Self-storage may be a modest real estate investment, but with its short-term business model, month-to-month leases, and fixed-base costs it sets up owners and investors to outshine those of other commercial sectors. As the inflation rate increases, the rent of a unit rises in relatively small increments and won’t scare off tenants. Therefore, it’s strongly recommended to look past the short-term decline and reposition themselves for another period of strong returns and sustained growth.
Americans felt the increase in inflation this year but real estate stakeholders shouldn’t be concerned about the erratic changes, as the ability of the real estate sector to adapt to these circumstances remains positive. Self-storage continues to be a good risk-adjusted opportunity because the gross margins—looking at 60% to 65%—are better, with expenses equaling roughly one-third of revenue. As a result, profit margins are higher and there are fewer expenses per dollar of income.
The consumer price index (CPI) peaked in June 2022 above 9%, although the key measure of U.S. inflation has slowly declined since then. Looking at the forecast of U.S. inflation, companies should be flexible and quickly adapt to market changes. The Personal Consumption Expenditure (PCE) used by the Federal Reserve as a primary measure in determining inflation goals, will average at a decline of 2.8% in 2023.
To calculate the rent prices for inflation, you should start with the inflation rate formula:
CPI in 2022 / CPI in 2021 * 2021 USD value = 2022 USD value
Plug in past CPI values.
The CPI for Rent of primary residence was 349.135 in 2021 and 368.794 in 2022:
368.794 / 349.135 * $16,625.46 = $17,561.64
Here are two main ways to make money with rental properties:
According to Forbes, investing in rental properties is a major commitment in real estate to consider. Rentals offer steady cash flow as well as the possibility of growth over time.
Long-term rental properties are generally designed to be rented for at least a year and provide a steady monthly cash flow, in theory, depending on how reliable your tenants are. Therefore do a thorough credit check before signing that contract. Short-term rentals cater to rotating tenants who may rent a unit for only one month, but with an average of 200 to 900 tenants per property, the combined income totals a large sum in revenue.
Investing in real estate with rental properties offers great profit potential, but requires a great deal of effort on your part. Finding and vetting tenants, paying for ongoing maintenance, taking care of repairs, and dealing with any other problems that may arise.
Some of these headaches can be prevented by hiring a property management company, although this will cut into your returns. Real estate fund managers should consider the use of open-ended fund structures in the current economic cycle.
The strength of the U.S. dollar
Kept afloat by Federal Reserve hiked interest rate increases and better economic conditions in the U.S. relative to other nations also helps reduce inflation in 2023. Efforts to bring inflation down will be to ship that inflation to the rest of the world. The U.S. Dollar Index, which measures against a great number of other currencies, has risen more than 17% this year.
The U.S. dollar has lifted the federal funds rate from almost zero at the beginning of 2022 to a range of 3.75% to 4% at the November FOMC meeting.
Investing in Self Storage Real Estate
Despite the current market uncertainty, there are still many opportunities to invest and get a decent return by delivering. By focusing on your existing asset portfolio, you will protect and increase the value of your real estate investment. Ensure to take the time to assess and upgrade your digital and technology capabilities across your organization and property portfolio. This way, investments will grow and reach revenue targets.
Although this seems like a difficult time in the real estate space, operators and managers who are adaptable and patient to these changing circumstances will strengthen their operations and create opportunities to grow with high-quality real estate assets. Self-storage certainly seems better positioned than most commercial real estate.