A sexy business opportunity - Self Storage centers

Thank you for this totally original and thoughtful idea. 

I take it you don’t spend much time on X (Twitter)

I would disagree, there is actually a lot that can break.  Also the pricing metric is way out of wack given the high levels of automation that are now avilable in the industry.  You used to be able to by storage centers for 3 - 4x profit on the business with the land.  Now you are looking at 5 caps on the RE. 

I think self storage is similar to car washes and laundromats in the sense that they've all jumped the shark a bit.  Like the story is out there, there's an active buyer market so you'd have a hard time finding one for sale at a good price.  But still probably a good opportunity if you can find a place that needs a new one.

the secret was out about 8-10 years ago. serious consolidation in that time with the big REITs buying out the mom/pops and regional players. i've known people to sell, res-start, sell, re-start, sell.. all to the same REIT in that time. seriously competitive now. I know another player that has been trying to source sites for the past 4 years and they have only identified one worth buying... v competitive

Its a good business model. Two of my friends bought one out and have meaningfully increased the monthly cash flow and the business has probably doubled or tripled in value over the course of 5 years. Both of them have other jobs (rather entrepreneurial in nature, e.g., day trading), but this strategy can be quite effective. 

The key is finding an undervalued one with an owner who has half assed the mgmt process and is looking for a quick exit. Buying one at the right price that can actually be effectively improved is the challenge. Just my $0.02 from someone who hasnt actually explored this type of endeavor. 

Curious what others here think the next Storage / Car Wash / SMB craze will be? 

A guess from me would be pet services (I know vets got rolled up last cycle thinking more pet and pamper care).

Anyone who buys an a real estate asset because "it's low maintenance" is going to lose a lot of money.

All real estate requires maintenance.  If you want an investment which doesn't require you attention after you buy it, stick to financial instruments.  Self-storage is less maintenance than multifamily, perhaps, but it still requires and ongoing commitment of time and energy and money.

One of my mentors through my church owns a large self storage portfolio and property management company - they are the largest operator, manager, and developer in the Midwest. He started this back before self-storage became an institutional product. He believes in a very hands on, management intensive approach to both his own portfolio and the ones he manages. He would make the argument that it is not a passive business but there’s more than one way to butcher the pig. 

Does anyone on this thread use storage lockers or know people who do? 
 

have always heard it was a good business but struggle to think of anyone I know of that actually uses them. 

Isaiah...plz stay in the off topic forum. We don't need your insight here...

A business friend owns and operates self storage facilities in the Midwest.

every other day...

- someone rams through the gate to break into some/all of the storage units
- fires are more common than you think
- illegal items stored that may leak, destroy your property, or harm other users goods. or stolen items being stored. or drugs.
- rodent infestations are common, again might destroy quite a bit items that are stored
- floods

I agree that not all/many of these risks will happen at once or even at all in your own storage business. But they will eventually happen.

there are also many businesses that combine some of the mentioned business types, i.e.

https://www.google.com/maps/@31.2527993,-85.3880638,3a,90y,187.79h,92.5…

The self storage business is also turning digital. electronic keys, locks, app based member onboarding, share storage surveillance to members, and more are features that customers are now asking for. Converting all of this is expensive.

also - attrition. people will stop paying and abandon their units. you will be the one who evicts them and then sells the goods, ..

This showing up on WSO means it’s the top.

Self storage has gotten reallyyyyy out of hand. It's not "passive income" by any means, but less intensive htan multifamily. 

Cap rates have gotten squeezed – still trading at mid 5's in T1 markets. 

Commenting half to subscribe to this as this is a fascinating topic. Love to hear how others are chasing things to the bottom…

on the car wash side it’s honestly pretty straight forward: a lot of car washes were built 30-40+ years ago before the major computer systems were made that the entire modern world works on today, so first it’s entirely impossible to just “update” the computer systems to change the equipments uses, etc, to modern standards (end to end systems with the tickets feeding the cash register and the exit ticket). So, what this means was that a LOT of money was needed to updated these lots to newer technology and infrastructure, and when you couple minimum wage skyrocketing and labor subsiding majorly at this skill level, it’s was nearly essential for mom and pop and smaller groups to take on private equity investments simply to survive, but at the time it appeared they could both cash out and keep steady income for a while and grow the business. Most used the platform operator to continue to run and enhance operations while they pumped money in, took advantage of extremely friendly depreciation schedules to offset other passive and direct income elsewhere, and tried to build and sale lease back as a NNN investment to others who wanted to take on depreciation or other tax benefits. Well, it worked the first few batches of car washes and the idea started to boom. So now all of the sites in between the original full service and these new express washes were scooped up by VERY well healed local, niche, operators, which means that nearly every market is now highly competitive, there’s no real need to go to the more expensive full service wash and the express washes have subscriptions that you can’t pass up. 

Well, the TPGs of the world are learning the HARD way what happens when interest rates change and people’s desire to cheap, risky NNN is basically nonexistent. Things that were listed for 3.75-4.5% cap rates can be had in the 7-8% range today with no real upside, sticky high leases to a company that isn’t getting all of its money back like its original investment strategy relied on, and you are probably expecting a further recession in consumer spending on thing like: expensive car washes. 
 

The toughest part is these groups took nearly every single remaining good piece of car wash real estate and are stuck with them, and no one can truly take on big projects that are home runs like these guys did. With capital being as expensive as it is and a lack of clear confidence in the car wash retail market, it’s a brutal time to be investing in it. You have to decide if you would pay for a RIGHT to a ground lease to just simply cash flow an own the building and have the responsibility for taking care of it, or you spend a bunch of money on both the real estate (land) and also operate yourself. In this scenario, the return requirements need to be HUGE from the op business for this to make sense with land prices and construction costs what they are today. 
 

Probably wayy too much information and extremely poorly written, but that’s about 35 years of direct car wash ownership in CA’s worth of info right there… do with it what you will :) 

I've been thinking about this lately, but instead am primarily evaluating it as a long term covered land play and otherwise for general diversification. 

Self storage tenancy tends to be sticky as it's a relatively nominal cost for users, and maintenance is about as minimal / LL friendly as it gets in terms of a CRE business outside of maybe IOS. And unlike laundromats or maybe even car washes, you're hopefully not contaminating the soil with chemicals and potentially jeopardizing your exit by turning it into an environmental nightmare.  

In terms of the income, todays yields are likely going to be too thin in any reasonably attractive (high basis) locations esp where interest rates currently are to be meaningfully attractive. But if it at the very least services your debt today at its current occupancy and property management structure, you've bracketed your operational risk and you know where your upside lies if demand improves. Provided there's a market for fixed rate debt, you're also able to bracket your risk with financing - you know where the floor on your cost of debt is, with potential upside coming via a refi if market conditions improve. 

 Assuming these are achievable, if you're able to identify a site that's perhaps in a tertiary location today, but is one that you believe lies along a path of development (highways being built alongside it, subway lines being extended, etc), I think you could presumably maintain its use as self storage, collect the coupon, wait for development to catch up to the area, and slowly work through entitling the site for other commercial uses (perhaps partly funding it with your cash flows). At this point, you either exit via selling the entitled site, or go find a co-gp / LP to redevelop the site. 

TLDR: your base case is the self-storage facility itself. You clip a coupon, it carries relatively light management, and is a form of diversification in your portfolio. But even if you're able to get an attractive yield, I still think the ultimate value driver and upside case is neighborhood appreciation and exiting via selling the entitled land, or co-GP'ing / LP'ing up and redeveloping it if market conditions warrant it. 

Curious what folks thoughts are.