Self Storage vs. Multifamily: Key Differences

Investing in Commercial Real Estate is a common route to passive income and wealth

In this post, we will compare Self Storage vs Apartments from an investment perspective.

We believe self-storage is an easy, hands-off investment compared to multifamily. We also believe that storage generates superior inflation-adjusted, long-term, returns.

Here’s why:

Key Differentiating Factors:
Market Demand, Management, and Returns

Market Demand

Self-storage demand is driven by life events: death, downsizing, family formation, and migration. These drivers are not strongly correlated to the overall economy, making storage a popular recession-resistant investment.

Multifamily demand is a function of job growth and population growth. Most top markets are highly supply constrained, resulting in rapid lease-up times for multifamily projects.

Management and Operations

Once an apartment building is leased at market rates, there isn’t a lot of work to do beyond maintenance calls and unit turns. Operating a self-storage facility is a much more active business due to the number of units involved.

Self-storage requires less ongoing maintenance as tenants do not occupy the space on a full-time basis. Apartment buildings require less ongoing leasing because they have so many fewer tenants than a similarly sized storage facility.

Investment Returns

Historically, self-storage has provided higher returns on investment than residential real estate. According to the National Association of Real Estate Investment Trusts (NAREIT), between 1994 and 2020, self-storage REITs produced an average annual return of 16.85%, while multifamily REITs generated an average annual return of 12.89%. The Self Storage Association reports that the average return on investment for self-storage properties has been between 8% and 12% per year, while residential real estate investments have provided an average return of around 6-8% per year.

** Note: Past performance is not indicative of future results, and individual assets can vary significantly in terms of returns. Location, market conditions, and management expertise all play a crucial role in determining the profitability of any individual asset.

Self Storage vs Apartments - In Depth

• Tenant Base: Self-storage facilities are used by individuals as well as businesses, whereas the vast majority of Apartment tenants are individuals

• Lease Terms: Self-storage agreements are month-to-month with no tenancy protections, multifamily leases are typically for 1 year or more.

• Turnover Costs: Getting a vacant apartment move-in ready and leased can take 30 days or more. The turnover process can require paint, new appliances, and additional maintenance. Self Storage Facilities can turn a unit over in 1 day, with no paint, appliances, or maintenance required.

• Lease-Up Time: Apartments can lease up and stabilize in 12 months or less because they typically have much fewer units. Storage facilities take several years to stabilize because there can be over 1k units you need to lease up and stabilize.

• Operating Expenses: Both asset types typically enjoy similar expense ratios (30 - 40% depending on size), but in some circumstances, storage operators can further reduce expenses through staffing efficiencies.

• Operations Headaches: Once an apartment building is leased at market rates, there isn’t a lot of work to do beyond maintenance calls and unit turns. While storage buildings have less maintenance and turnover work, operating one is a much more active business due to the number of units involved.

• Property Management: Self-storage requires less complex property management than residential real estate, as tenants do not occupy the space on a full-time basis and typically require fewer maintenance needs.

Multifamily + Self Storage Benefits

If you are already invested in multifamily and do not wish to sell, investing a small sum in self-storage syndications can provide several benefits. Beyond the obvious benefits of diversification, storage investments can be great hedges against economic downturns due to their countercyclical nature.

Mason Equity Partners specializes in Self Storage Development and Adaptive Reuse Conversions. Please feel free to call or email if we can be of any help.

Thanks for reading!

John & Shane Mason
[email protected]
408 590 8577