I get asked that question a lot?
“How much can I pay for land to build self-storage on?”
Or… “How much can I pay for a building to put self-storage in?”
If you have been following me at all, you most likely know I have a fairly stock answer to most questions…” It depends”.
Overview
Let’s look at the self-storage business from 30 thousand feet. I am surprised how few really do this.
If you are buying or building self-storage (let’s use building for this example), you are building a physical asset, in this case, storage units, in order to generate cash flow.
Said another way you are investing capital money (cost of land, construction, and soft cost) to create operating money, and ultimately surplus cash flow (cash left after operating expenses, loan payments, and ongoing capital money to keep assets generating operating cash).
(Side Bar: Self-Storage is such a great asset for smaller investors because the ongoing capital investment is extremely low compared to any other real estate asset).
So you can see, there are a lot of variables that all are interrelated with each other.
Anyone number affects all the others. If the gross operating capital (i.e., gross rental income) is $17 psf (i.e., rental income before operating expenses, loan payment, and ongoing capital money to keep assets generating operating cash), you will get a very different amount of profit than if the gross rental income is $12 psf.
If your operating expenses are 43% instead of 38%, you get a different profit level.
But ultimately, it depends on how much profit you are requiring for the amount of money being invested.
That’s why REITs can pay so much for a facility. Their cost of money is so much lower than what we can pay; they require less profit than I do so that they can pay more.
Business Plan
So as far as I am concerned, it all starts with your business plan or your business strategy.
What are your building or buying, and what is the minimum amount of profit per deal you need.
Someone expecting a minimum of 10% cash on cash return on the amount of “capital dollars initially invested” (i.e., down payment or equity in the deal), can pay more for a piece of land than someone expecting 15% cash on cash return on their investment, with all other things being equal.
Theoretically, a building system being fabricated by a self-storage fabricating company is going to cost the same (transportation cost excluded) no matter if I am building in Chicago, IL, or Johnson, TN.
However, I bet the rents are very different. I bet soft cost are different too. I bet labor cost are different.
You get the picture.
So if I am expecting, let’s say a 12% cash on cash return on a 25% down payment for the land and building cost, I can pay vastly different amounts for one acre of raw land between the two locations.
Even the loan has a big effect on what one can pay.
Conclusion
I am sure someone smarter than me can design some kind of excel sheet that would have all the variables, and ultimately spit out some kind of value for the land.
I just work up the analysis in the analyzer and figure out what I can pay for land-based on what outcome I am trying to create.
So if you get asked, “How much can I pay for a piece of land to build self storage on?” I hope your answer is now some version of “Well…it depends” …
