One Of Most Lucrative (But Underrated) Real Estate Businesses On The Planet

I had been putting it off for months. But I finally had to make another trip back to our storage rental unit to deposit a few more items. My allotted space was already teetering with furniture, toys and various other household items — not to mention a mountainous stack of books that almost reached the ceiling.

But there’s always room for another box or two, right?

This had been an ongoing process since we decided to put our house on the market a couple of years ago. It felt like it would never end. “With any luck, we’ll get a quick sale and have vacated completely by the end of the summer,” I thought. But since we hadn’t even started construction on the new home, our belongings wouldn’t be taking a direct flight to their final destination.

Instead, they would be sitting right there in our storage unit. The only question is how long… Three months, six months, nine months?

While there, I couldn’t help but count the number of padlocks, figuring each locked unit was rented, while the unlocked doors were vacant. Much like Peter Lynch, I get investment inspiration from the world around me. The famed Fidelity money manager used to gauge potential retail sales trends by counting the vehicles in store parking lots or observing traffic-flow patterns at the mall.

Self-Storage: A Beautiful Business

In this case, I felt a little bit jealous of the owner. In one row of 50 units, only three or four were unlocked and available. That’s an occupancy rate above 90%. And there were four other rows just like it. Keep in mind, each of these cubicles earns a steady rent check of $100 at the first of every month.

A back-of-the-envelope calculation indicates the facility generates about $23,000 in rental income each month, or $276,000 annually.

And here’s the beauty with this business… There is no inventory to buy. No manufacturing costs. No costly research and development. There’s very little operating overhead at all, except for the occasional maintenance expense and a single 9-5 worker at the front desk.

With few variable expenses, this tends to be a scalable business. So once fixed costs are recouped, incremental revenue growth from new renters drops straight to the bottom line. Most storage facilities can turn a profit even with occupancy as low as 40%. By contrast, the average apartment complex must be 60% occupied to break even, according to some estimates.

Back in 1995, there were about 25,000 self-storage facilities nationwide. But that number has since doubled (to more than 51,000) and continues to grow. On average, about four new locations open per day. That expansion reflects growing demand — more than one in 10 households rents a storage unit, according to SpareFoot. You don’t open a new facility if an existing one across the street is empty.

Even with capacity doubling, it has been soaked up quickly by new renters. So national occupancy rates have remained stable at around 85% — even higher in some locales. As a result, average monthly rent for a standard 10X10 foot unit has increased by more than 50% over the past couple decades to around $109.

How To Invest

I love rental income — any recurring cash flow stream, really. So it’s no surprise that my High-Yield Investing portfolio is filled with utilities, wireless providers, midstream partnerships and other cash generators.

But the self-storage business might just take the cake. It’s one of the easiest cash-flowing machines I’ve ever come across…

I probably won’t be opening a self-storage facility (although it’s tempting). But I can still put money to work in this industry. And it’s been good to investors… The National Association of Real Estate Investment Trusts (NAREIT) conducted a 15-year study of REIT stock prices and found that these humble storage cubicles outperformed sleek high-rise office towers, busy retail developments, and other properties, posting average annual gains of 15.4%.

There are a handful of REITs in the public storage sector that are worth a look, including Public Storage (NYSE: PSA), Cubesmart (NYSE: CUBE), National Storage Affiliates (NYSE: NSA), and Extra Space Storage (NYSE: EXR).

In fact, EXR has been the single best performing REIT of any kind over the past 15 years. Thanks to a rising price and soaring dividend, EXR has crushed the S&P 500…

All of these names offer market beating yields. So if this corner of the REIT market intrigues you, feel free to research these names on your own.

In the meantime, look for the facilities of these companies the next time you drive around town. In fact, I encourage you to do that for any of your holdings — it’s a good reminder that we don’t just trade ticker symbols, but are part-owners in real dividend-paying businesses.

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