How to Start a Self-Storage Business? | Simple and Easy Steps


Friday, March 29, 2019

How to Start a Self-Storage Business? | Simple and Easy Steps

How to Start a Self-Storage Business?

Around 50,000 self-storage facilities are spread across the country from Alaska to Alabama. This is about the same amount of McDonald's, Starbucks and Subway sites combined across the U.S. These facilities constitute the basis for the American self-storage sector, which is expected to generate revenue of $37 billion in 2019.
In each of them, people pay rent— usually per month— to store their items in units of different sizes. They may include furniture, art, equipment, TVs, documents, vacation decorations, wine, cars, boats and rental cars. For business equipment, inventory and supplies, many small businesses use self-storage systems.
Each self-storage property is not just a warehouse for our goods— it's also a small business in every building. And this can be a profit-making enterprise. One estimate shows that a US self-storage company has a typical profit margin of 11 %. For several other small business types, this is well above the profit margin; for instance, the typical profit margin for a restaurant goes from 3% to 5%.
Given these numbers, it sounds very attractive to start a self - storage enterprise, right? That's sure. All who wish to set up a self - storage company, however, must look beyond profit and assess the practical considerations:

  • How much will starting a self-storage company cost? 
  • What type of research and plan does it take to start a self-storage business? 
  • Should you purchase an existing storage facility? 
  • Should you build an on-site self-storage facility? 
  • How much is your self-storage business going to cost? 
  • How will your self-storage facility be managed and marketed? 
  • Of course, these are big questions, but then a self-storage company is a big business. Follow as we guide you through what you need to start a self-storage business. 

    Weighing costs for entering the self-storage company You'll have to crunch a few numbers before scouting places for the self storage facility— whether you want to shop for an existing facility or build a new. 
    At the beginning, you will need a good idea of how much it will cost to enter the self-storage business. The numbers vary widely according to a range of factors, such as location, purchase cost, land and building costs.(We will get into details afterwards.) 

    Not only do you have to consider the costs of buying or developing a facility, you also have to examine where the money will come from:

  • Do you have sufficient liquid assets to buy or build your own self-storage facility? 
  • Can you allow the assets to be allocated to a self-storage facility? 
  • Do you need to take out and acquisition or construction loan? 
  • Do you need to hire self-storage investors to support a procurement or development contract funding? 
  • After you've come up with answers to these questions, you'll need to figure out how much it will cost to run the facility once it's yours.

    • Will you and your family run it on your own? 
    • Are you going to have to hire staff to run it? 
    • Would a third-party managing company be best suited to the operating side? 
    • Do you need a provider such as SiteLink to install self-storage management software?
    • Ultimately, how much time do you want to spend running a self-storage facility? 
    Remember, a self-storage facility is more than a structure. It’s a business.
    You will almost certainly have to spend millions of dollars to buy or build a facility and cover various operational costs, including salaries and taxes to get to the self-storage business. In early 2018, a report released by commercial real estate CBRE shows that 28 percent of total operating expenditure for self-storage accounted for real property taxes, with management expenditure on-site and off-site amounting to another 38 percent.

    Putting Together a Feasibility Study

    How to Start a Self-Storage Business?
    Once you've thought about starting a self-storage company at some high level, it's time to do some research. All this research is to be carried out in a feasibility study which tells you if the business idea is feasible, as its name suggests. You could study it yourself, but you would better hire a self-storage consultant to do it.
    Whatever route you take, you have to answer a key question: 

    will they come if I build it or buy it? 

    In other words, will you generate enough income to cover debt service and operating expenses if you invest money in a self-storage facility and still make profits? 

    It is crucial to conduct market research. This exercise helps you to find the customer base's demographics within a radius of 1 to 5 miles. Typical size of the market for a self-storage facility is a three to five-mile area.
    You’ll want to nail down the median income in the market area (self-storage renters tend to be in the middle-income and upper-middle-income brackets), along with the median age (self-storage tenants are normally in their early 20s to mid-50s). 

    Furthermore, the following aspects of your proposed market are to be reviewed: 

  • Current population (from approximately 20,000 people in rural areas to 100,000 or more urban in general). 
  • Projected growth of the population (more people means more prospective tenants). Daily traffic (most self-storage systems rely heavily on drive-by traffic for the attraction of customers). The landscape is competitive. 
  • Which self-storage facilities operate in the area already? What is its rate of occupancy? Are there facilities under development or in the business area planned?? 
  • An overview of the self - storage industry, long - range projections of the rental rates, income, expenses and value of properties and information about the zoning of the project will also typically be included in the feasibility study.

    Writing a Business Plan

    Each company should have a business plan. In short, a business plan can help to drive a company to success, enabling it to realize its goals and manage problems. Before extending a loan, most lenders would wish to see a business plan.
    A lot of online templates for a business plan are available, so you can certainly try to deal with it yourself. You can also seek support from a not - for - profit organization like SCORE, which provides free business mentor-ship, or you can hire a business planner writer.
    Note that a business plan for an existing self - storage facility looks completely different from a business plan for a proposed facility. 

    Each business plan should be tailored to suit your own needs, but information such as: a business plan for a storage facility usually contains:

  • Mission statement.
  • Vision statement.
  • Ownership structure.
  • Business structure (such as an LLC, or limited liability corporation).
  • Staff roles and responsibilities.
  • SWOT analysis (strengths, weaknesses, opportunities and threats).
  • Market analysis.
  • Competitive analysis.
  • Marketing and sales strategies.
  • Pricing strategy. Roughly speaking, monthly rents for a self-storage facility in a high-population area can be anywhere from 50 cents to $4 per square foot.
  • Menu of product and service offerings, including a rundown of the unit sizes, like 5×5, 10×10 and 10×20.
  • Sources of capital.
  • Revenue streams.
  • Revenue and expense projections covering several years. Financial modeling will enable estimates of revenue and expenses on a per-square-foot basis.
  • Marketing is one factor that ensures that revenue projections are met. While drive-by traffic provides many customers, marketing — especially internet marketing — can not be neglected. Self storage consumers increasingly turn to the internet when they are shopping for a storage facility as their first stop.
    Any smart internet strategy should ensure that your services are available both on search engines such as Google and in online self-storage markets such as SpareFoot. Furthermore, the website of your facility should be up to date. Companies such as storeEDGE specialize in the development, upgrading and maintenance of mobile websites for self-storage operators. 

    Buying a Self-Storage Facility

    With regard to the purchase of an existing facility, prices are all on the map, as do self-storage facilities. As you might expect, there are tens of millions of dollars for an existing self -storage facility in New York, while there is probably less than $1 million to buy an existing facilities in rural Iowa. 

    In a March 2019 spot analysis of the sale of self-storage facility, prizes were usually between one million dollars and ten million dollars per facility. Some on the market facilities were also bundled into a single portfolio for sale. 
    A experienced broker knows the market and the price negotiation. An experienced broker knows the market and how the price is to be negotiated. You will of course want to purchase a facility in the region you live in if you are running the facility. But it is not necessarily important where the facility is if you hand out operations to a third party management company. Make sure that you and your broker get to know the local market well. 

    Developing a Self-Storage Facility

    How to Start a Self-Storage Business?
    No surprise, but the location plays a major role in the cost of building a new facility. You could build a single story self-storage development of 40,000 square feet in a little town for one million dollars or less, whereas a two-story 80,000-square-foot facility in a more urban environment can set you back 6 million dollars. Be aware that these estimates are rough. 

    You can usually expect to spend between $25 and $75 for new constructions on each square foot. But this is only a rough range. Again, the site— including the cost of land — determines the price tag for construction 
    Here are some statistics to keep in mind if you’re developing a self-storage facility:

  • Facilities range from 10,000 square feet to 100,000 square feet or more.
  • The average self-storage facility encompasses 46,000 net rentable square feet (the amount of money-generating space that can be rented by tenants).
  • A facility typically covers 2.5 to 5 acres.
  • What follows are six things to take into account when you’re building storage units:
  • What will the mix of units be? If the facility is in a trade area that’s populated predominantly by apartment renters, then you might want to include more small units, such as 5×5 or 5×10. But if the residents of the trade area are mostly homeowners, more 10×10 and 10×20 units might be in order.
  • Should the facility consistent only of drive-up units or only indoor-access units? Or should there be a blend of drive-up and indoor-access units. The answers depend on the demographics of the trade area.
  • Should there be only climate-controlled units or only non-climate-controlled units? Or should there be a combination of the two? The local climate will come into play regarding this decision, as will your construction budget.
  • Should you limit the facility to one building? Or will you have enough room — and does it make sense — to spread the units across several buildings? How much land is available, along with how much demand is projected, will influence the configuration of the facility.
  • Should space be set aside for storage of boats, RVs and other vehicles? The answer hinges, in part, on market research indicating how many boat, RV and vehicle owners live in the trade area.
  • Should you look at converting an existing structure, such as a shuttered retail store, into a self-storage facility? A number of self-storage developers have successfully transformed unused and often overlooked spaces into tax-revenue-generating, job-creating storage facilities.
  • Apart from the appearance of the facility, zoning and entitlement are another key factor. 

    The zoning of the property will be a huge problem. If the property is already zoned, it removes a huge barrier. But if you need to rezone the property then you might spend months or even years seeking zoning approval. 
    Government officials and local inhabitants are sometimes vigorously opposed to self-storage on the base of the ill-informed notion that they are crime and traffic magnets and that they are eyesores. In fact, the opposite is true. Self-storage facilities do not lead to increased crime or traffic, and many modern facilities are designed to fit neighborhoods and even strengthen them. 
    There is also the entitlement matter. This includes getting government agencies ' approval for your development plans. As in the case of rezoning, a case for entitlement could last months.

    All of that being said, keep two things in mind:

  • It takes time and patience (and, of course, money) to develop a self - store facility. In addition to zoning and entitlements, bad weather, labor shortages and the limited availability of construction materials may delay construction.
  • Self-storage development requires expertise. A development team should include seasoned legal, real estate, financial, construction and design professionals. Few new to the self-storage industry can do that themselves when a new facility is developed. Financing a Self-Storage Facility 

  • Similar to any business, there are hard realities about self - storage regardless of whether you are talking about a newly built or newly acquired facility.
    For one thing, you’ll need money to launch the business and keep it running.
    The amount of money you put in a facility vary widely according to locations and countless other factors, as we mentioned before. But you have to choose how to finance an acquisition or a new development before you spend a dime. You'll have to take a loan, for example? There are a number of options, including acquisition loans, construction loans and SBA loans. Many of the loans cover 10-25 years. Work with a creditors who have the knowledge to point you in the right direction within the self-storage industry.
    To qualify for a self-storage loan, here are four things you’ll likely need:

  • A credit score of at least 680.
  • A credit history clear of recent bankruptcies, foreclosures and tax liens.
  • A cash down payment of 10 percent or more.
  • A business track record of at least three years.
  • You might not need to take the loan and have plenty of cash to buy or construct a facility instead. Do you however have sufficient money to run the facility? You don't want to purchase or develop a self-storage facility from your pension funds. Or you could plan to team up with other investors to purchase or construct facilities. This can be done through:

  • A debt partnership, which is a lending relationship that does not assign an ownership stake to the person or entity you are borrowing the money from.
  • An equity partnership, with each partner chipping in a certain amount of cash and owning a share of the business.
  • A joint venture with, say, a self-storage developer. Each partner owns a certain percentage of the business.
  • A syndicate of accredited investors assembled for the sole purpose of buying or developing a facility.
  • A tenant-in-common arrangement, which allows at least two people to own a property and enables the relatively seamless transfer of an ownership stake to another party.
  • Making Money in Self-Storage

    While self-storage facilities generate traditionally healthy, stable cash flow, anyone entering self-storage must know that this is not an affluent operation. 

    In general, self-storage occupancy rates range between 70 and 95 percent. With a newly built or re-positioned facility, a new owner will often face a lease-up period of 18 to 36 months before an occupancy stabilization is achieved. Positive cash flow may be years down the road as well. 
    The good news however is that the break-even occupancy rate is well below the other asset classes in the self-storage facility break-even in self-storage is 40% to 45% in one measure, compared with 60% or more in the multi-family sector. In addition, self-storage facilities offer some of the best short-and long-term returns on commercial property.
    When buying a self-storage facility, the capitalization rate is one investment number that must be taken into consideration. The capitalization rate is always a major consideration, whether for buyers and sellers in the self storage industry.
    The cap rate is the ratio of the NOI (net operating income) to the value of the property. For example, if an property sells for 1.5 million dollars and its NOI is 120,000 dollars, its cap is 8% (120,000 dollars is 8% of 1.5 million dollars).
    In the simplest possible terms, the cap rate shows an investor in income property how much he / she can expect to earn if he / she buys a property with all cash. If an investor believes that a property value is 8 percent cap, for example, then he is expecting an 8 percent cash return. Caps for Class A facilities ranged from 4.5% to 8.5% for Class C facilities in the third quarter of 2018, according to CBRE. 

    Bottom Line

    At the end of the day, it will certainly take time, energy and money to buy or build a self - storage facility. In a continuously growing industry, however, payoffs can be significant. There is plenty of evidence for this growth:

  • In 2018, rates for self-storage and rental rates reached record highs in a number of US markets. 
  • Self-storage demand continues to increase with a number of trends, including the overall reduction in households of baby boomers, the preference among millennia for apartment rentals versus homeowners and the continuing mobility of American employees.
  •  Self-storage over time has proven to be a resistant recession industry. Briefly, self-storage offers a wealth of reasons why an existing facility or the construction of a new facility can open the opening door for attractive investment gains.
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