REITs vs. Private Equity: Which is Better for Self-Storage Investments?

Introduction

Because of its steady demand and capacity to weather economic downturns, self-storage is a favored sector among real estate investors.  Real Estate Investment Trusts (REITs) and private equity investments are two popular options for those wanting to get into this sector.  But which one suits you better?  Let's clarify it by comparing risks, returns, accessibility, and other factors.

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What Are REITs and Private Equity?

Publicly traded businesses that manage and own real estate, especially self-storage facilities, are known as REITs.  They are comparable to stocks in that they frequently issue dividends and you can buy shares through the brokerage account you have.  Explore well-known names like Extra Space Storage or Public Storage.  

On the contrary, private equity involves investing money into private funds in order to directly purchase, construct, or operate self-storage facilities.  These contracts may offer more oversight and possibly higher returns, but they are less liquid and often call for a greater initial investment and a longer commitment.

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Why Self-Storage?

It's essential to consider the advantages of self-storage before going into the subject of comparison.  The industry benefits from constant demand—people frequently need storage for unforeseen circumstances like moving, downsizing, or business merchandise.  Research studies state that even during recessions, self-storage occupancy rates in the United States have stayed above 90% in recent years.  Because it requires fewer maintenance tasks than office or retail space, this asset class appeals to both private equity and REITs.

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REITs: The Accessible Choice

For most investors, REITs are the easier way to get started. Here’s why:  

Low Entry Cost: With private equity, which typically demands minimums of $100,000 or more, REIT shares can be bought for as low as a few hundred dollars.  

Liquidity: Are you ready to sell?  As soon as the market opens up you are able to trade REIT shares.  Your money can be locked up for five to ten years by private equity.  

Dividends: In order to offer a steady source of cash, REITs have to give away at least 90% of their taxable earnings as dividends.  The dividend yield of Public Storage, for instance, has been between 3 and 4% in previous years.  

Diversification: Without you needing to do anything, a single REIT could own hundreds of locations throughout the United States, spreading your risk.

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However, there are drawbacks.  Even in a strong self-storage market, your investment could fall because REITs are correlated to stock market volatility.  In addition, dividends are covered by ordinary income tax, which could lower high earners' earnings.

Private Equity: High Risk, High Reward  

Private equity appeals to those with deeper pockets and a taste for bigger potential payoffs. Here’s what it offers:  

Higher Returns: Unlike REITs, which usually achieve total returns of 6–10% (dividends + share price increase), private equity may shoot for returns of 10–20% per year by directly owning or constructing properties.  

Control: Unlike REITs, where you are a passive stakeholder, investors in private equity deals often play a role in the management, exit plans, and property selection.  

Tax Benefits: A benefit that REIT dividends cannot offer is the ability to lower your tax liability through real estate depreciation and other deductions.

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The catch?  The money you have is locked up for years in private equity, which renders it illiquid.  Since returns rely primarily on the fund manager's skill and market timing, it is also risky.  Losses could prove severe if an agreement goes wrong.  Gains can also be undermined by excessive expenses, such as the conventional "2 and 20" model, which calls for a 2% management charge and 20% of earnings.

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Which Is Better for You?  

It depends on your goals and resources:  

If you're searching for an inexpensive, liquid choice to invest in self-storage with steady earnings, go with REITs.  Novice or those with smaller investments who value flexibility and diversity will find them appropriate.  

If you are a licensed investor with more money on hand and willing to lock up funds in preparation of maybe higher returns, go with private equity.  It works for people who are willing to take risks and are eager to get their hands dirty.

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The Bottom Line

Investing in self-storage is an excellent decision, and there are possibilities to get involved through private equity and REITs.  For those who are okay with the risks and illiquidity, private equity offers more advantages, but REITs are the favored choice due to ease of use and accessibility.  Before making a decision, consider your spending limitation, timetable, and risk tolerance.  If in uncertainty, a mix of both might achieve a balance between growth potential and regular income; talk with an advisor to be sure your decision matches your overall portfolio.

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