Thoughts On Efficient Portfolio Construction For Self-Storage Properties By Frank Rolfe

Lay’s potato chips has the slogan “bet you can’t eat just one” – and the same can be said for many self-storage investors. They buy a property and then they buy another one. And since that’s the likely scenario, there are some things to ponder regarding building a highly efficient portfolio. So what are the issues to consider?

Manager efficiency

The first thing that most storage owners think about when starting to consider buying a second property is having one manager handle both. While that would seem sensible, it’s actually not a great idea. The problem stems to the fact that most managers are not really capable of handling two properties. In fact, the failure rate is really quite high. So what’s going to happen is that the decrease in your net income on both properties because the manager being stretched too thin will negate and exceed any perceived benefit from this strategy.

Portfolio diversity

Another issue related to trying to “bunch” properties together to serve the manager is the lack of portfolio diversity. In a mutual fund, part of the strength is that you have a basket of stocks and not just one so you can have a big decline with one stock and still be OK. However, if you buy all your storage properties in one market, you’ll have a huge amount of risk if that specific market becomes weak. Just ask the owners of properties in some urban markets like Chicago that have been hammered from Covid and urban unrest.

Sense of control

This is a different consideration than having a manager “share” several properties. This relates to your personal interests and feeling of control that comes from being to drive to any of your holdings and back in one day. For most owners, this would mean that the storage property is only 4 to 5 hours from home. While it sounds good that you are only a “plane flight” away, in reality that’s a whole different level of travel planning required and makes you feel more powerless to stay on top of things.

Casting a big enough net

If you limit your purchases to an incredibly finite area – like one single market – it’s really hard to find a good deal. You always do better when you cast a big net. Assuming there are only 10 storage facilities near the one you already own, what are the odds of one of those coming on the market at the right price in the near future? Not nearly as good as one in 10 in 10 different markets – that’s a ten times greater level of probability.

Adding it all together

When you look at all these considerations and put them together, what it tells you is that you should draw a circle around your house five hours in travel radius, and this should become your “territory” for expansion. This gives you portfolio diversity, but maintains your feeling of control. It also increases your odds of finding the right storage facility by a quantum amount.

Conclusion

When it’s time to grow your self-storage portfolio, you’ll find that advance planning is key to building the right mix of properties. And the worst time to think about this is after you’ve already purchased a handful of storage facilities.

By Frank Rolfe

Frank Rolfe has been an active self-storage investor for around two decades, with self-storage units in many states throughout the U.S. His nuts and bolts knowledge of what makes for a successful self-storage facility has led to a three-decade career without a single failed property.