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A “Hidden” Real Estate Market Generates More Money Per Square Foot Than a Las Vegas Hotel Room!
9:22 AM
Greetings!
My friend P.S. (RIP buddy) launched what would become a multi-billion dollar real estate market in the 1970’s.
This “hidden” real estate is still making entrepreneurs a lot of money.
In fact, five people on the Forbes 400 Richest List have ties to this phenomenal market.
And the market keeps growing despite the recession.
More important, the money making potential of this baby is still under the radar!
One of the reasons the market remains hidden is because it’s not “sexy” and it doesn’t have enough “flash” for financial talk shows.
The best part is you don’t have to be a billionaire or even a millionaire to make money in this market.
Plus it’s fairly easy to get involved, and especially as a passive investor.
You don’t need special training, college degrees, or real estate expertise. These things won’t hurt you, but they’re not required.
The market I’m talking about to is “self storage” real estate.
And here’s the kicker…….
You can start out small and build this business in a way which suits your lifestyle.
My good friend P.K. in Henderson NV started a small venture about a ten years ago and now controls three self storage investments.
If you like the idea of residual income (without the headaches of typical real estate investments) this could be the perfect opportunity for you.
My friend P.S. whom I mentioned, developed a unique twist in this market called a self storage real estate investment trust (REIT).
You’ll like this……
Little-Known “Investment Trust” Angel
A self storage real estate investment trust or REIT is similar to conventional REITs. And it can be an incredible tool for generating substantial wealth, and in many cases it can reduce tax burdens.
If you’re not familiar with this concept, I’ll break it down for you.
A REIT is a tax designation for a corporation investing in real estate. A REIT can reduce or eliminate corporate income taxes.
On the flip side, REITs are required to distribute 90 percent of the income to shareholders. This income may be taxable in the hands of the investors.
The REIT structure was designed to provide a similar structure for investment in real estate as mutual funds provide for investment in stocks.
Like other corporations, REITs can be publicly or privately held.
Public REITs may be listed on public stock exchanges like shares of common stock in other firms.
Self Storage Wildfire
The modern self storage business in the U.S. began in Texas in the late 1960’s.
But self storage can be traced back to the United Kingdom more than 800 years ago!
People are still buying “stuff” and running out of room in their houses, apartments and businesses so they need somewhere to put it.
Today, you can find thousands of self storage buildings along major highways throughout the U.S., Canada, South America, the U.K., and Australia.
However, the neat thing is this business is not limited to prime locations along major highways.
You can find self storage properties in almost every town, village and rural area around the world.
Here’s the deal……
The average self storage facility consists of about 100 storage units.
In larger metropolitan areas you can find facilities with 500 units or more.
I toured a facility in Orlando, Florida recently with more than 2,500 units!
The dimensions of the storage rental units vary. But the most common sizes are 5’ x 10’, 8’ x 10’, 10’ x 10’, and 10’ x 15’.
Customers can rent a self storage unit to customers for 30 days or as long as 5 years or more.
The average rent for a 10’ x 10’ storage unit in the U.S. in 2010 was $79 per month, according to Inside Self Storage magazine.
The rent in larger cities can be as high as $300 a month.
But get this……another surprising source of revenue in this business is late fees.
Late rental fees –typically run $5 to $25 per month.
Another source of revenue is the auctioning off of storage-unit contents when renters don’t pay within the certain period of time.
One of the hottest shows of the year is Storage Wars on A&E. It details the self storage auction business…..you gotta love it!
Anyway, an auction occurs when the owners have forfeited their stored items by failing to pay their rent. As an owner or manager have to clear out contents anyway to make room for a new tenant and selling the contents and make up for at least some of the money the renters owe.
Portable self storage is taking off too.
The biggest player in the portable self storage business is PODS (Portable On Demand Storage). Home Depot and other large retailers are getting into the game now too.
In the 1970’s and 1980’s, self storage owners were buying low budget properties often hidden from view by other buildings and structures. This is not the best formula according to 35-year self storage veteran Paul King of Las Vegas.
Here’s what Paul told me:
“In my experience the most profitable self-storage operations are those located on the way to a grocery store, Wal-Mart, gas station, or home improvement store. It doesn’t hurt if your self storage facility is located on a major road with super-easy access.”
Current trends back up Paul’s opinion.
Today, mega-franchisees are buying prime frontage as well as retail lots, and paying big bucks for them.
Sovran Self Storage Inc. a New York based company has nearly 25 million square feet of self-storage in 381 facilities.
There are hundreds of companies which serve to the self storage industry, too.
You’ll find mini-storage consultancies, brokerages, and financing companies that specialize in this market. I’ll cover some income opportunities’ in these markets in future issues.
Self storage development seminars are selling out nationwide.
If you think that’s great, then listen to this…
What’s the Big Deal with Self Storage?
The self storage market is considered by many real estate entrepreneurs to be a true “cash cow” venture.
This simply means operating expenses are relatively low and owners often realize more revenue per square foot than other real estate investments.
The self storage market is almost recession proof.
I know everyone says his or her market is “recession proof”.
But just think about it.
The economy is hurting.
Real estate foreclosures, bankruptcies, and subprime mortgage meltdowns are at historical highs.
But have you seen any self storage businesses or REIT in this market go bankrupt recently?
Most of the self storage operations which are not overleveraged with first class management (with an eye for direct marketing) are doing fine.
Why is the self storage market flourishing when so many others are going under?
One reason is when families are forced to move out of their homes due to financial difficulties they usually need someplace to store their goods – enter self storage!
There are other reasons too.
But self storage has a relatively small monthly charge.
Therefore self storage bills are often grouped together with other utility bills like electricity, phone, Internet, cable, and water.
The delinquency rate in self storage is typically much lower than home or apartment rentals.
Business owners have found self storage useful in a downturn too. They can rent smaller office space and supplement the lack of space with self storage.
Let’s Do the Math! Comparing Other Real Estate Ventures with Self Storage
Here’s an example of what an entrepreneur in Atlanta did recently:
He purchased an older, three-story building in a rundown section of Atlanta for $550,000 (owner-financed) and converted it to a mini-warehouse consisting of 110 units. The mini-warehouse is currently 85 percent full.
The monthly rent for a 10’ x 10’ unit is $100. The math is pretty simple: 93 units x $100 = $9,300 per month in revenue. The mortgage payment is $1,100, and there are a few additional costs because of the location. There expenses include a security system, as well as a full-time manager.
Still, this is an example of how an older building can be converted to a profitable self storage business.
Here’s another example:
An entrepreneur in north Chicago has 75 10’ x 10’ units, for a total of 7,500 square feet. (Actually, it’s a bit more – but we’ll simplify it for this example.)
Her potential revenue (with 75 units rented at $225 per month) is $16,875 per month. $16,875 divided by 7,500 gives her $2.25 per square foot.
Meanwhile, the typical 2,500-square-foot, three-bedroom home rents for about $1,500 per month. And $1,500 divided by 2,500 equals only $0.60 per square foot!
Can you see why self storage facilities are so attractive?
Let’s look at a medical office building...
There’s a new 100,000-square-foot medical building in Las Vegas that offers office space from 1,485 to 7,200 square feet in size.
I’ll use a 2,500-square-foot space (which is about the average) for this example.
Okay, the rent for this space goes for about $1.50 per square foot, or $3,750 per month.
This particular building is 40 percent occupied. With that occupancy rate, let’s say five 2,500-square-foot office units are each generating $3,750 per month for total monthly revenue of $18,750.
And $18,750 divided by 100,000 square feet equals almost $0.19 cents per square foot in actual revenue.
If the building was 80 percent occupied and the revenue was $120,000 per month, the actual revenue would still come out to only about $1.20 per square foot.
What about a strip mall?
Let’s take a look at a typical strip mall near a nice area in Austin, Texas. A 4,000-square-foot space was recently available for $4,500 per month.
There are 10 units in this particular mall. Three of them were empty.
Four 4,000-square-foot units were currently occupied at $4,500 per month each.
Three 2,500-square-foot units were currently rented at $2,750 per month each.
Four units x $4,500 = $18,000.
Three units x $2,750 = $8,250.
Total revenue: $26,250
The total retail space in this strip mall is approximately 36,000 square feet. With the parking lot, the actual total is about 50,000 square feet.
Here’s the math: $26,250 divided by 50,000 square feet equals only $0.52 cents per square foot!
Not only is the potential profit per square foot of self storage mind boggling – especially as compared to most residential and commercial properties – but get this: self storage does not have most of the headaches typically associated with real estate – like plumbing, live tenants, and wear and tear. On top of that, the cost of utilities for each unit is a bare minimum. Can you say overhead light?
But before you get into this business you have to do your homework:
1. Locate and identify every self storage facility in your area or state.
2. Physically look at all the locations – and take notes. Walk around the property. Rent a traffic meter and stick it on a tree or utility pole (check local regulations to make sure its okay). Observe the condition of the buildings, fences, and traffic to and from the facility.
3. Talk to the managers of the facilities if you want to, but only as if you are a customer looking to rent a unit.
4. Spend 30 minutes per day educating yourself on the industry. Most people don’t do this, but that’s how you become an expert.
5. Subscribe to the industry’s main trade publications (listed below).
6. Do the math!
Self storage is a great business opportunity! The profit margins can be as high as 70 percent.
And one of the most attractive aspects of this business is that there are no people in the units! If you’ve ever been landlord, you know what I’m talking about.
There are ways to really leverage your profit in this industry, too, including my friend’s concept of self storage real estate investment trusts (REITs).
There are also investment partnerships that acquire only the most profitable facilities.
Real Estate Collapse Actually Helps this Business Grow
As I said at the beginning of this issue, my friend was instrumental in developing the self storage REIT market.
He would always tell me, “People will always store stuff. And they often have to store even more of it when times are bad or their real estate investments go south.”
Take this advice to heart.
People will always store stuff. And when real estate investments go sour, people have a lot more stuff to store.
InDetroit, for example. Real estate sales have been plunging for two years in this city, with no end in sight. There are no buyers. In many ways Detroit is a war zone today.
But the self storage business in Detroit is actually pretty healthy. I was unable to find any self storage businesses for
