Starting a business entails a long list of concerns you should take into account, from financing it to choosing its location, and from cost assessment to covering customer service, just to name a few. If you think you’re not sure where to begin, here at STORAGECafé we have created a list of the most common questions and answers to help get you on the right track with your budding self storage business.
Let’s take a look at what most prospective or current self storage business owners may want to know more about concerning this business sector.
1. What’s the best way to enter the self storage real estate sector?
If you are new to the business end of this industry, there are two routes you can go: You can either buy an existing facility or you can buy the land and build one yourself.
2. Is it better to build a new storage facility or to buy an existing building?
Buying an existing facility may mean that you’re taking over another self storage business or acquiring a building that’s currently hosting a different kind of activity – a supermarket, for example – that can be repurposed as a storage facility.
If you are buying an actual storage facility, make sure your purchase happens at a time when you aren’t going to pay top dollar. The self storage industry requires long-term investment and that is something you should be aware of when you’re calculating your return on investment (ROI).
Depending on the condition of the building, additional construction might be necessary in order to meet the requirements for a fully operational storage facility.
“When you are purchasing an existing property you are buying an income stream. What you are wiling to pay for that income stream will depend on a number of factors such as your cost of capital and your risk/return expectations relative to alternative investments”, says Shawn R. Hill of BSC Group.
If you are choosing to start from scratch, the most expensive part of this endeavor is probably the land. Most business owners apply for a mortgage in order to cover the costs of the land. Consider what you also need to budget concerning the construction of the facility. According to Hill, investors should keep in mind that “the cost of the debt and equity need to bring the project to cash flow positive.”
Besides financial considerations, building a storage facility comes with a whole array of challenges, as Hill points out: “There is significantly more risk in building a property than buying an existing property with cash flow because in addition to the risks associated with construction (on-time completion, cost overruns, etc.) the builder then has to lease the property up, which takes time and involves additional uncertainty means additional risk.”
All things considered, each business owner needs to assess whether building a storage facility or buying an existing is the better business decision for their situation. In this sense, Hill also added: “The basic analysis has to start with is a comparison of replacement cost relative to the cost of purchasing existing assets in the market. Once an investor has a good handle on those factors they then need to weigh in the risks associated with both to determine which is more profitable from a risk/reward spectrum, and this may differ from market to market and also across the spectrum of time as market fundamentals and variables change.”
3. Which market should you address?
Before you commit to a specific location, make sure to check demand in the area. Urban areas with high population densities usually have the highest demand for storage and also bring in the most profit. If possible, investigate whether there are other self storage facilities within a 3-5 mile radius.
Think about how much car traffic the area attracts. This is also a good predictor of business success, as it means you are more likely to gain new customers who are attracted by the convenient location.
Consider your largest customer base, such as military personnel or college students. If possible, try to take population growth into account and assess how this can help you increase your customer base.
To get a better grasp of how some of the largest cities fare in terms of square footage per capita, we put together a table showing the top 20 cities in this category.
Local economy is also a factor you should take into account, especially if you’re planning on building a facility in secondary or suburban areas, which are less likely to attract other businesses. Additionally, these types of markets are usually not on the radar of the big self storage companies. Next, you should look into getting approved for a loan.
4. What kind of financing do I need? How do I get a bank loan?
Now that you’ve decided to move on with your self storage business, you can finance the project either through short-term/bridge or long-term/permanent options.
You should go for short-term/bridge financing (3-5 years) if you’re taking over another facility that hasn’t been successful or needs additional units built. If your facility operates below stabilized occupancy – typically 80% – your odds of getting approved are higher if you apply for a loan with a local bank. The down payment should cover 20-25% of the purchase price.
Long-term/permanent (5, 10 or 15 years) is typically a refinancing route for a short-term loan or for buying/refinancing a property with 80% occupancy. Long-term loans that exceed $1 million are better financed through a conduit lender – a commercial real estate loan through a commercial mortgage. As it happens, this type of financing groups similar real estate assets in order to sell them to outside investors. The main perks to lenders constitute lower rates, longer amortization periods and non-recourse loans (loans for which the borrower is not personally liable).
5. What else do I need to get my project approved?
Your feasibility study should also include approval concerning zoning regulations. Make sure you do the research on the planning and zoning regulations in the area where you intend to build. The information is usually available online or at city hall.
As it happens, zoning regulations differ tremendously from town to town. While some city halls have specific building regulations for the self-storage industry, others simply lump storage facilities together with those of other sectors under general commercial buildings. Besides industry-specific guidelines, there are general regulations that apply to all commercial developments.
Generally speaking, zoning laws differ, but some of the most common requirements include the following:
- A self storage development must be located no closer than three miles from another storage facility
- For each 1,000 square feet of building, a parking space must be provided
- Fire codes or building codes overrule zoning regulations for driveway widths, as they require 30 feet in between buildings
6. Is there another way to operate a storage business? What are some alternative storage-based business models?
One interesting storage business model also includes the transportation of items. The company picks up the items, stores them and returns them at the client’s request. They usually need a warehouse space and a truck. This business model favors those that have experience in the moving business.
Container storage is another similar type of self storage business heavily reliant on transportation of stored items. It takes more work to manage, but it can be very profitable considering it involves small investments. The basic idea is that you drop off containers at your customer’s address and they pack their items inside them. This type of storage is used when people move and they need a way to transport the contents of their home.
7. What does investing in self storage entail?
The most common type of transactions involving investment in self storage include portfolios and institutional transactions (national companies, REITs – real estate investment trusts) that typically buy mom and pop facilities. A self storage portfolio usually includes a collection of storage facilities under the same ownership. Portfolios are popular as they maintain a steady cash flow and are considered efficient when their expense ratios hover around 30%. As a general rule, expenses are underwritten to 35%.
Whenever investing in a storage facility, buyers look at capitalization rates, commonly known as cap rates. These reflect the amount of cash flow generated by a particular storage facility within a year. To put it simply, a cap rate is the number by which you divide net operating income to determine property value. Common cap rates are usually between 6.5-7.5%. Cash flow, encapsulated by cap rates, is the main driver in self storage property purchases.
8. Is running a self storage business profitable?
Broadly speaking, the industry is thriving. “Relative to other commercial property investments, self-storage has proven to be very desirable because the cash flow income stream has been proven to be more consistent and reliable than some alternative investments like retail and hospitality.”, says Shawn R. Hill. It takes a small investment to build a facility — or repurpose an existing building — and operation costs are also low. Typically, facilities can turn a profit with occupancy as low as 50%, while the business runs with no inventory and few staff — the exact number depending on facility size and the preferred management style. The greatest value lies in the land the facility occupies, which tends to go up long-term.
Self storage is a high-revenue industry especially if you’re an institutional investor and you own urban facilities, which typical charge a premium. According to Hill, “the large volume of spaces and month-to-month nature of the leases affords flexibility to manage the asset through both the peaks and valleys of the economy, which is an attribute that few other commercial property types can boast.”
This type of business can be equally profitable for individual owners as well. Another common practice of institutional investors is to keep tabs on the pricing of their competitors. Consequently, they tend to adjust their rates accordingly. This is where large companies have an edge in profit-making over mom and pop facilities, which tend to overlook their competitors’ pricing.
Institutional investors can afford to operate at a total loss of profit for up to five years as long as the land the facility is located on is highly valued. Holding a portfolio becomes more important than the profit each individual facility is yielding. Operable square footage comes first in the portfolio, while actual profit-related information comes in second.
The industry also presents an opportunity for generating additional income outside traditional self storage services. Many facilities are renting parking spaces and trucks, offering PO boxes and even selling packing supplies.
Overall, “Investors need to be disciplined, however, and do their homework. Like anything else, investments are only as good as the underlying assumptions about basic drivers like rent, occupancy, and expenses. Currently there is a development boom in the industry and many markets are oversaturated with new supply, which can put downward pressure on rent and occupancy. Also, the tax assessors are wise to the increasing demand for and value of these properties, so real estate taxes are increasing in many markets and reassessment will often be triggered by a sale. At the end of the day investing in self-storage can be a very solid investment, but it is not a “simple” business regardless of public perception”, added Hill.
9. How do you establish pricing?
There are lot of considerations that go into establishing pricing. The most significant one is unit size. They tend to run from 5×5 to 10×30, and pricing goes up the larger the unit is. However, the most popular unit size is 10×10, which can typically house a bed, a few small pieces of furniture and some medium-to-large boxes.
Location is another decisive factor that can influence rates. Facilities located in large urban areas can typically charge a premium for this service. As it happens, residents of New York renting a storage unit in Manhattan ($373/month) pay exorbitant rates for a standard non-climate-controlled 10×10 unit. Similarly, facilities charge a pretty penny to those looking to rent a storage unit in San Francisco ($260/month) or in Los Angeles ($244/month).
Amenities are another category that shapes pricing. Adding gated access, climate control, security cameras and even security guards can easily add to the price baseline.
As self storage is an industry marked by fluid pricing, seasonality also influences the going rates. Spring and summertime tend to be busier times for storage, which means that you can charge more during that time of the year, as a result of increased demand.
Doing a competitive analysis on pricing is equally important. It allows you to assess what other operators in your area are charging and what kind of services they are offering. Using a market intelligence resource like Yardi Matrix can be very effective and will allow you to make informed decisions about pricing.
10. What are the pros and cons of owning a self storage business?
Owning a self storage business comes with a series of pros and cons. Here are some of the most common ones:
- Diverse income from a large pool of tenants (applicable to large facilities)
- High occupancy rate
- High return per square foot
- Management-related expenditures
- Lower profits in case of low occupancy rates
- Tenant delinquencies
11. What is your most important asset for the business?
The key to your success is your manager, unless you’re planning on running the day-to-day operations yourself. Their professionalism, dedication and marketing skills are paramount to retaining existing tenants and also to attracting new ones. Make sure you offer your staff proper training, so they know how to manage operations in every potential scenario. You can even have a friend ‘secret shop’ occasionally. Moreover, your manager can decide which units to list on a self storage search website such as storagecafe.com and when to do so, giving you the edge over your competitors.
12. What else can improve my business?
Consider using property management software in order to help you manage aspects related to your business. The main perk that comes from using one is that you can streamline workflows. As a self storage manager, you can manage all your properties from any device, you can track unit types and amenities and manage discounts. Using this type of tool can even help you keep tabs on your communication with tenants and owners all in one place. Depending on the software of your choice, it can offer a variety of extra features. For example, Yardi Breeze is capable of tracking property and corporate general ledgers and even controlling security for all users at the menu level.
13. Should I make insurance mandatory for my tenants? Why do I need insurance?
Running a business well also entails insuring your facility properly. To that end, insurance is a natural cost of doing business and it should involve comprehensive coverage in case of unforeseen hazards.
Besides protecting your facility and equipment against natural hazards such as flooding, fire, wind, etc., you are also responsible for the safety of your tenants’ property. Make sure that you choose a policy that protects you against liability lawsuits filed by tenants injured on the premises of the storage facility. Additionally, you need to consider potential losses that could occur as a result of interruptions in business, but also other types of coverage such as workers’ compensation — a common law requirement.
The cost of a general liability insurance policy for a small self storage business ranges from $67-$129 per month, depending on location, number of units and sales.
While it is very easy to brush over the subject of insurance when a new tenant signs a lease, make sure to stress the benefits of getting insurance to your tenants. At $10-$20 a month, both you and the tenant are protected in the long run.
14. What amenities should the facility have?
- Climate control
Consider offering climate control in order to accommodate customers that intend to store electronics, clothes, metal appliances and belongings made of paper or wood. If you’re opening a storage facility in either a cold city such as Chicago or a hot one such as Miami, offering the climate control feature is vital in order to protect stored items from the dangers of extreme temperatures and high humidity.
- Security Level
Adding a keypad entry-based access to the facility and video surveillance will give customers peace of mind when storing their belongings with you. Providing gated access, which typically comes with storage units that have drive-up access, is another security feature that helps gain the trust of your prospective tenants. The higher your security, the easier it is to offer flexible, round-the-clock access to the units, which makes your facility more tenant friendly.
15. What other add-ons could further my business?
Consider offering parking spots, which can bring in a bit of extra income. Truck rental is yet another popular additional service associated with self storage facilities. You can also offer storage bins and packing supplies or even labor assistance.
16. How to make the facility tenant-friendly?
In order to keep your client base and to attract new customers, make sure your service is impeccable. Your facility needs to be secure, clean and pest-free.
17. How to attract more customers?
The first thing you need to keep in mind is your location – make sure you pick a location that’s close to a densely-populated area and a main street. Also, having a well-crafted sign could help attract more customers.
Moving beyond the traditional marketing strategies such as placing ads in online media and using outdoor advertising, it’s equally important to maintain an active online presence. Before you consider using social media, don’t forget about the perks that come with using a designated ILS. For instance, as lead engines, ILS sites such as STORAGECafé refine searches in a way that match potential clients with the best self storage options for their needs.
Additionally, you should hire a social media manager to keep your accounts updated or, if you choose to do it yourself, you can use scheduling tools to help you better manage your posts. Make sure your social media presence includes Facebook, Instagram, Twitter and even YouTube in order to address a wide pool of customers. Engage the public with varied posts that include discounts, information about your facility, and even tips and tricks to address common issues your customers are facing. You can occasionally use a call-to-action post.
18. Who uses self storage?
Consider your largest customer base: It might be transient, such as military personnel or college students, but don’t forget about residential owners. Business professionals such as contractors, retailers, restauranteurs, entrepreneurs and real estate agents, among others, also use self storage.
19. Can business owners run their operations from a storage unit?
Working from a storage unit or running a business on the premises of one is generally not allowed. However, many businesses use storage units to help their operations, as it provides a place for storing their merchandise temporarily.
20. What sort of stuff do you usually see being stored?
The most common items put into storage are furniture, home appliances, books, clothes, toys and so on.
21. What can you not put into storage units?
Food, hazardous materials, plants, live animals and wet items are usually not permitted to be kept in storage units.
22. What are some strange items people have put into storage?
Some of the strange items people have put into storage include, among other things, chocolate-making equipment, theater props, lightbulb collections and many others.
23. Has anyone ever tried to live in a storage unit?
While living in a storage unit is nothing new, doing so is illegal. Zoning laws and housing codes clearly express which areas are destined for residential living. Storage units are spaces allotted for inanimate objects and are not safe for human living.
24. How long do you wait before auctioning off a storage unit?
Auctioning a storage unit occurs when a tenant fails to make the monthly payment beyond the point of default specified in the lease. This represents the time period in which a tenant is legally allowed to access their unit after failing to pay rent. You should check your state law, but generally, the default period is 30 days.
25. Are auctions profitable?
As it happens, storage facilities avoid auctions, as most of the time they do not yield major profits. You’re basically bargaining on the unknown contents of a unit. While some storage units could host some extremely valuable items, that is rarely the case. In most instances, storage unit auctions bring in roughly $425 per unit.
26. Do customers tend to come looking for their belongings after the locker was re-sold?
It can sometimes happen. However, the facility notifies the tenant by phone, email and certified letter that they have a certain amount of time to retrieve personal belongings before disposing of them. Even when customers fail to either retrieve belongings or to pay the delinquent rent in order to regain access to a storage unit, some of them can become disgruntled. Consequently, lawsuits are common in this type of situation. As the facility operator acts as a landlord, reclaiming property and goods pertaining to the storage contract is part of the process. When this happens, the correct legal channel involves placing a lien against the property. Just make sure you follow procedures to the letter, and the law will be on your side.
27. When is the busiest season for business in self storage?
The busiest season for self storage is early spring into September, as this is peak season for moving in America. Accordingly, prices will be higher during this time period, and this is when most facility owners make the most of their profits. As business slows down in the wintertime, rates will also go down.