Let me show you how you can create, let’s say, $292,000 additional value on your subsequent self storage acquisition of, let’s say, a 365-unit self storage facility.
I’m talking tenant insurance.
Yes, I know you are either saying, “tenant insurance is in the Offering Memorandums,” or you are saying, “yes, but (indication of a closed mind) tenant insurance won’t work in my market.”
Let me address each of these.
Dos and Don’ts When Calculating Tenant Insurance Income
Let’s start with the don’ts.
First, don’t use the number in the offering memorandum unless it is a historical number. Odds are it isn’t.
And if it is, verify it in due diligence very closely.
I will show you how I calculate it in a minute.
Next, don’t assume every unit will pay it.
Again, I will explain in a minute.
Do make it mandatory, or at least mandatory that their goods need to be insured.
Do use the minimum commission number per unit.
Do make the program mandatory for existing customers that are currently not paying it.
Let me explain all of what I have just said.
Our Program
It took me years, yes, years to summon the courage to make tenant insurance required.
I was like many small owners, even though I often spend much energy portraying a sophisticated self storage owner.
Bottom line, I was scared that if I made tenant insurance mandatory, I would run my customers to a facility that didn’t make it compulsory.
I would say things like, “not making tenant insurance mandatory is a competitive advantage,” or “the income for my customers is low here, and the extra cost would be a burden to them,” or whatever scared small owners may say.
Yes, I said them.
Boy, was I wrong
Within three months, I was smacking myself, asking why I didn’t do this sooner.
Here is what we did.
- We explained our insurance doesn’t cover your goods in the event of a problem. As much as I may want to, if our roof leaks or there is a weather event or a break-in, there is no way our insurance will ever cover your items.
- If you are paying to store items, they should be insured.
- Even if your homeowner’s insurance covers them, that is not good for you because if you make a claim at a storage unit, your home insurance is raised for years.
- We are adding the minimum tenant insurance to your bill. If you really want to have your homeowner’s insurance cover your stored items in the first 309 days, bring me a declaration page from your insurance provider, and we will drop the tenant insurance from your monthly bill.
- Hint: IN our fictitious 365-unit facility we are discussing, I guess you can count on one hand with digits to spare how many people do this.
Now you may be saying that another facility in my small market is doing this.
To you, I say good. Be the leader and make more money than your competitors.
You see, tenant insurance is one of the few win-wins in life. Both you and your customers benefit.
I can’t tell you the number of times I repeated a story I heard from our first tenant insurance provider, the Bader Company. They told us that within a week, they had card tables set up at the facilities cutting checks when Hurricane Katrina hit New Orleans. The people who were insured through their homeowner’s insurance spent years trying to get something.
You may say, “but my customers may leave me and go where they don’t have to pay it.”
Good. Let them go.
I had to get this to start our program. If A customer is too stubborn or dumb to pay $9 or $10 extra to insure their goods, let them go. They are most likely a problem or a problem to happen anyway.
Replace them with a better customer.
So, when I put on my big boy suit and started our tenant insurance program five years ago, we used it on every property, no matter where, ever since.
When I am looking at a self storage opportunity to buy or develop, I include it as well.
However, I use a slightly different formula than many.
How I Calculate Tenant Insurance In A Proforma
When calculating tenant insurance, I never use the number in the OM if there is one.
I try to be a little more conservative and almost, if not always, exceed the number I come up with.
I assume that 80% (sometimes as low as 70% on an existing facility with no tenant insurance program) of the customers will use the tenant insurance program, and 20% will not.
The reality is it close to 95%.
Then I assume no one will purchase more than the minimum, which is usually around $2,500 per unit for approximately $10 to the customer.
Finally, I assume the lowest commission we earn per unit per month which is $5 (as our company grew, so did our minimum per unit).
So, in the fictitious 365-unit facility, here is the math.
365 x 80% = 292 Units paying tenant insurance
292 x $5 = $1,460 per month
$1,460 x 12 = $17,520 additional income per year to the facility in tenant insurance
$17,530 divided by .06 = $292,000
(6% CAP rate)
My bet is the value you would create here well exceeds $300,000n at a 6 CAP, but I wanted to keep it very conservative to get your attention.
The self storage business is maturing, and as small investors, we need to mature with it.
My coaching is that if you don’t have tenant insurance, start to offer it now. If you are in a market where more significant players or REITs are offering it, start within one hour of reading this.
Believe me, they are.
If you are in a smaller market, my coaching is to still do it. Even if no one else is, do it. You are doing yourself and your customers a favor.
Summon the courage to try it. Phase it in. Something.
In my opinion, which my wife often reminds me is wrong; you are leaving a lot of money as well as cash on the table if you are not implementing tenant insurance on every project you have.
