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Dividend Income from Idle Real Estate

December 26, 2018

One of the better-performing market segments in 2018, including the recent plunges in the S&P 500 Index, has been REITs. With the S&P 500 down in price by 10.33% for the year to date, REITs have delivered 4.93% in total return, as measured by the Bloomberg REIT Index (BBREIT), since the bottom in the REIT market in February.

While the old adage about real estate—that it always has value since they’re not making any more of it—rings true, there are plenty of parcels and buildings that just sit idle. And idle real estate is really just dead money.

But it doesn’t have to remain dead money, because it can be revived and used to generate plenty of income.

One of the best ways to make idle real estate generate cash is to use it for temporary storage facilities. The process is one of the simplest in the real estate market. Suburban or rural land that owners are waiting to develop or sell are ideal places to put storage facilities—easy to construct and easy to take down for other projects.

All you need is for the land to be graded, very basic utility connections to be brought in and concrete slabs to be poured. Then, bring modular storage units and fencing in and the facility is pretty much ready to generate revenue. If and when the property is needed for a different purpose or a sale, taking down the facility is relatively straightforward.

In urban settings, many buildings can be retrofitted for storage. Stripping out drywall and turning a building into a shell is the first step. Then, modular storage units are brought in with minor electric service and lighting, and the facility can be up and generating income. And as on rural land, removing modular units can be done with relative ease.

Even if you don’t own a parcel of empty land yourself, there is a collection of real estate investment trusts (REITs) that are in this market and take an active role in turning idle land and properties into income-generating facilities for investors.

And in 2018, self-storage REITs were one of the best subsectors of the REIT market.

From February to date, self-storage has generated a return of 15.88% to the general REIT market’s return of 4.93%. And since the end of September, the self-storage market has continued with a positive return despite the overall market sell-off.

One of the reasons self-storage companies are booming is because Americans are in love with more stuff. Retail sales in the US, as tracked by the US Census Bureau, continue to rise on a monthly basis. From the recent lows of 2015-2016, when consumers were only adding some 2.0% or less, 2018 has seen sales gains running as high as near 7.0%.

And with consumers remaining comfortable, as measured by the Bloomberg Consumer Comfort Index (what I call the “Comfy” Index) sitting at 59.4%, up significantly since the lows in 2016, more stuff will be finding its way into US households, many of which can’t hold it all.

Right now, one-in-eleven Americans use a self-storage facility. Not only that, but the 40 million people in the US who move each year are also contributing to the market for self-storage.

Self-storage facilities are much like gym memberships or other subscriptions. They are often set up with regular bank debits or credit cards on file. And many customers just join and forget, allowing fees to just keep flowing. Many self-storage companies set up accounts so that the longer they are rented, the more the rental rates rise. This is meant to ensure that customers remain focused on their contracts.

And if they don’t pay, storage facilities are happy to stage auctions for the stored goods, which you may be familiar with from a popular reality show.

The ease of setup for a storage unit has led to a very fractured industry. With so few barriers to entry, there are many mom and pop operations offering storage space facilities on their idle land or in their vacant buildings. In fact, right now the majority of all storage companies are locally owned and managed.

But there is a movement to make this even more profitable, as larger companies are moving to change and improve the patchwork of locally made storage facilities.

Self-storage facilities are going through a massive consolidation. Recognizing an opportunity, bigger companies are buying up the mom and pop facilities developing a chain of standardized facilities. And they are also rolling up smaller companies into the larger public storage companies to gain scale. And when independent operators or smaller companies want to keep their land and facilities, publicly-listed storage companies offer them the ability to outsource management and marketing with national branding.

One of the easiest ways to invest in the profitable REIT market, including the storage REIT segment, continues to be in the Vanguard Real Estate ETF (VNQ). This ETF has some of the best REITs in the US market, including some of the leading public storage REIT companies. These include Public Storage (PSA), Extra Space Storage (EXR) and CubeSmart (CUBE).

It has a nice dividend yield of 5.24% and continues to be a positive performer in the market since February, with a total return of 3.71% to date.