This week we’re continuing a series exploring the skill sets I think are necessary for the small investor today to be successful in starting or growing their self storage business.
This series is a deeper dive into an article I wrote for Inside Self Storage earlier this year.
So far we have gone over the first four skills needed:
- The ability to find self storage projects
- Analyze the financial viability of opportunities
- Finance storage opportunities
- Put cash into projects
In reality, it doesn’t matter what is going on in the industry or the economy, the above skills are needed. Prices could be low or high, the economy strong or week. All of the above skills are always needed.
However, the remaining skills I think are necessary to have are more a product of the fact we are still in a market where self storage projects are still extremely expensive.
In order to get the return we need as smaller investors, we are going to need to have some value-add play when buying existing self storage.
There’s no way to buy at the pricing out there today and get any kind of return without a major value-add.
And the best value-add is to be able to expand. Adding more self storage at a much lower cost than you can buy existing self storage and its cash flow for.
Why not build new then?
You can. We have. But it’s riskier. In most cases, there’s also two to three years of negative cash flow before you break even.
For someone new to the self storage business, finding smaller mom and pop facilities that can be upgraded and/or expanded is the best play given our current market.
Expansions
If you are going to double the size of a project, this means you are going to be in the construction business.
For many of us, this is an unsettling thought.
My wife still laughs at this thought of me in the development or construction business.
In reality, we can break down the components of what it means to be in the “self storage construction” business into something manageable, even if we have no construction experience.
The first skill set in the “construction/development” value-add area to have is the ability to estimate and project construction costs.
These costs along with the purchase price for the existing facility are the total cost of the project.
A lender will loan their percentage of the LTV (Loan to Value) based on this number. So it is important to know early on in the project what this number will be.
This means you, or someone you work with has to be good at estimating cost.
Yes, you can use a number line of $50 per square foot.
But let’s go deeper. What makes up that $50 psf?
Construction Costs Breakdown
I break the construction project down into three sections:
- The self storage construction component
- The Land prep and everything outside the self storage building component; and
- The soft cost component.
The self storage construction component is usually the most expensive.
What I usually do is send a survey or site plan to one of the self storage fabricators and request a preliminary layout.
In today’s market, I now have to pay for this. It usually costs me between $1,000 and $2,000. I want to make sure I own that drawing, so I make sure I pay for it. After it is reviewed and tweaked a little, I will have other companies bid off that same drawing.
Believe me, you will more than make up the cost of that drawing by having competitive bids.
Depending on what you are building – how much is climate controlled, single story or multi-story, etc. – we are seeing fabrication cost between $8.50 and $12.50 per square foot.
Then the next big number is the erection or assembly cost of putting that building up. We’ve been seeing $3.50 – $4.50 depending on the climate controlled portion and/or if it is vertical or not.
The good news is it’s self storage so there are very few moving pieces. Depending on what you are creating there are not that many more components to deal with.
The biggest wild card and the number I just have to guess at is the site work number.
This is all the work to get the site ready to build on. Moving the dirt around to get the right elevation. Removing trees if they are there. Underground water runoff if required. Retention area if required. Getting the pads ready for the concrete floor to be poured. For us, all of these are included in the site work number.
It can vary wildly. I have had a project with costs as low as $13,000 and as high as $870,000. I will usually ask an engineer what they think is going to be required for a particular site for the regulatory approvals and their estimate of the range of cost.
If they don’t know I ask them to ask a site work contractor or to give me the name of one and I will ask.
Next, think of what other trades will be necessary. Usually, it is an electrician, a plumber, a concrete company, a fencing company, a security company to install cameras and a gate system, and perhaps an HVAC company.
That’s about it.
If this is totally new to you, I would have a construction manager or a General Contractor give you their estimates of these numbers (if you have no idea what they would be).
You can also use the Self Storage Association or Inside Self Storage publications for construction averages. That is what I did to get started. Now we have some historical numbers to refer to.
The soft cost can also vary some.
Two sets of plans required are usually required. One is the site work drawings, and the other is the building plans.
I learned early on that having a good engineer is critical. One of the first calls I make after I have sent a survey or site plan to a self storage fabricator is to figure out what engineer we are going to use.
Make sure you use an engineer who has self storage experience if possible. They should also know the regulatory process and players in the municipality you need to get the approvals from.
We usually have the engineer drive the approval process for us.
Get a quote from them early on. For us, a typical expansion is between $15,000 and $25,000. It can be more if the project is complex.
In some municipalities, the building drawings from the self storage fabricators are enough to get the building permits. Often other items such as life safety, electrical, lighting, etc. need to be added to the plans.
This is where an architect comes in. If you are creating a new office/retail area, the self storage fabricators usually don’t put that portion in their plans other than the space where it is going to be.
Again, the good news is it’s self storage. Other than office area and plan preparation, there is very little for an architect to do.
Most of the soft cost numbers we can estimate after we have a conversation with the engineer.
Resources
For many of you, when you first thought about getting in the self storage business you didn’t consider having to know how to estimate construction costs.
That’s simply the reality of the market today.
There are a lot of resources out there to support you, including a course I offer called “How To Build Your First Self Storage Facility”.
If you want to go deeper into self storage construction, it covers construction and expansion from a non-contractor’s point of view. It has our preliminary budget, forms, and other support material.
Today, it is important for you to be able to determine how much new self storage you can put up and the approximate cost of it.
When you get good at that, you can compute the project’s total cost. You already know (or soon will) how to determine the income/expenses of the new space.
When you have this component, you will have all you need to determine if this is going to be a profitable venture.
Our experience is that even if you have to pay more for the existing project you can get a blended return required to interest investors. For example, if you purchase an existing facility at a 6.5% CAP rate, and you can bring another 20,000 square feet online for $50 psf, and get it leased up, you blended return can be up to 15% cash-on-cash return and over 20% IRR (internal rate of return) on a ten-year cash flow statement.
That is how you can get in the self storage business or grow your self storage business in today’s environment.
And here is a hot tip: the sooner you get in the business, the sooner you can begin to create the wealth only self storage can generate for you. It is still, even in today’s high priced environment, the best business for the small investor there is.
