Five Beginner Mistakes to Avoid When Buying a Self-Storage Facility
Let’s talk about five mistakes people are making when getting into the self-storage business today, especially people new to the business. Now I have made every one of them myself, so I will talk from experience.
Let’s shorten your learning curve.
However, many of these today have a higher price tag than before because of the higher interest rates, making carrying costs so much more expensive, coupled with the high cost of materials and labor if construction is involved. And for us, some kind of value-add play, including construction, is almost always involved. So avoiding them altogether has never been more important.
These issues are somewhat in order but just know anyone of these can cause some serious challenges to overcome.
- No Visibility. No matter what anyone says about self-storage, to me it is a retail business. You need retail type visibility.
Now I know there is the belief that the internet will drive people to your facility. Perhaps. Perhaps not. I don’t want to win that argument.
Here is what I do know. At any given moment, there is about 10% to 12% of the population that needs self-storage. I also know in most cases; your market lives within three to five miles of your facility. In our portfolio, 87% of our customers live within 3.2 miles of our projects.
I want 100% in my market, if possible, to see us and know about us. Then, when they become the 10% to 12% that actually need self-storage, and they do go online, they will recognize our facility, and we are their first click.
We track the sources of new leases, and usually number two or three today (sometimes still number one like it used to be), is what we call “drive-by.” “I see your facility every day as I pick up the kids” is the type of thing we hear.
My slowest to lease up of new space in this business was a project that had no visibility from a main road. There is a whole story about that I could go into, but suffice it to say for now, I didn’t do my due diligence as well as I could have. We adjoined an expressway but had no visibility. I thought I would be able to get it, but I couldn’t get the type of signs everyone else seemed to have. Because I didn’t, it took well over a year of extra time to stabilize and lots of monthly payments out of our pockets, not from the facility, to keep the deal going.
Be visible so your trade area knows who you are and where you are. That is my coaching.
- Not A Good Trade Area. There are a lot of things we can overcome and fix in a low-performing self-storage project, but one thing I can’t fix is an overbuilt trade area.
You do not want to buy a project in an area that is overbuilt. Believe me; it gets old quickly.
Today, there are subscription services, like Radius Plus or Yardi, that can give you a glimpse into the supply/demand of a particular address.
Ultimately, I recommend you get a feasibility report, especially if you are bringing on new self-storage. But I have seen a lot of time and money wasted trying to make a project work in a trade area that just isn’t right at that time for self-storage.
I myself have grown too attached to a project or location and lost my objectivity. Yes, there can sometimes be situations that these subscription services won’t pick up everything correctly, but that is not the issue I see most often. Most often, people are trying to sell me on why the data is wrong.
“There are a lot of new housing starts, or there is a new apartment complex going in next door.” Well…OK. A 100-house neighborhood may produce 10 customers.
Always be willing to walk if a trade area isn’t a good one.
What makes a good one? A lot of factors can go into that answer, but let’s just narrow it down to three.
- Population growth. I don’t need to be over 50,000 in a three- or five-mile radius. I have many successful projects with lower population than that. I just need population growth of some sort.
I don’t even need large population growth. I just need more people moving into and living in my trade are than are dying or leaving. In fact, I will go so far as to say population growth will fix over time any mistake you make in buying or developing a self-storage project.
- Median income of a trade area. I often get asked, “What is the best income for a trade area?”
Well, it depends. $45,000 in certain southeastern markets is good, and $100,000 in San Francisco may be close to poverty. I used to say it is important that whatever the median income in a trade area is, it’s important that be above the average for the market that trade area is located in. Today, I want is somewhat (10% to 15%) above that average.
Again, I have developed projects in trade areas where the median income is below the market average. The average length of stay is shorter. Marketing costs are higher because you are releasing the same units more often. Not to mention in a lease up situation, one may have to rent the same unit two to three times before stabilization thus increasing the length of time it takes to be profitable. Believe me it is not fun, especially when you interest only period runs out on your construction loan.
- Supply/Demand of a trade area. There are just a lot more storage projects out there than there used to be.
It is not hard to quantify you trade area and the number of people in that area. It is also not hard to see how much storage is already present and being brought online. If there is more supply than demand (i.e., more self-storage units than people in a trade area to rent them), everyone loses. But larger players usually have deeper pockets than I or you may have, so we are the real losers.
The only way to rent units in an overbuilt market is to offer lower prices than your competitors. Yes, I know “good customer service” can help. But good customer service doesn’t pay the mortgage payment. Rental income does. You need tenants in units, and in overbuilt markets, dropping rates to compete with the current rates in that trade area are now part of the game, especially if you are in a lease-up situation.
Don’t think you can beat an overbuilt market with good marketing. I hear this a lot. Someone may have had marketing success in other business ventures and thinks they can apply it in an overbuilt market and win. Well…perhaps. Are you willing to bet $4 million on it? (or whatever the cost of your project is).
- Not Getting A Good Feasibility Report. Yes, I use subscription services to get a glimpse into a trade area as I am considering one. But I never buy a project, especially if I am bringing on new storage space, where I don’t get a “good” feasibility report.
There are feasibility reports, and there are good feasibility reports. I don’t consider a desktop a good one in most cases. Look, you are investing a lot of money in a project that for many of us has our hopes and dreams in it. Don’t cheap out on a feasibility report.
Yes, a full feasibility report may cost you $8,000 to $10,000. But that is pennies compared to what you could lose if you build a project that should not have been built, or you buy one that is going to take twice the time to turn around than you thought it would.
Make sure whoever you hire to do one is one your lender will approve of. If you want to know who I use, you can go to https://creatingwealththroughselfstorage.com/resources. Scroll down until you see feasibility reports. Amanda Helfrich is my go-to person for this job.
- Not Understanding Your Competition. The self-storage business has become very sophisticated today. Ai algorithms, dynamic pricing, value pricing, and online marketing strategies just to mention a few.
It is critical today to understand who your competition is and how they market. It is also important to know their strengths and weaknesses. And you need to know this as you underwrite, so you can price into your income stream what it is really going to take to compete effectively.
One of the best features of the subscription service I use, Radius Plus, is the ability to get in almost real time, the current rates being offered by the competition is in a trade area. I can see the discounts, rates, and average rates over the last 12 months in a trade area, and underwrite to that, or towards what I think I may see from the trends detected.
The days of just going to a competitor’s web site, seeing what the current rates are in one or two projects in the trade area are, then underwriting to that are over. If your competition offers dynamic pricing or lower rates to move in, you probably will have to as well. If not, you could miss your income number by a lot. That isn’t a lot of fun.
- Payment Plans. I have written about this often, but I still see it out there.
Here is my number one rule when running an existing facility. Never, never, never offer a tenant who can pay their bill a plan to catch up and stay.
How often? Never!
It is not fair to them, it’s not fair to you, your partners, the bank, or anyone involved.
I won’t go into it how now, but in most cases (depending on the software) I can look at any random daily close from a project an instantly tell you if that owner offers payment plans. You are 100% of the time better off just letting them walk and take their stuff and get nothing than you are stretching it out, gumming up you cash flow, and watching them get further and further behind.
If by day 30 (or whatever day that state states a customer’s goods go into lien), the customer hasn’t paid, have a policy in place. Not that this must be it, but we allow them to pay 50% of what they owe and walk if they can be out in 48 hours. If not, the unit goes to auction. Period.
You are way better off putting that unit back into service, even if it takes some time to rent. I have seen up to 50% or more of projects cash flow dribble in from payment plans. Never allow that. You are not better off getting “something.” All you have is an occupied unit with little or no income and no way to remedy it.
These are the main mistakes I still see made out in the real world today. If you are getting into this fantastic business of self-storage, hopefully, you can dodge some of the problems I have created for myself and get to profitability fast.
This business changed the trajectory of my life and the life of my family. The best time to have entered the business (no matter when I say this) was ten years ago. The next best time is now. Only by stepping up and playing the game can you have a shot at reaping its rewards.
But the stakes can be high, so it is important to do it right. I hope this episode helps.
