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Considerations for Investing in Self Storage

By Edited Sep 30, 2015 2 0

Where is Self Storage Most Popular?

Self storage facilities are a specialized class of commercial real estate.  The industry started in the US and remains American based, with over 80% of mini-storage facilities being located in the USA.  Canada, Japan, the UK, France and other markets are also developing self storage facilities, with penetration much lower then in the United States but arguably a much better chance to get in on the ground floor of this attractive business.  The Southern and Southwestern states have more self storage per person then the Northern parts of the US.  Areas with a highly mobile population (ie around military bases) are more attractive for the business then more stable areas. 

Self Storage Market Analysis

The self storage or mini storage business is a very local business with nearly all customers found within a few km of the facility. Industry experts say that the number one reason customers chose a self storage facility is convenience to their residence or place of business.  Other factors considered by customers are price, availability of suitable units, facility security, how they connect with the facility manager, and facility reputation. Some facilities also differentiate themselves by offering heated facilities. Finally a clean, well maintained facility is going to bring the operator better prices and a higher rate of return on investment.

To understand the income potential of a self storage facility, do a complete spreadsheet detailing the rates and estimated vacancy rates in all competing facilities within a reasonable driving distance of the proposed facility.  Include all buildings within the local market.

Define the local market as:

  • the entire town if it is under 200,000 population and all closely connected towns
  • the city if over 200,000 people, up to perhaps 30 min drive out

These are just rough guides.  Call and visit all storage facilities within the market and build a spreadsheet to chart the rates they charge.  You will find a fair amount of variation in unit sizes and prices, but you can compare by calculating the sq.ft. of each unit and comparing to similar size units.  

Generally the smaller the unit the higher the rate per sq.ft. but also the higher the cost of construction (extra doors and walls).  It may be tempting to plan a whole bunch of tiny units but remember the market will be seeking a range of unit sizes from 5x5 up to maybe 20X30.   Ask managers what units they have the hardest time renting, and which are always full to better understand what unit mix you should plan.  You might also phase construction of units leaving room to adjust the unit mix as you fill up.

Specials & Promotions

Offering move in specials (free month, prepayment discount, ½ of the first month free etc) is a time-tested strategy. 

Since the self storage business is very localized, facilities and competitors outside the immediate market are not relevant to the operation.  Local customers simply will not consider a facility in another town.  The specifics of the market area and adjacent markets will determine exactly where the line between markets is, but in a distinct city that is separated from the next city by rural area, each city is a distinct market.  In a large metropolitan area each facility's market is going to blur into adjoining facility's market. 

Where to Invest

Because self storage facilities are relatively hands off if you hire a facility manager, the self storage facility owner can safely consider buying an existing facility or building outside the immediate area he/she lives in.  If the facility is too far away though, don't buy it because it will be inconvenient to deal with if you need to step in and replace a manager or otherwise get more hands on.

Design Innovation & Types of Facilities

There is value in considering design innovations from facilities outside the immediate area. Different markets will support different types of self storage facilities.  The cost of land is one of the key considerations in the type of building you put up. The types of customers you expect is another.

In urban areas the traditional storage facility consisting of single storey exterior access door buildings is very hard to justify.  In an area like Yaletown in Vancouver that includes new condo towers and old multi-storey warehouse lends itself to a storage conversion.  The customers will be storing boxes mainly and will not be averse to using an elevator.

In a rural or resort area, storage of RVs, boats, contractor equipment and assorted toys on wheels will be a big part of the market, so easy drive in access is much more important. 

Valuation of Self Storage Investments

Sales of facilities in any similar market are relevant for valuing a completed or proposed facility.  Adjustments for facility age and condition may be required, but generally similar facilities in the same state or province will attract similar CAP rates.

A full, well-managed self storage facility is usually worth more than a proposed or brand new facility.  Proven market and recurring cash is obviously worth something to investors.  Therefore if you are planning to put together a new facility and fund it through the lease up, you should expect to profit from this effort.  However, since the real estate market is not fully efficient and economic factors, the personal situation of the owner, and other factors come into play, run your numbers carefully. In some cases the cost of construction and losses during lease up might be higher than buying an existing facility. 

Storage facilities are valued and will sell based on the following formula:

Gross Income minus Operating Expenses=

Net Income of the Facility (before debt servicing)  

Divided by a percentage called a CAP Rate (perhaps 5% to 10%) or capitalization rate.

Plus extra land (were applicable) that is available for additional development of buildings

Less deferred maintenance, assumed debts etc. 

What is a CAP Rate?

Don't confuse CAP Rate with Rate of Return. They are related but not the same. The CAP Rate of an income property sale is calculated by taking the: 

Annual Net Operating Income (say $50,000) divided by Sales Price (say $1 million) = CAP Rate  (5% in this example).  You can compare and value different properties easily by comparing the CAP Rate.  As a buyer you want the highest possible CAP Rate (lower price vs income), but as a seller you want a low CAP Rate (more money to you). 

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