“Self storage facilities are so expensive to buy today!”
“I’m afraid to build a new one as my first facility.”
“How can I get into this business?”
In today’s competitive self storage market there is a way smaller investors, like us, can get in the business and still get the returns on our time, money and risk that make it worth it.
Expansion.
- Approximately 60% of self storage facilities today are owned by someone who only owns a single facility.
- Many of these are owned by people who are planning to sell in the next five to ten years.
- In my experience, many of these are under utilized because the owners are happy with what they have. They feel like they’re making good money and they don’t want to take the risk of raising prices, spending more money on the facility, or expanding – even when they have the land to do so.
These are the people we can pay a “high price” or a “low CAP rate” on their income stream, but still purchase the facility at a price that really works after we increase the value.
In two of the last three facilities we have put in service, we did just that.
This is just one example:
We purchased a 25,000 square foot faculty plus 1.5 acres next door with a 29,000 square foot industrial building. This property was sitting on a 4 lane, main artery in our market, but had an industrial building at the rear of the property. The community was happy to see something positive being done with that building.
We put 20,000 square feet of climate controlled space in the industrial building, and added an additional 12,500 square feet of non-climate controlled space on the front part of the land, bringing the total to 57,500 ft.
The project was generating $8,500 to $11,000 gross income per month when we purchased it. It will be generating over $45,000 when the last unit to hit 88% occupancy is leased.
We are generating 12% on the cash in the deal after debt service and operating expenses.
These are not home runs, killer deals, or “doubling your money in five years” type of projects. These are just solid, good investments that appreciate upward every year creating “true” wealth as the net income rises each year.
What works about these type of self storage expansions is that there is cash flow from day one.
There will be some clean up of the existing facility and the existing customer base, however, this is usually not hard work or too expensive.
- Make sure you can convert the facility into something that meets your long term business strategy.
- Look for properties that are between 15,000 and 35,000 square feet, and either have expansion room on the property itself, or you can purchase adjoining property. We have done both.
- If you see a facility with as lot of parking, that could also be your expansion room.
Always, get a feasibility report that quantifies the demand for self storage. You, any partners you may have, and your bank will then know that your expansion will most likely be absorbed by the market and how long it will take.
You can use the new Storage World Analyzer if you are not good with spreadsheets to model out the economics of the expansion and lease up. Make sure you have enough money to handle the down payment and any negative cash flow that may be modeled.
The good news is that in every project we have done in the past two years, we have leased way more square feet per month than the feasibility report indicated we would. That doesn’t mean you will, but there is a good chance your market is robust like the ones we are in now.
If construction is new to you, like it was to me, make sure you work with a partner or contractor who knows self storage. It is different than most types of construction and it’s very easy to put too much money in the project.
Many builders prefer to do stick building. In my opinion, if you don’t go with self storage building systems you tend to get an over-built product that loses the flexibility to alter unit sizes easily to adjust to a changing market.
For more information on this, you can go to the SelfStorageQuickStartAcademy.com, and in the next few weeks the course How To Build Your First Self Storage Facility will be available. There will be a lot of worksheets and details about self storage construction from a non-contractor point of view.
I think this is one of the best ways to get in self storage today, and there are going to be a lot of these type of opportunities over the next decade as we see a passing of one generation to another.
So…
- Keep you eyes open.
- Know how to quickly figure out the economic model of a property.
- Be able and willing to pull the trigger fast when you see one of these that meet your business strategy.
Let me know how you are doing and if there is any thing more that can help you execute this strategy.