On the surface, the self storage business and what it will cost to build storage units looks so simple. Other businesses have product ordering, inventory count & storage, spoilage issues, obsolescence, staffing, scheduling, product liability issues, equipment & supply consumables etc. etc. etc. most of which are not part of the self storage equation. But, still waters run deep, and jumping into self storage because it looks easy may cause more of a
splash than you are prepared for.
First, “build it and they will come” does not work here. A good advertising campaign and great
prices will not create a “need” where none exists. People can be convinced that they are “missing
out” if the they don’t have the latest gadget, best pizza, fastest motorcycle, or most alluring
scent….but telling them they need to pay a monthly fee to store stuff they don’t have isn’t going to
work, no matter how attractive the price or spiffy the facility.
Self storage is so versatile in terms of construction, and so simple in operation compared to most
businesses, individuals that have land or want to start a business for personal reasons, are tempted
to jump in with minimal research. Part of the responsibility that those of us in the industry face is
helping people to see the bigger picture. Self storage is a BUSINESS, and must be evaluated in the
same terms as any other business.
Cost to Build Storage Units – Self Storage Business Model
The primary question that must be answered in determining if self storage will work for you is: Will
the money that your facility is predicted to generate be enough to cover all of your costs and
expenses, and will it provide you with the profit income you desire during the period in
which you need it ? So, there are four determining factors. (1) How much can you expect to earn
in sales (rents + merchandise). (2) How much will it cost to build and operate your facility, and (3)
how much profit do you need to make this a worthwhile investment? (4) What is your exit strategy
(the long term or ultimate goal for the investment)?
Answering the first question is a combination of two factors. How much of each product (unit sizes,
types) do you have room for on your land, and what rate can you charge for each of them? The rate
issue is generally easier than the product issue, it just takes a little research. Typically you can
charge about what your competitors’ charges for similar products. If your facility is nicer or more
convenient than competitors you may be able to charge a little more. People generally prefer to
store family belongings as close to their home as possible, or someplace convenient to the roads
they take to or from work or other places they routinely travel. So most of your customers will come
from within a few miles of your facility, or from traffic on trade routes near your facility. These are
the areas in which you need to check your competition’s rates and occupancy.
Scoping the Competition
Visiting the competition in person is necessary to see how your proposed facility will stack up compared
to theirs and whether or not their businesses seem to be thriving. If your competitors are not
well occupied, the area may have reached a saturation point and there is simply no more customer
base to draw from. Do not build thinking that if you have a nicer facility they will move to yours, they
won’t. It’s inertia; an object at rest tends to stay at rest. That is one of the reasons self storage
works. Get as much information as you can through questions and observation, then follow up with
phone calls to fill in the blanks. You may not be able to get the information you need from the direct
approach. Be prepared to do a little sleuthing, if necessary, to determine your potential unit rates and
competitors’ occupancy.
Site & Unit Mix
The next step is to determine your unit mix. Unit mix determination is an art/science with a few general
guidelines. The denser the population the better smaller units will sell; the inverse is true of
larger units. A mix of units is more marketable than units of all the same size, and commercial tenants
tend to use larger units than residential customers. Although many types of metal buildings can
be reconfigured if necessary, great care should be exercised in determining unit mix. The air space
divided by the walls is your only product. The more the configuration of units matches your potential
clients needs the better your sales will be. If you want to target a niche market like records or
wine storage, this may be an area in which you choose to seek an expert’s advice through a feasibility
study. Check with several companies to see what services they offer as well as their fee structure.
Be sure what you are paying for is not just gathered information but actually provides the answers
you are seeking. When unit mix and rates have been established you can calculate your potential rental income. If you offer merchandise sales or other ancillary services estimates of this income is added to rents to calculate your gross potential income. Once income has been established, costs and expenses need to be forecasted.
Site Preparation
Site preparation is often the most costly element of construction, and is completely individual to
each location. Most builders can quote “slab and above” estimates of building costs. Design expenses
and a plethora of governmental approval fees will also significantly tap your wallet. In addition
to the cost of building the facility, you will need operating capital sufficient to operate you facility
in the lease-up phase.
Leasing
The lease-up phase is the period of time from the day you open the doors to the day you have
enough income from rentals and merchandise sales to cover the expense of owning the store. Ownership
expenses include monthly operating expenses (employee expense, utilities, maintenance,
etc.), debt service on the construction loan or mortgage, taxes, and liability insurance (property, not
unit contents). To estimate how much lease carry money you will have to borrow (usually as part of
your construction loan) determine what percentage of your net leasable square footage you can reasonably
expect to have leased each month. The difference between gross square footage and net
leasable square footage is that gross square footage includes hallways, entries etc., and net leasable
square footage is only that space that can be rented. Multiply the net leasable square footage by your
average rent per square foot, and that will give you your total potential income.
The next “gray area” you face is making an assumption about how much square footage you expect
to lease each month. In most areas of the country, rentals start out with a bang in spring, hold fairly
well through summer, then taper off for fall, and almost freeze in winter. However, local economies
can significantly affect that trend. If you are in a college town you may load up with teacher supplies
and student belongings from May- June to August-September and conduct heavy marketing
the rest of the year to keep things going. If possible, read trade magazines to find lease up rates in
your area or talk to local operators about trends, then put together your estimate of what percent of
rental income you expect to gain each month.
If you expect to rent three percent of your net leasable square footage the first month, and three
the second month you can expect 3% of your net leasable income the first month and 6% the second
month, etc. For the first few months you will probably not have many move outs, but after 3 to
6 months you will also need to subtract square footage income lost to move outs to have a good
estimate of actual gross income for the month. Subtract estimated expenses from estimated gross
income to determine estimated net income. As long as that net income number is a negative number,
you need to borrow money to cover expenses. That is “lease carry”. Once your income covers
expenses, you have achieved equilibrium and no longer need to borrow. That is, unless your expenses
did not include an accrual for taxes and insurance. Taxes and insurance usually don’t have
to be paid on a monthly basis but they can never be forgotten – have a plan to cover them as well.
Self Storage Investment Returns
After all of your expenses are covered, the income you receive from your facility is profit. The final
determining factor on whether or not to build your store is whether or not the profit you will receive
from this investment is equal to or greater than the profit you can achieve by investing in something
else. An added factor to consider is whether or not you want to sell the facility at some point, or
just have an income stream for the foreseeable future. Do you want to flip the property as fast as
you can to get more money for additional investments? Do you want to keep the facility until the
kids are ready for college and then sell to have college funds? Or, do you want to hold on to it for
retirement income? This is your exit strategy; you should choose the investment that best meets
future goals as well as immediate ones.
The allure of self storage is real, it is a uniquely simple business, but it is still a business. Before
any other decisions are made, you must decide whether or not this is the business that will meet
your goals. Then you get to choose the look you want, apartment or just office, colors, what doors
to buy, security system, fencing, flooring, etc.