“They want HOW MUCH for their self storage facility?!”
#x*!(*%!
“Maybe we should just build one.”
As the self storage market heats up, and prices keep getting higher and higher for existing self storage facilities, more and more people are leaning towards building new facilities from the ground up.
This is a valid approach. We’ve done this as well. But you must go in with your eyes open. And even when you think you know what to expect, there will still be some surprises.
Hey, life is full of surprises right? Sometimes even when you buy an existing facilitiy with a known history (just not as many it seems to me).
So as you go through the steps that we’re all going through looking at existing facilities. You’ve made a bid on your tenth property, and just could not get it at a price that would work for you. So lets look at the cost of building a facility and compare.
Let’s examine why people are building today, sometimes people who have never built anything, as a strategy for getting in the self storage business.
The main difference between building and buying an existing self storage facility is what you are actually paying for.
- When you buy an existing facility, you are not paying for the buildings and land. You are buying the income stream, which just happens to be generated by self storage buildings on land.
- When you build, you are paying for the land, the building materials, and the cost of assembling those materials on a site after the site has been made ready for the assembly.
There is a big difference.
In todays market, the challenge we are having, is what seller’s can expect for their income stream. The larger players, mostly publically traded REITS (publically traded real estate trust that specialize in a specific real estate product), are willing to pay a high price for the income stream generated by self storage.
How much is a high price?
Well for “institutional grade” self storage, as high a price as necessary to generate a 5% to 6% cash on cash return for an all cash sale (in other words a 5% to 6% CAP rate). I don’t know about you, but I need a higher return than 5% to 6%.
Now sometimes, I can pay a higher price for the “seller’s income stream”, but still get the return I need: by adding additional income, cutting expenses, and/or improving the income on the existing facility. Even with that said, a lot of people are turning to building.
Why?
Let’s look at the numbers.
Let’s assume a fictitious 75,000 square foot institutional grade self storage facility is for sale in a large market. The real estate agent tells the Seller “I can get you a 6% CAP in todays market”.
The Seller says “How much is that?”
The agent wipes out his HP calculator and does the math. Here is what he is doing.
- He would enter the square feet of the facility…75,000.
- He would look at the P & L or the unit mix page and enter the average per square foot income based on the unit mix and asking price, lets say here it is $12.50 (a nice facility with 30% climate controlled space).
- He would get $937,500. Then he would enter or estimate the operating expenses, lets say 43%, so he would multiply the $937,500 times .57. He would then get a $534,375 number.
- That is the Net Operating Income estimate (NOI). He quickly divides that by .06 (he is using an HP calculator so it is lightening speed) and gets and says at the same time “About $8,906,250”.
Then we would have to slosh through negotiating with a Seller who now thinks his self storage facility is worth $9 million dollar (they always round up). Fun.
In the course “How To Buy Your First Self Storage Facility” I have shown you how you can pay more than you may think you can and get the facility in at a price that allows you to achieve your goals. But don’t be deceived, it is challenging today. The above example may seem ridiculous, but believe me, it’s happening every day.
So we look at building.
Let’s look at those numbers.
This is very general, but if that same hot shot real estate agent was there and he whips out the same HP calculator, he would most likely enter 75,000 (sq. ft.) multiplied by $37.00 and say something like “It would cost you $2,775,000 to build 75,000 square feet, plus the land cost and the carry.”
That sounds a lot better than $9 million.
And it is, but not as much as you may think, especially considering the risk.
Now $37 is a high construction number for some people. I have seen some people build as low as $25 psf. But they were contractors themselves and did not factor in developer fees or GC fees. On the two projects we have built, our budget was around $37 psf. For the hard and soft cost, not including the land.
Then you have the land cost. A 75,000 square foot facility is going to have to be on about a 5.5 acre site or so. At $250,000 per acre (remember a large city here, if your market is different lower the numbers all around, but percentage is still about the same), that is an additional $1,375,000 for land cost. We are now at $4,150,000.
But we’re not done yet.
The “carry”.
You have taken the course at the Self Storage Quick Start Academy on How to BuildF Your First Facility (being released in a couple of weeks) so you know you must, a real must, have gotten a feasibility report. The feasibility report says you will lease up a new facility at 1,200 “net square feet per month”. You are using the Storage World Analyzer and you see that it will take you until year 4, month ten, to break even in your cash flow (9 months’ construction time then 1,200 net square feet rented up a month…it takes that long to hit 60%, which is your break even point on this facility).
So that is 4 years of paying the debt service and a year or two of paying some or all of the operating expenses.
On a 70% loan to value at 4.75% interest, the interest alone is $137,987 per year. So for four years that is an additional $551,950 in interest plus a deficient in operating expenses you may need to fund.
So that $2 million building cost (we always round down) quickly turns into almost $5 million.
But still less than “$9 million” for sure, but with considerably more risk.
I have often been surprised by the site work cost being higher than I expected. I have also been pleasantly surprised at our ability to beat the feasibility report’s estimate on renting up.
You just never know for sure when you build.
But if it goes right, your returns are going to be much higher in the long run. As well they should for taking all the risk you assumed to build with no income coming in.
That was a quick look at the number difference between buying and building. I can assure your of one thing: my number are not exactly correct. These are estimates and there is never a situation where these numbers will be exactly right. I hope Jed (my lawyer) is happy with this paragraph.
No, Jed is telling me to tell you not to depend on these numbers at all. They were for example only.
There you go. A not exact, but I feel fairly realistic, comparison between building and buying in today’s market.
For a shameless plug, you can find out more information on both buying existing and building at Self Storage Quick Start Academy.
In general, this is the process many of us are going through as we look at how to get in or grow our self storage business. But the good news is, you CAN get in. We’re buying existing facilities and building new ones all the time.
Next week we will look at what our real winning strategy is today: buying a small self storage facility and expanding it.
I hope this helps. As always, I’m here to answer any questions.
Hi! I’m 17 and am intreged by the storage unit business. It seems very lucrative but I can start until I’m 18 with a good job in real estate and selling health insurence(insurance agent job will be just for a few years) I’m just going to save and put some money back for a nest egg, some into stocks and the rest into lucrative assets. That’s the plan anyway. When you have a minute could you tell me if this seems like a good plan, thank you for your time !
Sounds like a very good plan. Impressed. Put as much as you can as a percentage of your income away. It just gives you more options in life.
Hello Mark, I’m 24 and have a construction management job making about 130k annually. I’ve been with this company for about a year and a half and have saved my first 100k(and have no debt). I want to build a storage facility but I’m not sure if 100k is enough to get a large enough loan. What do you think? Being a beginner to this, should I hold out and continue saving, test the waters with a small storage facility and build it later, or go all in and scrap up enough loan money to build a substantial facility? Any advise would be appreciated.
First of all, congratulations on your success. You are way further along at your age than I was.
To answer your question, it depends. Not to be vague, but it really does depend on your goals and where you want to build.
With an SBA loan you could construct up to $1 million project with $100 K. I would go 85% down if possible.
Depending on your cost that’s probably 17,000 sq. ft. to 20,000. Small, but would have your feet in the business and could run with a kiosk after lease up.
The real issue is where and what is the supply demand there, what you really want out of being in the self storage business, and does a small project like this help you or detract you from your self storage goals.
It sounds to me like a good way to start. Perhaps a little more funding so you don’t take every cent you have in savings. But all in all, it sounds like you are doing great in life and will do great in storage.
Hello Mark, thanks so much for all the resources you posted online. I have watched, read many of them and they are very informative. I really want to build a small one and start from there. But with only $70000 in the bank, I don’t think I can. I’m looking at a 2.5 acres land for $120,000. Thinking of gathering all my fund together with a few more months of saving and pay it off cash. Then get together with a small crew to build it by ourselves. With your expertise in the field, can you please tell me what part I will still have to hire expert to do? For example, civil engineer + supplies + certain contractors…Thanks so much,
This is way too much to reply to. Perhaps we should schedule a call. Please set one at the link below. Pleas use an exploratory call.
https://markhelmcoachingcallschedule.acuityscheduling.com/schedule.php?notembedded=1
How are you im a property manager I’ve been working for a storage company for 2 years now and I came in and the owner revenue turned around I started hitting yearly goals 4 months early and on the right path now to hit 500,000 in revenue and I decided that it’s time for me to stop making other people wealthy and wanted to start to build a storage facility with vehicle in RV parking of my own. It makes sense i have the knowledge. So I’m looking st a great location it’s 5.55 acre private own ready to build n approve for a standard septic system the cost is 69,000 now I wanted to stated out small so I created a 2,730 sqft building and making the building temperature control. I apply for a SBA loan for about 400,000 and plan on using it to pay the construction payments and interest nts up for 2 years . I just want to know is this so far good? And what advice you would give me when I plan on building?
Sounds great. Just make sure there is demand and create unit sizes the market wants. It really sounds as if you are on top of it and your experience will make the difference. Keep us posted
I saw a 4 acre rectangular parcel in one of the better areas of Dallas fort worth area. The land price is 1.7 million for the land. I do not have experience in the storage business but I can learn very quick. How many units can fit in it the land? how much money to build the business?. I work in medical field and my current income is around 250k annual, I have around 200k in my bank. Please advice.
To many details for a open reply. I can talk directly with you if you want. Schedule a “exploratory” call at this link if you would like to talk.https://markhelmcoachingcallschedule.acuityscheduling.com/schedule.php?notembedded=1
Hi Mark my name is Steve I have a 9 acre lot that is already a RV mobile home facility I would like to turn it into a storage they’re asking 5 million and it is an upcoming area I have enough to get an SBA loan for it but I would like to know if it would be worth it thanks
No way to know with the info you sent. I would get a feasibility report first to determine what, how much, and what prices a facility thdere would most likely be. Then do a Proforma with that info to see if it is worth it.
HI Mark,
I have about $550K and I am very interesting in learning more about buying a land and building your own storage facility. I am a developer, but I have bought couple lands in the past and hired a builder to build residential duplex, but haven’t done anything commercial like that. Met a friend today and he recommended me to take a look at the storage facilities land and building. How to I start? Is the $ enough? Thank you
That amount could be enough for some projects. It just really depends. I am in the middle of a getting started series. I will link to the rirst one and they come out once a week. I thin, next week is the 4th. I would also read a lot about the industry. Also go back through the traning/blog I have and see about benchmark numbers, how storage is different from other businesses, etc. keep me posted.
http://creatingwealththroughselfstorage.com/getting-started-in-self-storage-series-1-the-most-important-question/
HI Mark. I have 4 acres of land. I would like to build a climate controlled storage facility that’s multi level due to small size of land. I don’t have a large amount of money saved. I just have the land investment and excellent credit. I have other rental property and they both have 60 to 120 K of equity in them. I have an opportunity to buy an existing small storage facility but the NOI is only 46K a year. I am not sure what is the best options for me as with that NOI I can’t make enough to pay for the loan 700,000 and save to build the other on my land.