Top 5 Reasons You Should Consider Investing in Self Storage With Your Self-Directed IRA
In recent decades, saving enough for a comfortable, secure retirement has become more and more difficult for the average investor.
What with dwindling Social Security benefits, rising inflation, and the skyrocketing cost of healthcare, many investors are having to get more creative about building enough wealth to fund their retirement.
What they’re finding is that many alternative investments not only have the potential for higher returns, they also provide more options for generating passive income and positive cash flow.
One such option is to invest in self-storage units. Among other things, investing in self-storage units allow you to:
Diversify your investments to a greater extent
Capitalize on the appreciating real estate market
Create a (relatively) passive income source
Generate positive cash flow
In today’s blog post, we’ll cover five reasons why investing in self storage can be a viable route to build wealth for a more comfortable retirement.
1. Investing in Self Storage Can Diversify Your Investments
When people think about investing for retirement, they usually think about investing in traditional assets such as stocks, bonds, mutual funds, and ETFs. And most investors know that to reduce risk, you shouldn’t put all your eggs in one basket. In other words, your portfolio should be diversified.
But even if you have a good mix of stocks, bonds, and other traditional assets in your portfolio, your portfolio is still largely tied to the performance of the stock market. While you’re technically diversified, you’re only diversified in the stock market.
Let’s take an S&P 500 index fund for example. An S&P 500 index fund can be a viable option for investors to track the performance of the 500 largest company stocks in the United States. An index fund like this can offer investors solid returns by diversifying them along the bedrock of the American economy. If one company takes a hit, the other 499 keep the portfolio’s overall performance positive.
But when an unexpected event hits (like, ahem, a pandemic) your portfolio may experience a major, heartstopping plummet – at least temporarily. In March of 2020, the S&P 500 fell 34%. And although it has recovered since then, investors were left holding a rather rotten basket for a while.
That’s why it’s important to consider other options that include alternative investments. There are many alternative investment options but today, of course, we’re talking about the benefits of investing in self-storage units.
Self-storage units are not as closely tied to the performance of the stock market, so even if the stock market plummets, your self-storage investments may continue to do perfectly fine. This is true diversification.
2. Real Estate Has Been Thriving During the Pandemic
It’s no secret that real estate markets across the US are incredibly hot right now. There are various reasons for this, and none of these reasons are similar to why the housing bubble popped in 2008. In 2008, disreputable lending practices led to millions of unqualified borrowers defaulting on their mortgages. Today, it comes down to a simple supply and demand issue.
There simply aren’t enough homes on the market to meet the demands of all the qualified buyers. (There are other reasons why the market is hot right now, but we won’t get into that here.) And with Americans upgrading their housing, looking to re-enter major cities, and relocating for job opportunities, self-storage units are in high demand.
Self-storage units are in especially high demand in (relatively) low-cost-of-living metropolitan areas such as Austin, TX, Miami, FL, and Charleston, SC. As Americans adjust to remote work possibilities, many families are choosing to migrate into these areas, driving up the need for more self-storage rental units.
Investing in self storage allows investors the opportunity to capitalize on the thriving real estate market without having to invest too heavily in residential real estate, which can be too costly and time-consuming for some investors who are looking for a more passive way to create wealth.
3. Investing in Self Storage Is A More Passive Way to Invest
So with the residential real estate market booming as much as it is, you might be tempted to start looking for your next investment option there. And who could blame you? Real estate can be an excellent place to direct the funds of your SD-IRA.
But new investors can underestimate the work they’re going to have to put in on residential real estate properties. The work involved includes, but is certainly not limited to:
Researching deals and available listings in your area
Finding and vetting qualified tenants
Drafting lease agreements
Collecting payments and security deposits
Completing home repairs in a timely manner
Performing routine maintenance and upkeep on the property
Having to evict tenants who don’t pay their rent
That being said, there are ways to make investing in real estate more passive. For one, you can use a property manager to handle the maintenance – granted, you’ll have to find a reliable one that doesn’t eat too heavily into your profits.
But here’s the thing: investing in self-storage units is going to require less work on your part than investing in residential real estate.
For one, you have less emotional involvement in the property because your renters are not living in or doing business through the property. Additionally, there are fewer ongoing repairs and maintenance costs associated with self-storage units because they are largely self-sustaining and require less active management than residential real estate properties.
4. Investing in Self Storage Can Generate Positive Cash Flow
There are also cash flow considerations to take into account. After all, part of the appeal of investing is the ability for your investments to put money in your pocket on a regular schedule. Traditional investments (like stocks and mutual funds) that generate cash flow do so by paying investors dividends, while residential real estate investments provide income in the form of rental payments.
With this in mind, you should weigh your cash flow options carefully. Dividend payments vary by stock, mutual fund, and ETF, and may only pay out once or a few times a year. (And of course, many stocks don’t pay dividends at all!)
Real estate, on the other hand, may provide more consistent cash flow in the form of monthly rent checks. Like residential real estate, self-storage facilities create cash flow in the form of monthly rental payments.
Because self-storage units are less expensive on a per-unit basis than residential rental units, you’re typically able to invest in many more storage units than you would be able to in residential units. So even if you have one or two self-storage tenants that don’t pay you on time, you have many more who are paying you on time. Plus, the eviction process for self-storage units is much less painful than evictions from residential properties.
Additionally, maintenance and upkeep needed for residential rental units can eat into your cash flow profits pretty quickly. Since self-storage units don’t require plumbing maintenance, appliance replacements, or general upkeep in things like paint and flooring (for the most part), your profit margin can be much higher.
5. Getting Started Is Incredibly Simple
There are many alternative assets you can invest in to generate cash flow. And what you invest in is entirely your choice. Depending on factors like your familiarity with the type of asset, your tolerance for risk, and your willingness to put in the time and research needed, one choice may be more appropriate than another.
However, investing in self storage has the potential to be a painless and profitable option. When you invest in self-storage units, you can diversify your investments in a relatively conservative manner while working toward financial freedom. And the fact that self-storage investments are relatively passive compared to other types of real estate makes this alternative asset all the more attractive.
At Chicago Trust Administration Services, we are experienced custodians of self-directed IRAs. We help investors like you capitalize on self-storage investment opportunities while staying compliant with IRS regulations. If you’re ready to learn more and start using a self-directed IRA to invest in self storage, we’re happy to help. We invite you to schedule a complimentary meeting with us by calling 312-869-9394 or emailing steve@ctasira.com.
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*The content and opinions in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
**CTAS professionals are not financial advisors and cannot provide advice or recommendations regarding specific investment decisions.