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America’s stuff has to go somewhere… and that creates an unusually compelling commercial real estate business.
When I first heard about self-storage investing, I thought it sounded painfully boring.
We are essentially talking about four pieces of sheet metal, some rivets, a floor and a door. No granite countertops to install. No hardwood floors to refinish. No elegant lighting fixtures. No dramatic television reveal where the hosts gasp, cry, and discover shiplap behind a wall.
Multifamily seemed far more exciting.
But after studying self-storage closely, I discovered something important: the property may be simple, but the business is not.
A basic self-storage facility can be operated almost like a passive parcel of real estate. And that’s what a lot of prospective owners expect. (This fact creates a great opportunity for investors, as we will see!)
A great self-storage facility, however, is run like a sophisticated retail business, technology platform, marketing company, and local franchise. The contrast between those two approaches can create significant opportunities for professional operators and their passive investors.
While self-storage is certainly not risk-free, the sector offers an unusual combination of durable demand, fragmented ownership, operational upside, relatively low expenses, flexible leases, multiple revenue streams, and the opportunity to create value by increasing net operating income.
And there is one more benefit apartment owners immediately understand.
No toilets.
We will come back to that.
Self-storage exists because people accumulate more possessions than they have room to keep.
Some of those possessions are valuable. Some carry deep sentimental meaning. Some were inherited from parents or grandparents. And some have remained sealed in cardboard boxes through three moves because opening the boxes might force the owner to make a decision.
Americans use storage during almost every major life transition:
Businesses also use storage for inventory, records, tools, equipment, promotional materials, and seasonal merchandise. Online entrepreneurs may operate from their homes but need somewhere to keep the 900 custom coffee mugs they were certain would sell by Christmas.
Self-storage is not merely a place to store junk. It provides temporary or long-term space to households and businesses undergoing change.
That is one reason the sector can perform in different economic environments. During prosperous periods, people buy homes, renovate, relocate, consume more goods, and start businesses.
During difficult periods, they downsize, combine households, close offices, sell homes, and temporarily relocate.
Both prosperity and disruption can create demand for storage.
This does not mean every facility will prosper in every economy. Supply, competition, management, financing, and local demographics still matter enormously. But the underlying demand drivers are broad and deeply connected to ordinary human behavior.
People acquire stuff.
People move stuff.
People delay getting rid of stuff.
Self-storage stands ready to help with all three.
One of the most compelling characteristics of self-storage is the structure of the industry itself.
The United States contains tens of thousands of self-storage facilities. The number of U.S. self-storage facilities exceeds the number of McDonald’s, Subway, and Starbucks locations combined. Self-storage is not a tiny niche business.
Yet despite its size, ownership remains fragmented.
Many facilities are owned by individuals, families, and small independent operators. Some own only one property. Others own a handful of facilities within a local or regional market. Large operators and publicly traded real estate investment trusts own substantial portfolios, but independent owners still control a significant portion of the industry.
That fragmentation creates opportunities.
In many mature commercial real estate sectors, professionally operated properties are typically sold by one sophisticated institution to another. The buyer receives professionally prepared financial statements, modern property-management systems, institutional-grade reporting, and an asset that has already been optimized.
There may still be upside, but it is often harder to find.
Self-storage buyers, by contrast, may acquire properties from owners who have operated them successfully for decades without attempting to maximize every dollar of revenue. These owners may have low debt, loyal customers, and enough income to support their lifestyle. They are not necessarily motivated to adopt sophisticated technology or spend their weekends studying revenue-management algorithms.
They may be perfectly happy.
A professional operator may see untapped potential by acquiring a property like this.
To be clear, independently owned does not automatically mean poorly managed. It simply means there may be opportunities to improve marketing, pricing, technology, expenses, or physical operations.
Even after decades of institutional consolidation, approximately two-thirds of self-storage facilities remain outside the largest operators. The sector continues to offer opportunities for professional operators to acquire, improve, and institutionalize smaller facilities.
Fragmentation allows professional operators to pursue an attractive strategy: acquire a solid property from an independent owner and operate it more effectively.
The ideal target is not necessarily a disastrous facility with broken doors, six-foot weeds, and a manager who accepts rent in chickens. Severe distress can create opportunity, but it can also create severe headaches.
A more attractive target may be a property that is doing “just fine.”
It may be well occupied and profitable but have below-market rents, weak signage, poor online visibility, outdated software, limited security, no automated payment system, or unused land that could support expansion.
Here are several characteristics that may make a mom-and-pop property attractive:
Acquiring an existing facility can also be less risky than building from the ground up. The buyer receives an existing customer base, operating history, known expenses, and evidence of actual demand. Ground-up development requires the investor to estimate what customers might do. An existing property reveals what customers are already doing.
That does not eliminate risk. The buyer still must verify occupancy, collections, local supply, property condition, competitive rents, and the accuracy of the seller’s financial records.
But the combination of existing cash flow and identifiable operational upside can be powerful.
A small facility can be operated as a passive parcel of real estate.
Collect the rent. Fix the gate. Replace a few doors. Keep the grass reasonably short. Repeat.
That approach may provide a comfortable income for a long-time owner. But it is quite different from operating a facility as a professional, revenue-maximizing business.
Best-in-class operators create repeatable systems across their properties. They standardize marketing, leasing, customer service, collections, security, reporting, pricing, maintenance, and employee training. Their facilities may have different layouts, but the customer experience and operating procedures become consistent.
This is why I compare professional self-storage operations to a franchise.
A great operator may use:
The individual improvements may appear small. Together, they can transform the economics of a property.
This creates a critical distinction for passive investors:
Self-storage can be a passive investment, but it is not a passive operating business.
The investor may receive distributions without managing the property. Someone, however, must actively execute the business plan. The investment’s success depends heavily on the quality of that operator.
A property does not optimize itself merely because the doors are painted an attractive shade of blue.
Imagine that you rent an apartment for $1,500 per month and receive notice of a 6% rent increase.
Your rent is rising by $90 per month, or $1,080 per year. And the neighbors are noisy. You may decide that it is worth looking at competing apartments.
Now imagine that you rent a storage unit for $150 per month. Your rent rises by 6%, which equals $9 per month.
Are you going to reserve a truck, buy packing supplies, recruit several reluctant friends, spend a Saturday carrying furniture, and move everything to another facility to save $9?
Probably not.
Your friends certainly hope not.
Self-storage tenants often remain longer than they originally expect. A customer may begin with, “I only need this unit for two or three months.” Years later, the same customer is still paying monthly rent while promising to clean out the unit during their next vacation.
Automatic credit-card or bank-account billing can make the tenant even less sensitive to the monthly charge. Unlike apartment residents, storage tenants do not routinely gather in the hallway and compare rental rates. They may never know that a customer two doors away received a different promotional price.
This combination of relatively low monthly cost, physical inconvenience, automatic billing, and emotional attachment to stored possessions can produce a sticky tenant base.
Month-to-month leases also give operators pricing flexibility. Rents can be adjusted more frequently than they could under long-term commercial leases.
A wise operator still needs balance. Excessive or poorly communicated increases may drive customers away, damage online reviews, and create an opening for competitors. Sticky tenants should be treated as valued customers, not hostages.
Self-storage demand is often described as being driven by the “Four Ds”:
Death, divorce, dislocation, and downsizing.
I would add several more, including deployment, decluttering, development, and the discovery that your new house has approximately half as many closets as the real estate photographs implied.
Economic expansion creates demand through home purchases, relocation, business formation, remodeling, and consumer spending. Economic contraction can generate demand through downsizing, business closures, estate transitions, and household consolidation.
Families moving from larger homes into smaller homes, from smaller homes into apartments, or from apartments into less expensive housing may still require somewhere to keep their possessions.
Storage represents a relatively small portion of most household budgets, making it less likely to be the first expense eliminated during a financial setback. I have an elderly relative on an extremely fixed income who will probably never use her stored stuff again. Yet her $250 monthly storage bill is paid month in and month out... year in and year out.
The proper term is recession-resistant, not recession-proof.
Every facility remains subject to its local market. A poorly located property with too much debt and three new competitors nearby is not protected by a clever slogan.
But the diversity of demand drivers can provide a degree of resilience that investors find attractive.
Self-storage generally has a simpler physical plant than apartments, hotels, senior housing, or office buildings.
There are no kitchens inside the units. No showers. No dishwashers. No carpet that must be replaced after a tenant leaves. No resident calling at midnight to report that water is pouring through the ceiling.
There are roofs, gates, doors, pavement, lighting, security systems, and sometimes substantial heating and cooling equipment. Those items require maintenance and capital reserves. Property taxes and insurance can also represent significant expenses.
But compared with many real estate sectors, the ongoing operating structure can be relatively straightforward.
This lower-cost structure can make additional revenue especially valuable. If a facility adds $1 of revenue without adding $1 of expense, much of the difference should flow directly to net operating income.
And as we will see, increased net operating income should create substantial additional property value.
Self-storage is both a real estate business and a retail business.
Rental income from the units is the primary revenue source, but it is not the only one. Facilities can sell locks, boxes, tape, mattress covers, packing supplies, and other moving products.
No, they probably should not sell your children’s school raffle tickets.
Facilities may also offer/charge:
Some value-adds require capital. Others require little more than new policies, employee training, updated software, or better execution.
Truck rental is a good example. A facility may earn commissions while creating a natural source of new storage customers. Someone renting a moving truck is, by definition, moving something. Asking whether that person also needs a storage unit is not exactly a wild leap of marketing genius.
Administration fees, late fees, automated payments, timely collections, moving-truck rentals, and point-of-sale products may increase revenue with limited capital investment.
Self-storage owners may be able to create additional rentable space on unused land.
An operator could add traditional drive-up units, multi-story climate-controlled buildings, covered parking, or outdoor vehicle storage. Existing units may also be divided or combined to match local demand.
For example, a facility may have too many large units and a waiting list for smaller ones. Reconfiguring selected units can improve both occupancy and revenue per square foot.
Expansion is not automatically successful. Operators must understand existing supply, unit-size demand, construction costs, permitting, visibility, access, and expected lease-up. Building more units because land is available is not the same as building units customers need.
Still, expansion provides a value-creation opportunity that many stabilized properties lack. A well-located facility with excess land may offer an investor both current cash flow and future development potential.
The most important concept in the self-storage investment case may be the commercial real estate value formula:
Property Value = Net Operating Income ÷ Capitalization Rate
Net operating income, or NOI, is the property’s operating revenue minus its operating expenses, before debt service and certain capital costs.
Suppose a storage facility generates $500,000 in annual NOI and comparable properties trade at a 6.5% capitalization rate.
Its estimated value would be:
$500,000 ÷ 6.5% = approximately $7.69 million
Now suppose the operator improves marketing, raises occupancy, adjusts rents, adds tenant insurance, introduces administration fees, reduces unnecessary payroll, and increases NOI to $600,000.
At the same 6.5% cap rate, the estimated value becomes:
$600,000 ÷ 6.5% = approximately $9.23 million
The operator increased annual NOI by $100,000 but potentially created approximately $1.54 million in asset value.
This is an approximately 20% boost in asset value. But if that asset utilized 67% leverage, that is a theoretical 60% boost in equity value. Not a bad ROI!
This is why seemingly minor operational changes matter so much. Buyers of stabilized commercial real estate are primarily purchasing an income stream. They are also purchasing concrete, steel, doors, pavement, and land, but the income produced by those assets drives the valuation.
A skilled operator’s goal is to expand the numerator and, when market conditions permit, compress the denominator.
Capitalization rates can move in either direction, and operators cannot control the broader market. But they can often influence revenue, expenses, occupancy, customer experience, and the property’s physical condition.
That is the essence of forced appreciation.
Commercial real estate returns can be divided into four categories. They can be summarized by the acronym CAPT:
It is not the finest acronym ever created. But it is better than CATP. (Say it aloud if you didn’t get it!)
Cash Return
After paying operating expenses, debt service, capital reserves, and management costs, the remaining cash may be distributed to investors.
Actual distributions vary widely based on the property, leverage, business plan, and stage of the investment. A facility undergoing renovation or expansion may distribute less initially while management reinvests capital to grow future income.
Appreciation
Appreciation may come from increasing NOI, improving the property, expanding rentable space, or changes in market capitalization rates.
The most controllable component is usually NOI growth. A disciplined operator attempts to create value rather than merely waiting for the market to become more generous.
Principal Paydown
When a property’s mortgage amortizes, a portion of each payment reduces the loan balance. The tenants’ rent helps pay down the property’s debt and gradually increases investor equity.
Investors may not see this return in their quarterly distributions, but it becomes visible when the property is refinanced or sold. Storage tenants effectively pay down the mortgage while the investor sleeps.
Tax Benefits
Commercial real estate owners may benefit from accelerated depreciation and other tax provisions. Depending on an investor’s circumstances and the structure of the investment, taxable income may be lower than the cash distributed.
Tax treatment is highly individual, and investors should consult qualified tax professionals. The important point is that total return is not limited to the quarterly distribution shown in a bank account.
Large operators and REITs often seek stabilized properties with predictable income and professional systems.
They may prefer portfolios of similar assets because acquiring multiple properties in one transaction reduces the time and expense required to assemble a portfolio one facility at a time. Standardized operations can also create efficiencies in staffing, marketing, technology, insurance, and reporting.
A professional operator may acquire individual mom-and-pop properties, improve them, create uniform systems, and eventually sell the stabilized portfolio to an institutional buyer.
An institutional buyer may pay a portfolio premium for a cohesive portfolio than it would pay for the same properties purchased separately because much of the operational work has already been completed.
A premium exit should never be assumed. Markets change, buyers change, and capitalization rates change.
But a property that is clean, stabilized, professionally operated, and supported by reliable financial records is likely to attract more potential buyers than a property held together by handwritten ledgers and the manager’s remarkable memory.
Some investors may read all of this and think:
“That sounds interesting, but I do not want to buy a storage facility, hire employees, monitor rental rates, negotiate with U-Haul, or investigate why the front gate has been open since Tuesday.”
That is understandable.
Investors can gain exposure to self-storage through publicly traded REITs, private funds, or individual syndications. Each approach has different advantages, risks, fees, liquidity, tax treatment, and diversification.
A private syndication generally allows investors to participate in a specific property or portfolio managed by a sponsor. A fund may spread capital across multiple facilities, markets, operators, or acquisition dates.
My firm invests passively in self-storage and other commercial real estate asset types alongside our investors. Our role is not to personally operate storage facilities. It is to identify, evaluate, and invest with experienced operators who have demonstrated the ability to execute their business plans.
An American investor living in Europe who had been considering the challenge of owning small rental properties from across the Atlantic. After learning about passive syndication investing, she had a realization. She asked herself a simple question:
“Why should I work harder than I need to… to make less than I could?”
That question captures one of the primary reasons investors choose passive commercial real estate. They want exposure to the economics of commercial real estate without personally managing the operations.
But passive does not mean effortless.
The investor must carefully evaluate the sponsor, track record, debt structure, market, fees, assumptions, reporting, conflicts of interest, and downside scenarios. Passive investing removes property management responsibility. It does not remove the need for careful judgment. In fact, it magnifies it.
Self-storage has many attractive qualities, but a great asset class can still produce a bad investment.
An investor can lose money by overpaying, using excessive leverage, underestimating new supply, assuming unrealistic rent increases, hiring the wrong manager, neglecting capital improvements, or buying in a declining location.
Creating substantial value for investors requires experience, strong operations, relationships, disciplined execution, and hard work. It is not free or easy money.
Investors should examine both the property and the people managing it. A great operator can often make a profit with a mediocre asset. But a mediocre operator can lose its investors’ capital on the best of assets.
A beautiful underwriting model cannot compensate for a weak operator. A great operator cannot always overcome an absurd purchase price. And neither can repeal the laws of mathematics, though many offering memoranda have made heroic attempts.
The goal is not merely to invest in self-storage.
The goal is to invest in the right self-storage assets, acquired at sensible prices, financed responsibly, and managed by capable operators whose interests are aligned with their investors.
The basic investment case can be summarized in a few powerful characteristics:
Self-storage serves customers experiencing common life and business transitions. The industry is large yet fragmented. Independent ownership can create acquisition opportunities. Tenants may be sticky, leases are flexible, and operating costs can be relatively low.
Professional operators have numerous ways to increase revenue, control expenses, improve occupancy, expand facilities, and create value. Investors may benefit through cash flow, appreciation, principal paydown, and potential tax advantages.
The buildings are simple.
The business is sophisticated.
The opportunity lies in the gap between the two.
In the next article, we will move beyond the timeless investment thesis and examine how self-storage performed through a challenging market cycle. That follow-up will explore what changed, what did not, and why local markets, conservative financing, disciplined underwriting, and operator quality matter more than ever.
Self-storage may never be glamorous.
But when a boring property combines durable demand, operational upside, and strong management, the investment results can be anything but boring.
This article is intended for educational purposes only and does not constitute investment, legal, accounting, or tax advice. All investments involve risk, including the potential loss of principal.
Written by
Paul Moore is the Founder of Wellings Capital. After graduating with an engineering degree and an MBA, Paul entered the management development track at Ford Motor Co. He later scaled and sold a staffing firm to a public co. in 1997. Paul began investing in real estate in 1999 to protect and grow his own wealth.
He completed over 100 real estate investments, appeared on HGTV’s House Hunters, and developed a subdivision. After completing three commercial developments, Paul narrowed his focus to commercial real estate in 2011. Paul is married with four children and lives in Central Virginia.
Press: Paul was 2x Finalist for Ernst & Young’s Michigan Entrepreneur and has contributed to BiggerPockets and Fox Business. He is the author of two real estate books: The Perfect Investment and Storing Up Profits. Paul co-hosted a wealth-building podcast called How to Lose Money and he’s been a featured guest on 300+ other podcasts including the BiggerPockets Podcast, The Real Estate Guys, and Entrepreneur on Fire.
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