Book 3: Storing Up Profits

Like anything BiggerPockets publishes, this book was great. Storing Up Profits was written by Paul Moore, an expert in the self-storage real estate market. I like these kinds of books because they tend to pack a lot into a small space.

Self-storage facilities are one of those ubiquitous businesses that are all over the place, but nobody notices them until they need to use them. They’re cheap and provide overflow storage for people in distress or in a transition period and households with too much stuff.

There’s a couple of concepts I wanted to pull out of the book: Cap rate and the consolidation going on in the industry.

Cap Rate

If you’ve never been involved with commercial real estate, you may not know what a cap rate is. In short, it’s the expected rate of return. In practice, it’s related to the price you’re willing to pay for the return you get on that property. This is very different from how the market values private homes.

You can get the value of a property by dividing the net operating income (NOI) by the area cap rate. This is localized and can vary over time. As an easy example, if you have an NOI of 100k a year and a local cap rate of 5%, you end up with a value of 2 million bucks.

On a recent call with a commercial real estate broker in Atlanta, I learned the cap rate is hovering around 5 and can go as low as 4 on some properties.

Consolidation

As it turns out, the vast majority of facilities are owned by “independent” operators. In this case that just means they aren’t owned by one of the major national companies.

I expect the self-storage industry to consolidate significantly in the next 20 years. This isn’t an official guess. It’s based on this book and some other public announcements of interest in the market. There’s large institutional interest, but large institutions aren’t interested in doing the work to add value to underperforming facilities. This means there’s an arbitrage opportunity to find and upgrade a bunch of facilities in an area and then sell it as a package to one of these institutions.

When I say “institutions” just think of a hedge fund or a union pension fund. These kinds of investors want a stabilized portfolio of facilities kicking off a good return for their own investors.

There’s a whole lot more in the book. There’s an overview of tax benefits. I didn’t even touch on the ways to improve the value of a property or how to get into self-storage investing. If you’re at all interested, I recommend getting a copy.

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