conversion and build that out.
You could do both. You could do the building if you’re that type of person or you can also own it and do it as well. These all right here, you have to have a strong stomach. This whole process could take years. Also, this costs quite a bit of money. The entitlements like zoning and going through the process, depending on where it’s at, it could cost anywhere between $30,000 to $200,000, depending on what type of deal is. That’s not even including the build price. It takes forever, so if you have to go through the process, you have to have a strong stomach. I’ve built houses before and it was horrible. I’m not this type of person. This is not me, but some people love this.
Wholesaling
I want to put this out there that this is available inside of the storage world if you are this person. I have many students that are contract. That is their mindset and they’re like, “I’m okay with building it and owning it. I can do the whole thing because I’ve done that.” That’s your thing. We’ve got building, we’ve got new construction conversions, we’ve got mismanaged facilities and income-producing properties. We can also get into wholesaling. That is like you are the middle person between the owner and the buyer. This is the owner of the facility, this is you and this is the buyer. You are going to exchange a contract that gives you permission to market that property as an assignable contract. That’s a regular contract.
You’re the middle person between the buyer and the owner. Your job as the wholesaler is to go out and find owners that once you sell their properties, you put it under contract and then you go out and once you get it under contract, you have to pay your earnest money. You still have to have a little bit of money to do this. You go out and you find the buyer and you see wholesalers and all the Facebook groups and stuff. This typically works in smaller facilities. You don’t see a lot of bigger facilities.
For bigger facilities, what you do is you can get a cut in the deal. This is what I do. I’ll wholesale a deal and I’ll be like, “You can have this deal but I want 10%.” I’ll do that. That’s the same concept. You can do that with the bigger facilities and then you can exchange money. Let’s say you get it under contract for $100,000 and you can sell it to this guy for $150,000. That means in the middle, you get the $50,000. That’s your price. That’s how it is. That’s how wholesaling works.
You make sure it’s legal in your state. In some states, it’s not legal. You make sure that you understand this process. I go over this process in the coaching program and in my course. I am in the process of doing a wholesaling course. Just know, if you want to learn how to do this now, get the course. It’s all in there. Everything that you’re learning in the course is exactly what you need to know in order to wholesale.
Lending
The last way that you can invest in self-storage, this is my most favorite way, lending. Why do the work? Hand your money over. Lend the money and let somebody else do the work. I have a lot of investors. The very first investor that I started investing with in 2011 or 2012 made over $1 million by lending me money to do all the things. He’s done nothing. In fact, of all the properties that we’ve worked on, he’s seen two. My very first rehab that we did together, he came out and he saw it with me and my very first storage facility. That’s it. He’s made $1 million off of it.
If you have money to lend, I highly recommend thinking and considering this either through your retirement account or actually with cash, whatever you have, you can lend the money out. You can partner on the deal or you can have debt. It depends on your risk level. Maybe the first time you’re more risk sensitive. If you can do that, I highly recommend looking into private lending or partnering on deals.
This is where we’re at right now. We are not going to be buying any more storage facilities. I’m partnering with my students and lending my money out. Ultimately, as an investor, that should be your goal. I want my money to make money and not us have to run around like crazy people. Lending is one of the factors that you can do in any investment, in any real estate investment out there. In storage, it is so good. I wanted to put that out there. That’s one of the niches.
You have lending, wholesaling, entitlements, new construction, conversions, and you have mismanaged facilities and income-producing property. As of right now, when you’re looking through all this, tell me which of these are the ones that you’re interested in doing. I’d love to hear or post it in our Facebook group and let everybody know. “I was in Stacy’s session and I’m interested in doing conversions and new construction.”
Also, a quick reminder. If you want to learn more about what I’m talking about, go to StacyRossetti.com or use the deal analyzer, come to this training and be active in our group and that will help you. Take action. Obviously, that is what’s going to get you into this industry. I see wholesaling, I see mismanaged facilities. I see a question. “The hierarchy of pricing, standard website, call in and market. Generally, which level gets the lowest pricing and which is the spread?“
I would say any marketing that we do, that’s going to be the lowest. We’re doing a promo right now, which is 50% off the first three months. If you are coming in through a Google ad, that’s going to be a different pricing than if you come on our website or if you call in. For us, using the 50% off in the first three months is the negotiation. We call in and we tell them what our normal standard prices are. If they are for that, awesome. We book them. If they’re not for that then we push to 50% off. That’s why our numbers are all different.
You also have to remember that there’s what’s called revenue management and dynamic pricing. This is where like I have twenty units available right now. This is the price. I have fifteen units available. This is the price. I have 10, I have 5, I have 1 unit available. This is the price. That 1 unit is way more expensive than the 20 that we’re trying to get leased up. Also, dynamic pricing is all percentages. You can increase to a flat rate or you can increase by percentage depending on your occupancy on that unit side.
When you start looking at prices, like if you see an owner and they have the same price for all the units and that’s it, they do not understand these concepts and they’re missing out on a lot of revenue. You as the owner need to understand these costs. That’s why I’m saying you’ve got to understand, that there’s a lot of different prices out there right now. Sometimes, there’s not. Sometimes, it’s like I don’t know what I’m doing and everything’s $5. Sometimes like us, every unit size is different across the board. When you came in, how much we have, if you’re in promos we have or whatever it is.
It’s hard to determine what that price per square foot would be because you have to determine what the average unit size of that unit is. The average unit price of that unit is based on all the different pricing that we have. I see a lot of mismanaged, I see wholesaling. Hopefully. I piqued your interest and hopefully, I’ll see you back again. I’m here to teach you how to get started. Let me know if you have any other questions.
