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November 9, 2018
Self Storage Investing Playbook: Part 1 Building and Acquisitions
Whether you’ve been in the self storage business for a number of years and are looking to expand, or you’re thinking of opening your first self-storage facility, the path to success can be a difficult one fraught with unforeseen obstacles and complicated questions.
Though breaking ground on a new self-storage facility can seem like a daunting task, there are quite a few common problems that most self-storage owners go through, and StoragePug has been in the business long enough to know exactly what you’re going to face out there.
Because we take our clients success seriously, we’ve created this nifty guide to help you navigate the possibly treacherous waters of self-storage investing and ownership.
We hope to equip you with the tools you need to own the self-storage facility of your dreams, so if you’re looking to jump into the biz, this is the best place to start!
To make things easier, we’ve broken up this guide into 2 parts. You can find Part 2 here.
The first section is about building your self-storage facility and acquiring the capital to get your business going. The second section is about operating your business.
We’re going to split up this first part into 6 topics in order to make things as easy on you as possible:
Before you start building your new storage facility, it’s crucial that you do a little (okay, a lot) research about where you’re about to set up shop. Remember, the success of your company depends on a number of location-specific elements that can make or break your business.
First, investigate how populated the area is where you’re looking to build your storage facility. Most customers want to be able to load their car or truck with their belongings and get to their space as soon as they can to drop it off. Nobody wants to travel for miles to reach their storage space.
This isn’t just conjecture on our part. Studies have shown that 75% of self-storage customers live within 2 miles of their unit. Also, experts say that you should build your facility within 3 miles of a city or town that has a population of a minimum of 50,000.
Bottom line is—a small town is not the place to open your storage facility.
You’ve probably been to the part of town where all of the storage facilities pile up on top of one another and you feel like you’re never going to see another residential street again. Though it seems like so many storage spots open up in the same area of your town or city, opening yours up in a space like this is, generally speaking, a terrible idea.
That doesn’t mean you should start constructing your business on the outskirts of town or anything like that. You want to make sure that your area is dense population wise like we mentioned, but you don’t want to be just the latest storage facility on the block.
Choose a spot that doesn’t have too much competition but is close enough to potential customers so you can attract a wealth of clientele without having feeling crowded out.
Also, do some reconnaissance. Check out your competitors’ layouts to give you an idea of what is popular in your area. What size units does your competitor have available regularly? Which ones are booked all of the time? Do they have deals on particular units? If they’re slashing prices on certain sizes that could give you a good idea on which sizes are in high demand and which are hard to sell.
To go above and beyond, investigate future developments happening in certain areas. If you can acquire a property that isn’t so great today, but will be great in the not-so-distant future, you will be in a great position. Some factors to look out for are: future school developments, population density/growth, household incomes, household sizes, and rental population.
Besides your on-site managers and your website, your storage facility is the face of your company and oftentimes, it’ll be the first impression that your business will have on any potential customers.
You want to make sure that your facility is visible, and ideally stands out to traffic. In the storage world, some pros say that 85% of a company’s business comes from drive-by traffic, which is obviously a significant portion of your clientele. Also, it’s best if you have somewhere in the ballpark of at least 25,000 cars passing by your facility each day.
This means that before you pick out your perfect spot, take a look at how much traffic is passing by your piece of land, and make sure that any drivers can not only see your building from the road, but can’t take their eyes off it.
The best area is a major street or highway that many people have to use every day to travel from their home to work. Most customers are looking for convenience, and they would like to be able to drop off whatever they want to store on their daily commute.
In fact, it might be one of the most important considerations when deciding where to buy your potential business site. Think of each square inch of space as a money-maker. Remember, the size of your plot of land determines how much space you can rent to your future clients.
According to some pros, most storage facilities are built on a 1-3-acre piece of land. Each acre allows you to rent out roughly 17,500-18,000 sq. ft. So do the math. Figure out how many differently sized spaces you need and how much land this will require to keep your business flush.
And keep in mind, although they look pretty cool, two-story buildings are quite a bit more expensive to construct so keep your project to a single level unless you have a fair amount of cash to spend.
Determining your unit mixture is a science that will most likely give you the biggest headache when you’re setting up your first storage facility. But we’ll give you some helpful hints that’ll make things a little easier for you.
First, look at the demographics of your area. If you are near a number of homeowners consider constructing either 40-foot or larger units or using some space for parking spaces. Most people who own a house store vehicles like boats, campers, motorcycles, ATVs, and other large machines that they can’t, or aren’t allowed, to store on their property.
Conversely, renters move more frequently, but they require smaller units. So if you’re in a high population density that probably means that there are a lot of apartment renters near you and your unit sizes should reflect this.
High-income earners probably want more bells and whistles with their units. Meaning, climate-controlled spaces where they can keep their wine collection, expensive antiques, artwork, etc. There are some helpful websites that can run the numbers for you in a flash, so make sure to check them out before you start building.
It’s not just homeowners who are interested in storing their extra possessions. Networking with other business owners is a great way to open up a new line of clientele to your business. Business owners, especially if they’re in the service, construction, or retail industry, have a ton of stock and other materials that they need to keep in a safe spot.
So take a walk around whatever neighborhood you’re looking at and say hi to a few people before you purchase your little piece of paradise!
Converting an already constructed piece of real estate into your brand-new storage facility can be a smart and cost-effective idea, though it also has a couple of downsides that potential storage facility owners should be aware of before they jump into a purchase.
Maybe this is obvious to say but renovating an existing structure, assuming the structure is in halfway decent shape, is generally quicker than building from scratch. If you’re converting an already existing storage facility and you’re handy, you might even be able to do most of the construction on your own, which means you could work at your own pace.
According to Terry Campbell of Live Oak Bank, lenders may be more willing to let you borrow some cash if you’re doing a conversion rather than building from the ground floor.
The reason why goes back to our first point in this section: if you’re converting an existing building, it will, more than likely, take you much less time to find your first client and collect your first dollar.
That quicker turnaround means that the bank will hopefully get their money back sooner and you can pay off your loan faster as well. This also means that you can get out of debt in much less time, which, as we all know, is a very, very good situation to be in.
Also, as mentioned in one of our previous blog posts, the Storage Builders Owners Alliance (SBOA) claims that many storage facility owners have a savings of up to 30% when completing a conversion of an existing building.
With all of that said, in terms of dollars and cents, there’s a strong possibility that self storage conversions are for you, but there are some setbacks, or at least, some things that you should keep in mind.
Older buildings can have lots of structural issues, especially with their roofing and HVAC. There’s no point of converting an already existing building if you’re going to dump a ton of money in trying to patch over damage that has been sitting there for a while.
Make sure you have someone who knows what they’re doing to investigate the structural integrity of the building before you take a hammer and nails to the building. You do not want to be most of the way through this project and realize the walls are coming down around you.
One of the biggest issues of working with an already existing structure is that you have certain constraints within the building itself. For instance, if the points of access are obstructed, or if there isn’t much space for parking, you might have to get creative to work around these kinds of issues, or, once you crunch the numbers, find another spot with a more agreeable layout.
Nobody likes dealing with bureaucratic red tape, but it’s inevitable that you’ll need to interact with the city and/or county when you’re breaking ground on your new storage facility.
Luckily, StoragePug’s got you covered with a number of helpful hints and tips.
First off, let’s take a look at some important zoning laws and requirements that you might encounter when you’re working on your first self-storage facility.
According to Inside Self-Storage here are some issues that you might run into, but make sure you check your local laws because these regulations differ from place to place:
Remember, If the land is not zoned correctly, rezoning could cost you a ton of money and be a waste of time. In the end, it might not even be successful, so make sure you have all of the pertinent information about rezoning before you break ground.
Land prices can vary greatly from market to market, but, according to Mako Steel, a good criterion to keep in mind when purchasing the land for your self-storage facility is that you should spend about 25%-30% of your total project development budget. So if you have 40% coverage and the land costs $1.25 gross per square foot than your net cost would be about $3.13 for each rentable foot of your projected building.
You can make the most of your parcel of land by building a multi-storied facility, but, as we mentioned, this will cost more than a single-story build so make sure you’re budgeting correctly for this expenditure should you choose to do it.
When shopping for your new self-storage facility, you might notice that there is a class rating attached to the listing price and building information. Here’s the down and dirty, concerning the 3 different classes of self-storage facilities:
Hiring a licensed contractor is going to be your best bet for making sure your facility is a quality build and up to code. Just make sure you spend some time researching. The Washington Post has a helpful article that will help explain how to go through this vetting process.
In short, here’s what you do:
If you complete all these steps, you’re sure to find a contractor who is up to the task.
Commercial Property Advisors claims that there are 2 main types of self-storage deals: turnkey and turnaround deals.
Turnkey deals are:
Turnaround deals, on the other hand:
Commercial Property Advisors recommends these websites to find the best self-storage bargains:
So go get yourself some great deals!
There are a number of places you can go to for the seed money for your self-storage space. Banks, credit unions, the Small Business Administration, private investors, seller refinancing, or a 1031 Exchange are some of the best places, in our opinion.
FitSmallBusiness.com breaks down the possible bank, credit union, and Small Business Administration loans you could receive for your business like this:
Seller refinancing allows you to refinance a piece of property that has appreciated in value in order to receive a cash-out for the increased value of the property, which you can put toward another use, like your self-storage facility.
A 1031 exchange lets you sell a property in order to invest in another property without having to pay capital gain taxes. Money experts say this is a useful and important protection that people should take advantage of if they can.
Asset Preservation Incorporated explains a 1031 exchange like this:
REIT is short for real estate investment trust. This is a company that owns and, most of the time, operates income-producing real estate.
The company gets investors to pool their money for a number of pieces of real estate, which they’ll purchase and then pay out profits to the investors. It might be worth it to check out if there are any REITs in your area that own self-storage facilities.
A feasibility study assesses the practicality or financial viability of your intended business plan and is an excellent way for you to see if you’re onto something, or if maybe your plan needs to change a bit. StoragePug recommends you get one of these done before you spend too much money.
And here’s a helpful hint: Union Realtime’s Compass Report can save you thousands on a feasibility study.
There’s a number of reasons why you might want to partner with someone on your self-storage facility. The most common partnerships are debt partners, equity partners, joint ventures, syndications, and tenants in common (TIC).
Good question. Inside Self-Storage lays it out like this:
With all of that help available to your business, taking advantage of a management company’s services should definitely be on your radar, even if you’re not 100% sure that it’s for you.
The advantages of hiring a third-party management company are pretty obvious. You’re paying an expert who has tons of experience running both the day-to-day and financials of a storage company.
You do not need to go into the “office” every day, and besides keeping in contact with your management company, you mostly just have to sit back, relax, and collect a check.
The biggest disadvantage of hiring a management company is the money you have to pay off the top. Also, owners who like to be more hands-on won’t particularly enjoy using hiring a company like this because almost all of the operations and decisions will be made by them. Though you will be told about most major decisions, the day-to-day operations will be entirely out of your hands, so keep that in mind.
Also, some self-storage facility owners fear that once they hire a management company it’ll be like they’re no longer the owners of their business. But take heart, even if you hire a management company, you’re still the top dog.
You just don’t have to work like a dog every day.
This is the million-dollar questions, and again, Inside Self Storage has an answer: “While most management companies charge 6 percent of a project’s gross revenue, many increase or decrease this percentage based on facility size.”
So make sure you get a quote for your specific facility before signing a contract.
Though a management company probably won’t be able to turn a completely barren self-storage business into a money-making behemoth, their main job is to stack up your income and make sure your operations run as smoothly as possible. The annual budget and operating guidelines that the company provides you with should lay out exactly how they will keep you in the black and the best ways for your business to run on a daily basis.
So, do they maximize your income and increase efficiency?
Well… that’s kind of their whole job.
StoragePug has a couple of recommendations for you, so if you’re looking for a third-party management company, take a look below!
Here’s what they say:
Likewise, the EPA claims that switching over to green energy, in general, has a tremendous upside:
The federal government offers a 30% corporate tax credit related to solar power and they also allow you to deduct 30% of the cost of installing a solar power system from your taxes, making solar panels an excellent opportunity for you to save some money at the end of the year.
Not only are you helping the environment and saving yourself a couple of $$ in the process, but you can also gain more clients by making your facility greener
These days, most Americans favor wind and solar power to fossil fuels and nuclear energy. That means that if you decide to install solar power or other green energy components to your facility, you can highlight this in your marketing material to attract new clients.
Continue on to Part 2 here.