I get asked many different self storage questions, but this one seems to come up a lot.
Here was the exact question:
“Hi Mark, …The biggest hurdle I am trying to overcome is determining how much money it will cost to start a facility from scratch. I know this cost varies depending on numerous factors. But could you do a case study on three different example facilities that cover the startup cost and their finances over the first rough 2-year period? Bonus points if one of the case studies is an example from Canada!”
First, I have never done a deal in Canada, so I don’t have that.
Secondly, in the US, we have SBA (Small Business Administration) loans, which are great for people getting into the business. I still use them often.
Thirdly, any case study I do from the past will be very different because the rates and rents were very different then.
What I can do is take projects I am looking at and people I am working with are looking at and run the numbers. Even though there won’t be historical numbers, this is probably more relevant than looking at a past deal that would be very different today.
Lastly, I don’t know how big your deals are, or how much money you have access to, so you just get our deals.
Deal One: Expansion
Here is one. A 12,500 existing sq foot, non-climate-controlled project on about 4 acres of land put under contract for $1,030,125.
The plan is to add an additional 25,000 net rentable square feet of space, 8,750 non-climate-controlled and 16,250 net climate-controlled sq ft. Due to hallways in the climate space, that would be approximately 28,250 square feet total of new buildings. This project is exclusively single-story, steel buildings.
The estimated cost for the expansion is $75 PSF for hard & soft costs. Thus, the construction numbers are estimated to be approximately $2,118,750 for a total cost of $3,121,875 in the project.
The current rents for non-climate-controlled space are $8.25 PSF per year, and the climate-controlled space in the market is $15.65 PSF.
So, I don’t have the room to run the full ten-year spreadsheet but let’s take a quick look at cost-in and returns.
This is a perfect deal for an SBA loan. This person has applied for a 90% Loan to Value, so the loan will be approximately $2,809,688; the total cost in for them is approximately $312,188.
SBA loans have higher interest rates, but the amortization is longer, so payment-wise, they are close to standard 20-year bank loans with lower interest. They have estimated a 7.5% interest rate range. The first couple of years are interest only.
They think (and are getting a feasibility report to verify) that the new space will take one year to build and bring online, and the new space will lease up at a 1,200 square feet per month net.
It will be an automated type of facility with low personnel costs using a third-party manager.
The first year is estimated to be a negative, but the current units are running close to 90% occupancy.
So, in year three or four, when the project would be stabilized, with a 3% per year rental increase, here are the projected numbers in year four or so.
| Gross Potential Income: | $500,394 |
| Ecc. Occupancy: | 90% |
| Storage Income: | $453,355 |
| Other Income: | $4,500 (Tenant Insurance & Fees) |
| Total Income: | $454,855 |
| Operating Expenses: | $162,383 |
| Net Operating Income: | $292,472 |
| Loan Payment: | $249,472 |
| Net Cash Flow: | $43,312 |
| Cash on Cash return: | 13.9% |
| Value at 7% CAP | $4,178,166 |
Will it be these numbers exactly? No, but it should be close.
This buyer is operating as their own construction manager, dealing directly with the subs and fabricators for the storage systems, so the cost is lower than using a general contractor.
But these are close to the numbers for a small expansion I think one could expect today.
Total-in is about $3.3 million with carry, and the total value is $4 million to $4.2 when completed. Not a home run but a solid deal for just investing around $310,000 to $320,000. You more than doubled your money in 3 to 4 years.
Deal Two: Multistory New Construction
Let’s look at a new multi-story construction in a large, growing MSA.
The site is on a 2.75-acre site zoned correctly for that location. Approvals are needed, but it is a fairly developer-friendly area of the country.
The land cost was high, $2.3 million, but the rents are high for climate-controlled space, $1.85 per month or $22.20 PSF per year.
The initial design is for 72,000 square feet of rentable space.
It looks like the hard and soft cost for construction of this 4-story building is going to be $120 PSF. So, all in the project appears to be in the $10,940,000.
This is going to be syndicated and there is going to be a standard 75% LTV (loan to value) loan with a 25% equity infusion. So, the loan is for $8,205,000 and the equity required is $2,735,000. Interest is quoted at 6% but may change.
It is estimated to take 34 months to hit stabilization once leasing commences.
When stabilized, the project is projected to look like this.
| Gross Potential Income: | $1,694,304 |
| Ecc. Occupancy: | 90% |
| Storage Income: | $1,524,874 |
| Other Income: | $24,500 (Tenant Insurance & Fees) |
| Total Income: | $1,549,324 |
| Operating Expenses: | $557,756 |
| Net Operating Income: | $991,567 |
| Loan Payment: | $634,739 |
| Net Cash Flow: | $357,188 |
| Cash on Cash return: | 13.1% |
| Value at 7% CAP | $14,165,244 |
We will see what Cap rates are in three years, but in this deal, about $3 million in equity is created when stabilization is reached.
Numbers are larger, but the premises is the same. Create a solid real estate deal. Go for the above-market but reasonable returns. As this project matures past stabilization, the returns push upper teens to lower 20’s in cash-on-cash return and slightly over 20% IRR (internal rate of return) on a ten-year cash flow page.
So, this deal is going to take a 25% equity investment and create between $3 and $3.5 million of equity when stabilized.
Deal Three: Boat & RV Conversion
I like this because it combines two of my favorite things today, conversions and boat & RV storage.
I like conversions because oftentimes, the development costs are lower than new construction costs, and boat and RV storage in many areas are completely underserved. My experience is new self storage absorbs in a lease-up situation between 3% and 6% of the square feet per month. Parking can go around 10% or higher. Development costs are less as well.
This project is in a Florida market where demand for boat and RV storage is high, very high. It needs to go on industrial land, and there is not a lot of that in Florida.
We are looking at a 52,000-square-foot industrial building on 9.9 acres of land for $2,000,000.
I am assuming that we can get 45% efficiency in the building. In other words, 45% of the building will be generating parking income. In reality, it should be much higher.
The rents for parking in the area are high. It appears that $0.75 PSF for outdoor parking is the rental rate per month, so I will up it 20% for interior parking.
I am going to assume $25 PSF to rehab the building and clean it up, and I will also assume that the building is going to take 2 of the 10 acres with parking, fire access, and radius turns for larger vehicles into the building.
So that leaves, let’s say, 8 acres to develop into parking. Assuming there is enough demand for that parking, which a feasibility report will verify, and using a 50% efficiency number (i.e., half the land will be generating income), that says we can get about 175,000 net square feet of land will be generating parking income.
Let’s use a high $50 PSF for the development cost for the parking development (all surfaces). This includes some demolition of existing small buildings, grading, and paving, fencing, etc.
| Acquisition Cost: | $2,000,000 |
| Building Rehab: | 1,300,000 |
| Parking Development: | 8,750,000 |
| Total Project Cost: | 12,050,000 |
Let’s look at the project when stabilized.
| Building: | ||
| GPI: | $280,800 | |
| Ecc. Occ. | 88% | |
| Net Income: | $247,104 | |
| Land: | ||
| GPI: | $1,575,000 | |
| Ecc. Occ. | 88% | |
| Net Income: | $1,386,000 | |
| Total Income: | $1,663,104 |
| Total Income: | $1,663,104 |
| Operating Expenses: | $538,924 |
| Net Operating Income: | $1,094,180 |
| Loan Payment: | $715:411 |
| Net Cash FLow: | $378,769 |
| Cash on Cash Returns: | 12.6 |
| Value at 7% CAP: | $15,631,138 |
This deal would require a 25% equity investment, or $3,012,500. The reality is our development costs are inflated to cover for mistakes, but even this is a good deal. If it took us 4 to 5 years to stabilize, we would almost have doubled our money by then and have a strong asset.
These are all real deals in today’s market with today’s numbers. I have used from $300,000 to $3 million in down payments. I hope this has helped.
If you want to dive deeper into how we analyze and our methodology, feel free to schedule a call with me and see if the upcoming Bootcamp on Nov 11 & 12 would support you at this link (click here), or if after Nov. 11 & 12,2022, click here for the OnDemand version of the bootcamp.
