Can you retire comfortably with $750,000 in cash or stocks? Not likely. Can you take $750,000, build a self-storage business and retire comfortably? Absolutely! Facility ownership can be an outstanding path to an early, prosperous retirement.
Let’s say your definition of “comfortable” retirement income is $250,000 per year. If that’s the case, a $750,000 investment with a healthy return of 10 percent would last just four years. Even if you cut back your income expectations, the money wouldn’t last through your golden years, particularly if you live to a very ripe old age.
By comparison, $750,000 invested in your own self-storage business could provide you with $250,000 in annual income for life, even into future generations. This is inflation-proof because profit can increase yearly by simply raising rental rates. On top of that, you can add to your real estate savings jackpot every year. Typically, the investment can reach multiple millions in just a few short years, particularly if you build a new facility vs. pay top dollar for an existing property.
Most multi-millionaires in the United States build their wealth through real estate or by owning their own business. If fact, statistics suggest real estate success has helped create 90 percent of millionaires. Self-storage combines the best of both worlds because of the following four factors.
Leverage. Real estate is one of the easiest assets to leverage into generational wealth. Self-storage is extremely loan-friendly due to calculable profits, and the industry has one of the lowest failure rates of any real estate investment.
Cash flow. When you buy or develop self-storage, it’s easy to predict cash flow. Remember, though, that a third-party feasibility study conducted by an industry expert is important to confirm that your expectations are reasonable for the investment.
Appreciation. Commercial real estate prices will always rise in the long term due to limited land availability. Everyone wants to own some, but not everyone can. Self-storage appreciates because it’s a real estate business; but it also responds well to strategic action. For example, annual rental-rate increases can typically outweigh any bumps in expenses.
Practicality. Compared to other ways to make millions of dollars, self-storage is the most practical for many owners. For starters, it costs less than other businesses and has fewer maintenance-related issues and expenses. Storage facilities aren’t equipped with the same level of plumbing, insulation and electrical as hotels and other real estate endeavors.
When you look to enter a business, you want one in which demand and income are increasing. Self-storage is a $39 billion industry that’s growing by mor than $1 billion dollars per year. Demand continues to increase based simply on shifts in how Americans live.
For example, people who are moving account for the highest portion of rentals. U.S. consumers remain very mobile, with people continuing to move for jobs and other reasons like weather, amenities, and upsizing or downsizing. The second highest percentage of renters comes from local residents, or those who aren’t moving. Data suggests that the larger the house, the more likely the resident is to use self-storage. At the same time, younger consumers are moving to urban areas with much smaller houses; and a lack of household storage leads to self-storage use. Across the board, even the average length of stay for most self-storage tenants is increasing.
Another practical advantage to consider is self-storage has proven resilient during down economies. The COVID-19 pandemic has been extremely hard on most businesses, from restaurants to wineries to travel and tourism. Self-storage, on the other hand, has continued to function as an essential business. In retrospect, 2020 turned out to be one of the best years for our industry.
Finally, self-storage requires fewer employees and is less demanding on ownership than most businesses. With a manager-driven system, it requires much less of an owner’s time to operate and make the same profit compared to other pursuits. Where else can you become a multi-millionaire in three to five years by clocking a scanty five to eight hours per week?
Consider, too, that your real estate income can be offset with deprecation for tax savings, which is a benefit you don’t get in non-real estate investments. While there’s no guarantee, the outlook for self-storage looks good for many years to come.
Stake in the Game
Intrigued? Well, let’s look at what you get for $750,000. If you qualify with an equity investment of 15 percent down, you’ll have the ability to borrow $5 million from a Small Business Administration (SBA) lender. The good news is you can also borrow to cover your soft costs (design, professional and permit fees, etc.), and the carrying costs (bills, staff payroll, mortgage, etc.) to the breakeven point.
Not long ago, SBA lenders weren’t permitted to offer self-storage loans, so you needed three times the equity. Under the current scenario, you can now invest $5.75 million (your initial $750,000, plus the SBA loan). This is a substantial project, one that isn’t just a hobby business, one that can be expanded as warranted.
Running some numbers, let’s assume 5 acres of land costs $800,000 and you have $1.2 million in soft and carrying costs. Subtracting both from your $5.75 million total investment leaves $3.75 million for construction. If site work and building costs are $60 per gross square foot, you can build a 62,000-square-foot facility.
This is just your starting point. Most developers use an SBA loan as a steppingstone and then refinance in three years with a traditional loan once their facility is full and the SBA prepayment-penalty window is closed. By this time, they’re often ready to either add a 20,000-square-foot expansion (with nothing down) for significant additional profit or take sizable cash out and still achieve a six-figure net operating income.
So, you’re probably wondering: If it’s so easy, then why doesn’t everyone become a self-storage millionaire? While being a storage owner is easier than working 9 to 5 for 40 years, it still brings plenty of challenge and risk. There’s also a significant barrier to entry, as most people don’t have $750,000 in cash to invest. Finally, many people simply aren’t ready to own their own business.
To succeed in self-storage, you need expertise, time, money and a strategic system that works in your market. Self-storage is tantalizing; but it’s just hard enough that most people will never own a facility, which makes it a great opportunity for the rest of us.
Marc Goodin is president of Storage Authority LLC, a self-storage franchise, and the owner of three self-storage facilities that he personally designed, built and manages. He’s been helping others in the industry for more than 25 years. To reach him, call 941.254.3055 or email [email protected]. You can also purchase his books on facility development and marketing in the Inside Self-Storage Store.