It seems like there have been a lot of self storage facilities lately I have looked at with large amounts of non-paying tenants, or tenants paying an extremely low rent compared to street rate.
Have you seen this lately?
People I am working with ask why?
Well, first of all, there is no excuse for non-paying tenants still in the facility except for a couple of reasons; (1) they are active and deployed military and (2) it is a comp unit.
Mostly, this is not the case in what we are seeing. What we are seeing is owner or manager incompetence.
I have seen a few instances, very few, but I have seen them, where the street rate is the lowest rate in the facility, and many customers are paying above that.
There is only one reason for that—owner or manager competence.
Pricing Strategies
All new pricing strategies start with one basic concept:
Do Not Do Payment Plans.
“But, with all the late fees that accrue, aren’t I getting more money in the long term?”
No! Do Not Do Payment Plans.
I can take one look at any daily close and tell if a manager or owner is offering payment plans.
How?
Their receivables.
If it is a well-run facility, there is zero, that’s right, zero, or perhaps a few dollars in the 60 day and on column of receivables and beyond. There is very little owed in the 30 to 60 days’ column.
Why?
Because in a well-run facility, those customers are either asked to leave or the facility auctions their unit.
The reality is, you will make way more money letting a delinquent customer leave owing you than you ever will with some goofy payment plan.
Do Not Do Payment Plans
My coaching is to have a policy in place.
In one of the brands I am involved with, here is our policy:
If someone was late, they can pay 50% of what they owe and vacate their unit; otherwise, we were going to auction their goods.
When they hit day 45 late, they schedule an auction (much easier to do that now with on-line auctions). Period.
Up until the auction, they could pay 50% and be out in 24 hours.
We keep the units turning and in service.
In most cases, you will make way more money putting it back into service. One month’s rent for a new PAYING customer will usually be more than you can ever get from a payment plan, and without all the drama.
“But these are good people who just need some help.”
Let them go then.
Cut them a check from your personal account, but let them go.
Send them a Christmas card, but let them go. Hire them and give them a job, but let them go.
Do Not Do Payment Plans.
When Buying
I see facilities all the time where 20%, 30%, 40% or more of their potential income is gummed up in the receivables column.
That’s right, when Owners really get it, they realize that 40% (sometimes more) of the monthly income they should be getting isn’t coming in because of bad, or more accurately put, incompetent management.
Notice to all real estate agents:
I am not going to pay full price for an income stream that isn’t there.
If there are rental price points all over the board, but mostly below the street rate, there is usually only two reasons:
- Incompetent manager or owner, or
- Soft market and they are doing whatever they can to get people in.
The good news is you don’t have to guess to figure out the cause. There are two ways of knowing.
First of all, you will most likely be getting a feasibility report, right? That report will tell you the supply-demand of the submarket. If the market is not oversupplied, you can be sure that the answer is number one above.
Secondly, you can look at any random daily close, and if there are a lot of receivables, especially in the 60 day and beyond column, then you can make a good guess it is number one above.
“But if it is a slow market, aren’t I better doing payment plans to get something?”
No! Do Not Do Payment Plans.
Even in a slow, overbuilt market, and I am personally in one (perhaps owner incompetence), we still have a monthly KPI (key performance indicator) we measure with our managers. It is the “Receivables” KPI.
The receivable KPI is the total receivables divided by the monthly gross potential income. In a well-run facility, it is no more than 5%.
I would rather have 50% physical occupancy and 47% economic occupancy than 80% physical occupancy and 47% economic occupancy. At least I have units to rent and some pride of ownership. The money is the same, and there is more upside because I have the potential of actually renting to a paying customer.
If you are interested in the KPI’s we measure and how we do it, click here and get a free eBook on the Five KPI’s.
Conclusion
It’s fun having a cause greater than yourself. Here is mine today:
Do Not Do Payment Plans.
If you are new, don’t start. If you are ever tempted to, just let a delinquent customer leave owing you. You are much better off.
Come up with a policy, and stick with it. Use it with everyone, including your friends, relatives, and the “good people.”
If you are taking over a facility with payment plans in place, try not to pay for that income stream (or at lease discount it). Next, at 12:01 AM the day following a missed scheduled payment from a customer (that is usually within thirty days of taking over the facility), tell them there is a new policy.
Then get that unit empty.
Then rent it up.
On average, we have added between 6% and 8% more cash flow to a project within the first 90 days of ownership through this policy.
So, I end this episode the way it started with one final word of advice.
That’s right… Do Not Do Payment Plans.
