How to Mitigate Risk When Investing in Self-Storage Facilities



Investing in any asset class involves risk, and the self-storage industry is no exception. However, self-storage has established itself as a resilient and profitable sector, attracting investors for decades due to its consistent performance and growing demand. As an investor, your primary responsibility is to deploy your capital effectively. By conducting thorough research, diversifying your investments, and seeking expert guidance, you can significantly reduce your exposure to risk while maximizing returns.

The Importance of Thorough Research

One of the most effective ways to mitigate risk is through comprehensive research. This involves deeply understanding the specific self-storage facility you plan to invest in and the broader industry landscape. Start by becoming familiar with standard self-storage due diligence practices.  Smart Investing: Advanced Due Diligence for Passive Investments, published in Modern Storage Magazine and written by StorageTrader co-founder, Alese Johnston, provides tips on where to begin.

Investigating the facility’s location is a good first step, as success in this business heavily depends on accessibility and customer convenience. Consider population density, local economic conditions, and competition from other self-storage facilities.  

Additionally, scrutinize the facility's financial health. Review its occupancy rates, revenue growth, and operational expenses. High occupancy rates and consistent revenue streams are indicators of a well-performing facility. Understanding the cost structure is equally important. High operational expenses can erode profit margins, even in facilities with strong revenues. Conducting a detailed analysis of these financial metrics will help you assess the true profitability of the investment and identify red flags. Many offerings are “turnaround” situations, so inquire into reasons expectations of future performance may differ from past performance.

Another crucial aspect of research is understanding the local market dynamics. Different markets have varying levels of demand for self-storage, and these demands can shift due to factors such as population migration, economic changes, and the development of new residential or commercial areas.

Finally, assess the facility’s management team. Leadership can significantly impact the success of a self-storage facility. Experienced management can be expected to reduce operational risks, improve customer satisfaction, and ensure efficient operations. Look for a team with a proven track record in the industry and a clear strategy for growth and risk management. Their expertise can be a critical factor in the long-term success of the facility. Read this article that explains further why the management team’s track record matters.

StorageTrader assists in this process by conducting rigorous due diligence on the deals offered before making them available for investment. This vetting process includes a thorough analysis of the financials, location, and management of the self-storage facilities, significantly reducing the risk for investors when choosing facilities through the platform. However, investors are encouraged to conduct their own research and seek professional advice to ensure their investments align with their specific financial goals and risk tolerance.

Diversification: A Fundamental Risk Management Strategy

Diversification is a time-tested strategy for risk mitigation. Instead of concentrating your investment in a single facility, consider spreading your capital across multiple self-storage facilities. This approach reduces the impact of any one underperforming asset on your overall portfolio. This strategy argues for using StorageTrader to place fractional investments in multiple facilities.

For example, if one facility encounters unforeseen issues—such as local economic downturns or increased competition—your investment in other facilities can help balance the potential losses. By diversifying across different geographic locations, you can protect your portfolio from region-specific risks such as natural disasters or economic shifts.  

Furthermore, diversification within the self-storage industry can be achieved by investing in facilities with varying characteristics, such as different sizes, types (e.g., climate-controlled versus non-climate-controlled), or customer bases. This nuanced approach ensures that your portfolio can withstand industry fluctuations and capitalize on various market segments. For instance, climate-controlled units might perform better in areas with extreme weather conditions, while standard units might be more popular in regions with mild climates.

In addition to diversifying by facility type and location, consider the size and scope of the facilities you invest in. Smaller, community-oriented facilities may offer stable, consistent returns, while larger, more complex operations might present opportunities for higher returns, albeit with increased risk. Balancing your portfolio between these types of facilities can provide both stability and growth potential.

Seeking Expert Guidance

For investors new to the self-storage industry or those looking to refine their investment strategy, seeking expert advice is highly recommended.  Experts can help you assess your risk tolerance, which is critical in determining the appropriate investment strategy. They can also assist in evaluating the potential returns and risks associated with specific self-storage facilities or investment opportunities. By leveraging their expertise, you can make more informed decisions that align with your financial goals.

Understanding Market Trends and Future Prospects

Another key aspect of risk mitigation is staying informed about market trends and the future prospects of the self-storage industry. The self-storage market has been growing steadily, driven by urbanization, increasing housing density, and the growing popularity of e-commerce, which requires storage space for inventory.

However, it's essential to be aware of potential risks, such as market saturation in certain areas, changing consumer preferences, and economic downturns that could impact occupancy rates. You can better navigate the market's uncertainties by staying informed about these trends and adjusting your investment strategy accordingly.  

In addition, consider the potential impact of technological advancements on the self-storage industry. Innovations such as smart storage units, automated check-ins, and enhanced security systems can improve the efficiency and attractiveness of self-storage facilities, potentially increasing their value. Investing in facilities that embrace these technologies can provide a competitive edge and reduce operational risks. As the industry evolves, facilities adopting these advancements may be better positioned to meet customer expectations and maintain high occupancy rates.

Understanding the broader economic environment is crucial. Economic factors such as interest rates, inflation, and unemployment rates can all influence the self-storage market. For instance, during economic downturns, there may be increased demand for storage as people downsize or temporarily store belongings. Conversely, during economic booms, increased disposable income might drive demand for larger storage units or additional services.

Final Thoughts

Investing in self-storage facilities offers significant potential for financial growth, but like any investment, it comes with its risks. By conducting thorough research, diversifying your investments, seeking expert guidance, and staying informed about market trends, you can mitigate these risks and maximize your returns.

The key is to balance potential rewards with the inherent risks. A well-informed, diversified, and strategic approach will protect your investment and position you to capitalize on the growth opportunities within the self-storage industry. Whether you're a seasoned investor or new to this sector, adopting these risk mitigation strategies will help safeguard your financial future while exploring the lucrative possibilities that self-storage investments can offer.

* If you enjoyed this article about How to Mitigate Risk When Investing in Self-Storage Facilities, you might also enjoy reading Why Are Self-Storage Facilities Considered a Stable Investment? and The Top 6 Reasons to Invest in Self-Storage.