In today’s reality of an overbuilt market in many parts of the country, it is important that we have a good strategy as an entry point or an expansion point into the self-storage business.

I have discussed conversions in detail over the past few months. If you are headed to the 2019 ISS convention in the first week of April, I will be teaching a class on it. If you are interested in going to the convention, you can get more information here. 

The other strategy I especially like is the expansion strategy. This is where you purchase an existing facility with expansion room. You add additional square feet. Perhaps your strategy is to purchase mom and pop smaller projects and expand to over 50,000 to create institutional grade self-storage.

The Submarket

As with any project, again you have to know if the market is oversupplied. You don’t want to be bringing on new space in an overbuilt market. We have discussed in previous episodes your options of how to do a preliminary analysis to see the approximate supply/demand of a particular submarket. A Feasibility report will ultimately verify your assumptions.

Let’s say you are purchasing a 31,000 sq. ft. facility, and want to add more storage. There appears to be demand for over 40,000 sq. ft. of self-storage in that submarket.

The first thing you do is try to determine how much additional self-storage you can add.

The number we use is .33. In other words, if I have an acre and a half of land, that is (43,560 sq. ft. x 1.5), I have 63,340 sq. ft. of land.

Next multiply 63,340 x .33 to get 21,560. So for my preliminary analysis, I am going to assume I can get 21,560 sq. ft. of net rentable self-storage. This assumes one story, suburban-style project. 

If I need more, and there is enough demand, I could erect a two-story (or more) building. Just make sure your demand is there and given multi-story buildings usually have a lot of climate controlled units, there is demand for this product.

Next, enter the existing unit mix. Then enter the operating expenses how you would run the project. Use the Offering Memorandum for some of the operating expense numbers like taxes or insurance, but use your numbers based on how you anticipate running the project.

Then you figure out on the expansion how much you would put in a climate controlled space in non-climate controlled space. On this fictitious expansion project, if we look at the current unit mix we have 88.71% as non-climate controlled space and 11.29 % as climate controlled. Let’s say we wanted to increase the climate-controlled percentage of the project. Let’s do approximately 50% of the expansion as climate controlled and 50% non-climate controlled space. Or in other words 10,780 sq. ft. of non-climate controlled expansion space and 10,780 of climate controlled expansion space.

Will how much income can I get for each type of space? Well, let’s see what we are currently getting. Look at the existing unit mix.

We can see for the non-climate controlled space our gross potential is $11.67 psf income and for the climat4 controlled space it is $20.09 psf. 

So in our new space, let’s be somewhat careful and lower it slightly. Let’s use $11 for the non-climate and $19 for the climate controlled space. You could also discount the rent during ease up, or use lower stabilized occupancy to adjust for any concessions. I usually just lower the rent to make it easy.

Construction Cost

If you have never done construction it may be hard to accurately project these numbers at first, but there are a lot of resources to assist you (including some of my classes at the Self Storage QuickStart Academy.com and CreatingWealthThroughSelfStorage.com).

For your concrete floors in today’s world, I would estimate around $5.50 psf. Electric is always more than I expect. HVAC, plumbing, fencing, and security.

The self-storage system in today’s numbers (with the person in the White House we currently dealing with his steel tariffs) you can expect to spend $13 to $15 psf. The cost to erect the system should be from $3.50 psf to $5.00 psf depending on where you are and who is erecting the system.

We are usually spending around $50 to $55 psf hard and soft cost for a single story self-storage expansion. That is more than some people spend and less than others. Where you are in the country and what is the cost for approvals has a lot to do with it as well. 

Many people spend well below that for their expansions, and some spend way above it. Don’t just take my numbers. Really research it using the resources I have been discussing. But for now, you are doing a preliminary construction budget. Come up with a number, then add it to the acquisition cost of the building. 

That is the total cost of the project and you will be financing whatever loan to value your loan is from that number.

=Assumptions

Finally, we put in some assumptions. For example, how much will the rental income increase per year on average? We use 3% per year.

How much will the operating expenses go up each year on average? We use 2.5%.

How much will the project be worth year by year? We use a 7% CAP rate on the year by year Net Operating Income year by year to calculate the values. That is called a “Reversion CAP Rate” or a “Disposition CAP Rate”.

How long will it take you to complete the expansion and start generating expansion income? That depends on where it is in the country, how long approvals take, and if we are doing in fix up and or lease up in the existing space. For this factious analysis, let’s say 12 months from the close to the time new income starts coming in.

How many sq. ft. of expansion self-storage space will come online as income producing space each month? Let’s use 1,200 net rentable sq. ft. per month until stabilization.

And finally, what has stabilized occupancy? Let’s use 85%.

Ten Year Cash Flow

Next, we run our ten-year cash flow. This tells us almost everything we need to know.

Conclusion

What works about expansions is that you can get income from day one. 

Usually, the time it takes to get to break even after you open the expansion space up for lease up is much shorter than new construction. Just a matter of a few months if any at all.

You are bringing on less sq. ft. of new space than new construction, and you know your rental pricing because you are already getting it.

Not all expansions work like this factious one, but many can. 

So between conversions and expansions, people like us can get in or grow our self-storage business. Even inexpensive markets like the one we are in now, we can reduce risk by doing these types of transactions.

Just remember, the sooner you get in or grow your self-storage business, the sooner you can start creating the wealth this product has to offer smaller investors like us. Just know your numbers and go in with a plan.