Self storage is the best business there is for the small investor.
It has all the benefits of a real estate play and few of the drawbacks associated with traditional investment real estate. It is also an operating business with very predictable cash flow.
Because of these facts, it caught the eye of Wall Street after the last recession. Their flood of money into the self storage industry altered the landscape for all investors. It has had a significant impact on the small investor who wants to start a self storage business.
- Prices are still high
- The industry has become more sophisticated
- The complexity of starting a self storage business keeps increasing
Your long-term success in this industry will be determined by acquiring specific knowledge and expertise.
There are seven key skill sets that you must develop to start or grow a self storage business.
The ability to:
- Find self storage projects
- Analyze the financial viability of opportunities.
- Finance self storage opportunities
- Put cash into projects
- Determine project construction costs
- Construct, or overseeing the construction of buildings and/or conversion.
- Oversee and schedule subcontractors.
Before you start looking for your first self storage deal these skill sets all need to be in place.
Why?
Because the days of finding a good self storage facility, buying it, and immediately getting the returns that make it worthwhile are gone. 2012 was the last time I could buy a stabilized facility and get the returns I need.
The influx of Wall Street money drove CAP rates down; value and pricing up. If you have been trying to get in the self storage business, but can’t seem to make a deal work, this is why.
As small investors, we need to find value-add situations. That usually requires an expansion: adding more rentable self storage units to an existing facility. For someone new to the business, that is usually the best strategy because it is the least risky.
Building from the ground up usually has 1 to 3 years of negative cash flow. Expansions usually at least break even from year one on. You’re going to pay more for the existing facility than you want to. But after you blend the returns from the acquisition and the expansion, you get a return worth going for.
The due diligence time frame has shortened down to at most a few months or as low as 45 days. This makes having these skill sets in place before you go for your first deal especially important now. If you don’t have these areas covered you can’t close a deal fast enough. By the time you can close, someone else has already stepped up and is willing to pay more than you were. I speak from experience.
So let’s take a look at these areas.
1. The ability to find self storage projects.
For most of us, the requires developing relationships with the self storage brokers that work in the area of the country where you want to own. Know these people. Meet them. Talk to them. Help them look good to their clients and you will get deal flow for a long time.
How do you do that?
Be a buyer.
How do you become a buyer?
Have these seven skill sets figured out and in place before you write your first LOI or contract.
2. The ability to analyze the financial viability of self storage opportunities.
It has never been more critical to be able to analyze a prospective deal and project the future cash flow of new space coming online.
Today how much you can pay for a facility is determined by understanding:
- The projected future cash flow of an expansion,
- The cost of building the expansion,
- The operating costs for the future expansion.
Then based on those future cash flows, you back into what you can pay today to get them.
The good news is there is a lot of training out there to acquire these skills. The ISS has a lot available to you. I, myself, support new investors with training programs (free and paid) and there are other experts doing it as well.
Compared to most real estate, self storage is a simple product to build and analyze. You just need to know how to do it at the beginning of the game if you want to be able to compete with other buyers. You have to know what you can and cannot pay for a self storage opportunity. You have to trust your numbers.
3. The ability to finance self storage opportunities.
4. The ability to put cash into the self storage projects.
5 – 7. Your abilities around construction
For the small investor to get the returns that we need today, it almost always has to be a value-add project. The safest way to create a value-add situation is to find a smaller “Mom & Pop” type facility, expand it, and bring it up to today’s “institutional” standards.
That almost always requires the ability to construct more self storage.
That doesn’t mean you have to build it yourself, thank goodness. But you do have to know:
- What the construction process involves
- The approximate cost
- When construction will start
- How long it will take
- What the income looks like as it leases up and when it is stabilized.
And oh yes, how you will do the construction? Will you hire a GC, a construction manager, or will you do it yourself?
You need to know this upfront so you can run your financial analysis. Why? Your financial model tells you what you can pay for the existing facility or raw land.
I am not a builder, you can ask my wife. But I do know self storage construction numbers. I also stay very involved. I don’t simply turn it over to a builder. That is a formula for the project not meeting the construction budget I created in the Proforma.
The good news.
To get in the business today it takes more skills than it used to but it’s not hard to learn them.
Do the work required and you will stand head and shoulders above the others trying to start a self storage business. Do the work and you can build a successful business and start creating the wealth that this product offers.
I believe it is the best business there is for the small investor. Just do the work first so you can be the one who wins.
Good info as always Mark. I appreciate your dedication to helping others get into this great industry.
That’s awesome Rodriguez. Really, way to go. That takes something and I acknowledge your effort. Keep us posted as to how it goes bringing the next two buildings on line.
Kind comments Ryan. This business can really make a difference. Nothing has impacted my life in such a positive way as the self storage business. I love it.
Thanks to Mark Helm for his generosity sharing his valuable SS knowledge. It has helped me greatly and added strategic value to the number crunching seminars and ISS conferences I have gone trough. I have one facility running, and readying for the next two buildings.
That’s awesome Rodriguez. Really, way to go. That takes something and I acknowledge your effort. Keep us posted as to how it goes bringing the next two buildings on line.