Aug
24
4 Untold Secrets to a Successful Self-Storage Business

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There’s no denying that the self-storage industry is booming as of late, but its commercial development began all the way back in the 60s. After all, real-estate was and always will be a premier asset for businesses, households, and the government. However, just like any other commodity, it is affected by the economic law of supply and demand. Thus, opening up a self-storage business is not a guaranteed success.

Below are the essential factors you need to consider for your self-storage business model:

1. Cashflow Analysis

The cashflow analysis may determine the total profit potential of any business, which is why you should never forget it in establishing your bottom line. For your statement of cashflow, there are several key factors you need to consider. This includes the amount of leasable space, income in gross annual rents, projected percent of occupancy, operating expenses, and loss due to vacancy/collection problems.

You can refer to this page for the typical financial model of a self-storage business. For a company with 40,000 leasable square feet in self-storage space, a gross annual rent of $450,000 is to be expected ($9 per square foot). Take note that this figure is for a year with 100% occupancy, so you need to adjust this by about 10% to represent the usual losses due to vacancy and late payments.

2. Development Cost

Before entering any business, make sure you completely understand the complete development cost. For self-storage businesses, the total cost of the land is the main consideration. Bear in mind that the area of land purchased before the development does not reflect the full amount of leasable space upon completion. Make sure you learn factors that determine leasable coverage such as building codes, utilities, easements, zoning setbacks, and the physical features of the land.

When it comes to the construction cost, the figures are entirely dependent on the type of facility you have in mind. On average, about 67% of the entire development budget may go to construction since it comprises labor costs, equipment, and so on.

3. Financial Projections

Having reliable financial projections on top of a cashflow analysis helps determine the ROI once the development cost is in the picture. However, first, you need to have a target occupancy percentage, which should be at around 90%. Based on this number, you should also calculate the total percent of cash-on-cash ROI considering the total investment put into the development.

Aside from the target occupancy percentage, you must also identify the break-even occupancy rate to cover the operational costs and debt services. For most self-storage companies, this could be anywhere between 60% and 72%. A lower break-even percentage is, of course, more ideal for investors as it provides an extra cushion for market fluctuations.

4. The End User

Today, the growth of the self-storage industry is powered mainly by the increase of business-minded individuals. These are normally startups that require temporary storage or mobile workspace. Companies such as e-commerce stores also use self-storage units as an inventory facility. Aside from the commercial market, people moving into new homes also avail self-storage units to temporarily store their belongings. Also, thanks to the mobility of self-storage units, the industry is not drastically affected by wide-scale economic declines.

By now, there is a market-established rental rate for different types of self-storage consumers. Operating within these rates is the key to the competitive sale of self-storage units. Below is the list of price ranges according to real-estate surveys:

  • Multifamily – $7.5 to $12 per square foot
  • Office - $14 to $24 per square foot
  • Retail - $16 to 20 per square foot
  • Self-Storage - $6.5 to $12 per square foot

Self-storage units are somewhat similar to multifamily real-estate properties regarding rent price. However, self-storage only requires a little over half the average development cost of multifamily properties such as apartments and cohousing projects ($34-42 per square foot for self-storage vs. $60-70 per square foot for multifamily).

Conclusion

Self-storage has many advantageous features as an investment over other real-estate developments. With more people founding startups and online businesses, you can expect the self-storage industry to continue growing—probably for decades to come. Just make sure you have all the necessary details in your bottom line ready before you jump the gun.

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