Why Self-Storage Facilities Are A Profitable Investment Despite the Pandemic
Did you know that Warren Buffett, a.k.a “The Oracle of Omaha”, keeps billions of dollars of cash ready to invest when a “big event” comes that will bring the market prices to the ground?
Many investors look up to Warren Buffett, a.k.a “The Oracle of Omaha”, because of his value investing strategy. As New York’s best-selling author Phil Town said — “it’s the patience of a hunter to do nothing when companies are overpriced, and to strike aggressively and buy when companies are priced far below their value”
Without a doubt, the global COVID-19 pandemic is a “big event”. Although many businesses are down, there are still others thriving despite the pandemic. Case in point — self-storage facilities.
Self-storage facilities have what Buffett describes as a “durable competitive advantage”. It’s what every investor should find in a business model. What makes the business stand the test of time against competitor sectors and through market recessions?
The Business Model of the Self-Storage Sector
Self-storage facilities rent out storage space on a monthly basis. On top of the storage rental, self-storage companies also provide full surveillance security, 24/7 access to your belongings, seamless access to moving companies, and with COVID-19 as a catalyst, you can conveniently do your rental registrations online.
According to industry experts, the main driving forces that make self-storage facilities profitable are — divorce, dislocation, death, and downsizing — a.k.a the 4Ds. All of these factors are huge lifestyle changes that have to do with moving. That’s where self-storage facilities come in and meet the demand.
Household items that we don’t need but are still valuable to us can be self-stored. Businesses can also store their inventories in warehouse spaces in between logistics planning. Others even use self-storage as office spaces. And, you can also store vehicles like cars, RV vans, and boats when not in use for the time being.
How the Pandemic Changed the Self-Storage Market
Before the COVID-19 pandemic, the profitability of self-storage companies was soaring reaching its peak in 2019. You know, our last year of normalcy.
But just like any other business, self-storage facilities took a hit from the unexpected global health crisis. Lockdown restrictions around the world majorly affected our mobility. Our stored belongings don’t matter as much as food and shelter during quarantine, so self-storage took a back seat.
Now that people are adapting and some countries have loosened community guidelines, people are on the move again. And so does the self-storage market.
Remember the 4Ds? Although divorce rates have slowed down during the pandemic, the other 3 factors — dislocation, death, and downsizing — were heightened up.
People were dislocated, having to move back to their parents’ houses in the country to reduce the cost of living. Other than the typical mortality rate in normal times, death rates increased around the world because of COVID-19. That means a lot of belongings have also been displaced and need moving. Businesses were forced to downsize as the economy swirls down — office set-ups have to be moved for work-from-home settings or stored away unused.
This is what Buffett considers “the moat” — or the durable competitive advantage. At the forefront of the recovering economy are businesses that leverage on market recessions. So far, history has shown us that the self-storage market is a profitable investment in good economic times and the bad.
Top 3 Reasons Why You Should Invest in Self-Storage Facilities
Real estate investment generates good cash flow
As long as you have a good location, the market price of real estate properties will go up in the long run. Real estate is the kind of investment that not only grows in value over time, it also generates cash flow through rental income. That’s what investors should look out for in a business — increasing assets and generating cash flow.
Low operating costs, maximize profit
Self-storage facilities are in the real estate business. Even better than typical rental homes and leased office spaces because there are minimal operating costs. The bulk of the company’s expenses goes to buying the land space and constructing the storage facilities. But other than that, the operating costs are limited.
It does not need extensive supervision as long as companies invest in security equipment. There are also minimal repair costs because usage is static and limited only for storage purposes. And now, online rental registrations also lessen the companies’ utilities onsite.
Recession-resistant
The 4Ds that drive the market demand for self-storage companies ride out the economic cycle. Whether the economic times are good or bad, the 4Ds will always be present. People will always change lifestyles and constantly move from one place to another. It also complements consumerism — new things come, the old will have to be stored away.
How To Invest in the Self-Storage Industry
If you are convinced now that the self-storage market deserves your investment, then you’re ready for the next step. You can invest in the self-storage industry through self-storage real estate investment trusts (REITs) for starters.
REITs allow small-time investors to benefit from the earnings of real estate companies by owning a share of their properties without having to buy the property itself. It works like owning shares of stock — you don’t necessarily buy the business for yourself but you benefit from its profits.
Here are the top self-storage REITs with their historical market performance:
Is It Profitable to Invest in the Self-Storage Market?
Coming back to Buffett’s value investing strategy, invest in a (1) business you understand with a (2) durable competitive advantage at (3) low market prices.
- The self-storage industry is a business we can simply understand: People need the space to store belongings when they move from one place to another.
- The durable competitive advantage comes from the 4Ds — divorce, dislocation, death, and downsizing. These events are always present in any economic cycle.
- We’re now in the midst of what Buffett calls a “big event”. Global economies are crippled and some are just slowly recovering. Companies are “on-sale”.
If you ask me, right now is the perfect opportunity to invest in the self-storage market. Who knows in how many years will a “big event” come again?
