Investing in Self Storage spaces?

[shelob]

I’m interested in hearing the forum’s opinion on this investment idea, and especially in any arguments that would speak against doing it.

I’ve accumulated around 50k that I’m now trying to decide how to invest. I’ve read five books on the subject (The Intelligent Investor, Fail Safe Investing,…) and my main conclusion from that was that I need to learn more about Economics before I can put that to use. That will definitely happen (I’ll start an econ-heavy degree this year) but I’d still like to not be all in cash in the meantime.

A friend introduced me to the idea of investing in garages and self storage. (She was going to do it herself but she’s now engaged and saving for a house.) Investing in it works by buying a unit from the firm that built the park, and then paying them a management fee for cleaning, managing clients, etc. This fee is automatically deducted from the rent payments, so it’s a pretty hands-off investment. The buyer’s name is on the deed for each individual unit, the sale is handled by a notary. The firm she would’ve gone with is: https://www.box-it.eu/
I’ve filled out their contact form and had a phone call with a representative of the firm. They have a unit on sale right now in a newly built park. It’s 12m², around 18k (20k with sales costs) and annual net income right now is 944€. The rent is set by the annual meeting of owners, which he said will raise the rent to keep pace with inflation (so it will likely increase to 1100-1300€ soon). I’ve asked how common it is that the units sit empty, and he said never – all the units are rented out and there’s a waiting list.
If it does happen that a unit isn’t rented out, there are around 20€ management fee due monthly. In that case, the rent could be decreased to attract a new renter.
I’ve asked about people who have sold their units, and the reasons given for the sales were:
1. someone inherited a unit and preferred the cash
2. someone had bought several as an investment object and resold individual ones at 20% markup
3. someone who “just didn’t like the idea anymore”, which I thought was strange?!?! It sounded like a disagreement had happened or something, but I’m not sure.

Arguments in favor of something like this as a Real Estate investment are:
Diversification away from paper assets, cash flow, easier to diversify geographically due to relatively low initial investment required, much less hassle and regulations than renting out living space, coupled to the real-world economy (as opposed to the capital markets).


Possible objections:

It’s illiquid.

A family member said that every one he knows who uses self storage does it as a hobby project and would stop immediately if money gets tight, indicating that it might not be very recession-proof. The counter-objection to that is that people need to store their stuff somewhere when they downsize due to a recession.

In case the buildings need work to ensure compliance with a changed code or something, the owners could be liable for the required money. I’ve written an email to ask about this, and to see the fine print of the buying contract.

It’s unclear whether the person who stopped liking the idea had a good reason for doing so???

I’d be very curious to hear what you all think of this idea. Is there anything else I should try to find out?

[jacob]

That would have been a good idea post-COVID lockdowns. Now, it's more of an average idea and possibly coming down from a high (at least in the US, you're still in Yurop, right?). IOW, self-storage does well when people are moving home-addresses beyond how much they usually move around.

For a concentrated investment (beyond buying paper), I think, the first question to ask is whether you're personally interested in this space? Dealing with people storing their unusables? Auctioning them off when they stop paying rent? ... that kind of thing.

[The Old Man]

This is NOT an investment. It is a business. Do you want to get into this type of business?

We are in the beginning stage of a recession that will go very deep. Is this the type of business that will do well in such an environment? This is the second question that you should answer before plunging in.

[Seppia]

Too many people are talking about it - so I’d stay away.
It was probably a great investment idea 5 years ago.
Plus, I would not be surprised if real estate value plummeted pretty much everywhere on planet earth in the near future.

[rube]

944 / 20.000 = 4.77%
It's a little higher than most dividend paying etf's, but also very concentrated and much less illiquid. Plus some of the details what others said.
I have (residential) rentals myself and would not buy commercial real estate against this (low) yield myself.

[Ego]

Has the company always managed the units for outside owners or is this a relatively new "opportunity" they are now offering investors? I ask because it feels like a brilliant way to move the risk of an economic downturn from their balance sheet.

Delinquencies, defaults and repossessions are the expensive, labor intensive part of this business. By selling the units are they turning these expenses into profitable activities by charging additional fees to manage them? Take a close look at the contract. What happens in your tenant stops paying? Do they charge you a fee to reposes the unit and sell the tenant's stuff?

[shelob]

Thanks a lot for the responses.
It's not a business in the usual sense, because they take care of dealing with tenants etc.

I'm still living in the EU, though that might change soon. I wouldn't want something where I have to take on a very active role for geographic reasons, which I don't have to here. According to their prospectus, the self storage trend is a lot further along in the US than in the EU, so the opportunity is still there. I'm not very confident in that assessment.

@Ego
I don't know if they started selling the units recently. Your theory sounds very plausible though, especially given the rising interest rates.
That would mean that they are essentially offloading the risks to the people they sell to, while keeping a profitable business with the management. Given that, the investment seems overpriced. If prices drop a lot but the self storage business model is still profitable, it might become a good idea again, but it doesn't seem to be one now.

I've thought further about why this seems so appealing, and it has to do with the solidity and tangibility of the investment. And sleeping well at night is important, but it's probably not worth paying that much for.

Thanks again for responding, I'm seeing more clearly now.

[Henry]

Two thoughts:

(1) You cannot discuss self-storage in macro economic terms. It has to be understood at a very, very, very, very local level. It's a basic equation: existing/anticipated housing units vs. existing/anticipated self-storage units. I don't know the equation, but research it and make sure you are not on the wrong side of things. There are also further factors to consider ie square footage of existing housing/housing starts. All these other issues you are mentioning - hobbies, recessions, interest rates, real estate trends, what my ex dog walker's alcoholic uncle thinks is incidental if not completely irrelevant;

(2) Don't do it. Ever. And most importantly never, ever do it at this scale. Self-storage is only truly profitable at scale. You are essentially AIRBNBing a room you own to a gaping asshole but within a complex web of ownership, licensing, management entities in a notoriously opaque industry. Take your 50K, index that shit, and don't look back.

[chenda]

@Henry +1

Renting out your garage to your neighbour to store his fishing tackle for a few extra quid is one thing. Anything much beyond that is likely to be more trouble than it's worth unless you go corporate.

I worked once for a removals company, a family run affair operated by two brothers (one of whom was a bit of a prick, but that's by-the-by) They had a large warehouse out in the countryside and did domestic storage as a sideline to the main removal business. It still required fork lift trucks, employees and all the usal annoyances which come from operating a business. It was only viable to them as a sideline as they already had much of the infrastructure to operate the removals business.

I think a lot of their customers were people who had taken short term jobs abroad or were considering immigrating or emigrating, and needed to keep their stuff in storage. (The aforementioned prick liked to rummage around in their private stuff looking for sex toys and other embarrassing items, which he would present to me giggling like a teenage boy and generally been a creep)

[Henry]

Most second hand office furniture companies started as movers as companies just left the old stuff behind.

I have spoken to many people in the self-storage business* and I have never made money with them. I honestly don't know how it works. But every time they call me I have to ask "In what capacity are you calling." Sometimes they are an agent, sometimes they are an owner, sometimes they are seeking a finders fee. And I can speak to the same person who is working in a different capacity from one opportunity to another. In the US, self storage is usually lacking in older urban areas, because population growth has outpaced capacity. The issue is they have to convert older facilities into newer facilities which is more expensive than building ground up in a rural/suburban location.

Also, it is becoming more of a service industry. The new model is for the user to call up management and have them bring back their winter boxes from the unit and bring their summer boxes back to the unit. I am assuming this is due to competition and over saturation. Plus, climate control is often desired. To me, buying one self storage unit is like buying one hotel room.

Edit: *One being a lead singer of a major 1970's shitty post-prog rock band that I loved when I was 13.

[shelob]

@Henry
I'm starting to see that this idea apparently failed the "don't invest in what you don't understand" rule. Thanks

[Sclass]

There must be a group of people to talk to who have done this. I have a friend of friend who owns three and says they’re the greatest thing. Is it possible to speak with one (or more) of the owners in the same building?

I wonder why they need to seek capitalization this way. Interest rates being what they are it would seem more convenient to just get a bank loan. There are many things I clearly don’t understand about this business.

I’ve had some interesting experiences at the ones near my home. They’re very popular among my neighbors but I don’t really understand the logic of paying to keep stuff stored away like this. But that doesn’t make it a bad investment. Most of my neighbors are just exploding out of their garages with cars, rec vehicles, Christmas decorations, and sports equipment. There is something kind of sick about it. You know, like not being able to let go.

So the interesting stories.
1) I bought a human crane (to lift an invalid out of bed into a bath tub) at one where the tenants actually lived in the units illegally. In the afternoon the doors opened up and BBQ grills just came out and the place became this wonderful hangout. Weed, food and love galore. They were like a village and treated me like an outsider. Once I got my crane I was hustled out of the party. As messed up as living in a bin sounds, I kind of wanted to be a part of this little pop up village.

2) a buddy of mine in the surplus electronics business used to bid on the contents of the units sight unseen after an eviction. One day he asked me if I knew what to do with VHS adult videos. Why? He showed me his latest win…thousands of old VHS porn tapes. They opened the unit and it was stacked solid with vintage porn. He asked if I knew how to sell it off.

3) I visited a college buddy at his home over spring break and his mom and brothers all yelled at him to clear his junk out of their unit. It was costing them thousands a year and the mom was sick of paying to store his high school football gear. She called all her boys home to take all their stuff before she closed it up. It sounded ridiculous. She had downsized to a condo when her sons moved out and she kept a lot of their stuff in this rental storage unit. The cost was driving her mad. From what I could see she was storing what they didn’t care to take from their childhood home. It went from the locker to the dumpster.

4) a coworker of mine downsized and moved years and years of his collections into one of these bins. They had all kinds of stuff in there from pre ban assault rifles, gun parts, military memorabilia, sports memorabilia, dirt bikes, sports equipment, arcade machines and vintage toys. It was burglarized and cleaned out by thieves.

So whenever I see these things I see them as silly and a waste of money. But somebody must be profiting off others’ folly. It sounds almost too good to be true for simplicity’s sake.

[Henry]

50K is a nice chunk. At least take time to do extensive due diligence. And don't ever ever ever enter a real estate transaction that does not permit an attorney review period. This is begging for it. Because in all honesty, your first post sounds not like you are buying something, but that you are being sold something and I don't really get a sense of confidence when I hear "A friend told me..." Self-storage has a wide array of business models. And it's never clear who actually owns them.

I don't judge people by what they do. Unless they are in human trafficking or some related field. I don't see myself breaking bread with a self-confessed pimp. I'm actually Ok with drug traffickers. I've known a few low end ones and they were nice. My nightmare scenario would be if the most beautiful woman in the world walked up to me and said "Henry, I'm a gym teacher, take me home." That would be a true test of principles. And its not say that everyone in the self-storage industry I have met is a scumbag, but there have been enough to impact my feelings towards the entire industry.

[Sclass]

Because in all honesty, your first post sounds not like you are buying something, but that you are being sold something and I don't really get a sense of confidence when I hear "A friend told me..." Self-storage has a wide array of business models.

This is a great self check that is applicable outside of this thread.

This thing sounds like a time share scam. Too much pitch. Why do they need your money anyway?

[PhoneticNachos]

I know a guy who wants to build storage space inside mountains/hills up in Alaska for survivalist/doomsday preppers to store goods in shipping container/ climate controlled storage facilities.

They pay yearly or monthly fees for each unit etc. It is still in the planning stages, but I could see similar alternative storage facilities working given the right location.

[icefish]

That's a fantastic plan for him-- when TSHTF, he'll know where all the good stuff is.

[Henry]

Who owns the mountains?

[PhoneticNachos]

Who owns the mountains?

I think it is more of a geographic intention, and not a literal mountain.

So more of a mountainous region.

It would make the most sense to build a bigger style concrete structure, or sink shipping containers in a pit style fill area with graded leveling, sort of like a pit mine.

I also had a client that owned an old abandoned missile silo in Nevada near Las Vegas, and he now rents it out on AirBnB and makes $4k+ a month from tourists.

[Henry]

I guess that's interesting. I don't know economic viability of such a niche market. The lure of self storage is that the actual storage units are so cheap. I'm not sure if units placed underground need stronger material. My other thought is how do you load them up? Is it done before they are placed underground. Because access seems to be an issue. I would also think regulations would be onerous based on the type of materials peppers value. Are there underground ramps for trucks? It's not like a soccer mom needing to get her kids bike out of it. Can users only gain entry during an apocalyptic event? Then you have a prepper traffic jam. Abandoned coal mines are used as storage (a/k/a underground garbage dumps) for environmentally contanimated building and ground material. There is a surprising number of things done underground.

[chenda]

I'm not sure it makes much sense to keep essential supplies in such a remote, isolated location at the control of some third party. When SHTF how you going to travel 1000s of miles to get there ?