Investing in Self-Storage Through a Self-Directed IRA

Published on April 22, 2021

Did you know you can include self-storage in your retirement portfolio? Real estate is the most popular asset class in self-directed IRAs—including commercial real estate—and self-storage is a growing segment that offers great potential for self-directed investors. In fact, it is a $39.5 billion industry in the U.S., utilized by approximately 10% of all U.S. households (with tremendous growth potential as Generation Z gets older and Generation X starts to downsize). As of this year, the estimated number of self-storage facilities is over 49,200.

The most common avenues for self-directed investments in this asset class are through promissory notes (lending) or private placements—direct investments in a private entity such as a self-storage REIT (real estate investment trust), C-corporation, LLC or fund. The self-directed IRA invests into those entities, with all income and expenses related to the asset flowing in and out of the retirement plan.

Strong asset class with strong ROI

• As of 2019, the National Association of Real Estate Investment Trusts (NAREIT) reported high annual returns of 16.85% over 25 years (NAREIT) – outperforming multifamily, retail and office
• According to Self-Storage Almanac 2021:
  • Around 31% of self-storage space by rentable square footage is owned by six of the largest public self-storage companies:
    • Public Storage
    • Extra Space Storage
    • CubeSmart
    • Life Storage
    • National Storage Affiliates Trust
    • U-Haul
  • Another 16.5% is owned by the next largest 94 operators
  • Mom and pop/small operators own 52.3%
  • This leaves a wide-open field for market consolidation through private REITs or funds specializing in self-storage investments
• Utilization of self-storage units continues to climb as people downsize, are in transition, or simply have too much stuff
• Self-storage facilities generally have low operating costs compared to other real estate assets and lower construction costs than other commercial real estate sectors—with high income potential

Investing in self-storage through a self-directed IRA

Before taking the steps to invest in self-storage through a self-directed IRA, there are a few things to note. This must be a passive investment to meet IRS investing guidelines. You, as the self-directed IRA owner, cannot be an active partner, director, or managing member of the investing entity (REIT, fund, LLC)—this makes you a disqualified person and creates a prohibited transaction which can cause your investment to lose its tax-advantaged status. Also, beware of investing in a private fund or company that is owned 50% or more by disqualified individuals, as this would constitute a prohibited transaction. Disqualified persons for this purpose are the account owner, his/her spouse, lineal descendants or ascendants; a beneficiary of the IRA; or plan service providers and fiduciaries.

At Next Generation, we take steps to make investing in all types of alternative assets as easy as possible. Our Starter Kits contain all the paperwork needed to open and fund a new self-directed retirement plan. After you do your research and identify the entity into which you wish to invest through your IRA, we’ll provide you with a list of the documentation required to process and execute the private placement (or promissory note, if lending). You will need to provide our Next Generation team with a buy direction letter, private placement instruction letter and advisory notice, transaction payment method, and outgoing ACH or wire instructions.

We will review the transaction for compliance with IRS investing guidelines and complete the transaction; our custodial firm, Next Generation Trust Company, holds the assets for our clients.

Want to know more including self-storage in your self-directed IRA? Watch this on-demand webinar on the topic, or schedule a complimentary educational session with Next Generation. You can always contact us by phone at 888.857.8058 or by email to NewAccounts@NextGenerationTrust.com with your questions.