How to Profit in the Self-Storage Business: Getting Started
Maybe you are like me and enjoyed a great career, or maybe you're just looking for a different type of business to start.
Over my twenty-five years as a civil engineer, I worked with a lot of business owners, developers, and entrepreneurs, but most of them did not have the lifestyle, flexible work schedules, and income I desired. There was one guy who had both time and money, and he owned a self-storage business. His visit to my office changed my life. Please let me share what I learned from that visit and later experienced firsthand to be true.
Benefits of Self-Storage Ownership
- Be your own boss: Also, there are next to no employees compared to most businesses and no company politics to deal with everyday. Self-storage is a manager-driven business.
- Flexible work schedule: I was able to keep working at my engineering business full-time. Then one day I had replaced my engineering income and was able to retire. Now my manager runs the day-to-day business for my three self-storage locations while I take care of the big picture and work in the office now and then for the fun of it.
- Control your own future and security: Even as an owner of an engineering business I was trading dollars for hours. And there were never enough hours in the day. Self-storage provides a kind of residual income for life once you get it running on all cylinders. And all along you are building equity so you can have retirement income when you’re ready!
- Growth opportunity and limited risk: I was willing to work hard but I did not want to risk everything I had already accomplished, so I looked for a growing industry, high profits and high success rates. If you check out the self storage industry like I did you will find that self-storage has higher long term return rates of all the major real estate categories including apartments, office buildings, industrial property, and retail and costs less to build.
How to Get Started
Taking the first step is the hardest part. I designed my first self-storage 20 years ago as a young civil engineer. I did not even know what it was until my client gave me the details, I designed it and got it approved by the City Planning and Zoning Commission. Since that time I have designed many similar facilities. More recently I planned, designed, built, and operate two self-storage facilities that I own and am building my first international facility in Canada. I have learned from real life experiences and continue to learn every day.
Some people may tell you that self-storage is easy, does not take a lot of planning, time, or out-of-pocket money, and always makes money. Beware. There is nothing further from the truth. For a typical facility of 50,000 square feet, you will invest around $400,000 to $500,000 of your own money, borrow 3 to 5 million dollars from the bank, and will personally spend hundreds of hours before you rent the first unit. But a properly planned, operated, and funded facility can be a very rewarding and profitable business.
Location, Location, Location. This is the single most important factor in the success for a self storage business. I recommend looking for a property on a road with an average daily traffic volume of at least 10,000 vehicles per day with a recommended average daily traffic volume of 20,000 vehicles per day or greater. Start talking to everyone from your local real estate agent, banker, town planner, and other self storage operators.
Each property is unique and every town typically has specific zoning regulations that impact how much storage can fit on a given property. Typically you need 4 -5 acres for a single-story building and 2 acres for a multi-story building. Often building manufacturers will do preliminary layouts at no charge.
Involving your engineer and building provider early on are essential to a well-designed facility. You can also get great ideas from reading trade publications and visiting existing self storage facilities. During the design process you should also start marketing your facility.
Do not underestimate the details and plans that will be required. Often nearly complete construction and site plans will be required. Do not under estimate the time it will take to get regulatory approvals. This is a critical stage where compromise is often required. You should have a 12 month time frame in your purchase agreement, even if you have to pay extra for the second 6 months.
The more detailed your plans and construction documents, the fewer cost over-runs your project will have. You should have a single point of contact with all your contractors and you want to be available daily on site. No one will protect your money and interests as well as you.
Operations, Employees, and Systems
Your number one asset is your employees. We run a 50,000-square-foot facility with one manager and a part-time employee to work Saturdays. Hire your employees based on their people skills, speaking and writing abilities, and common sense first and their self-storage knowledge last. Start day one making systems and procedures to make the work flow smoother. Remember you will have multiple employes over the years, so written documentation is critical.
Marketing and Sales
Your marketing should start long before your site opens, starting with site selection and design. I said this previously but it is worth saying again: Ninety percent of our renters found us by driving by, the Internet, and referrals from existing customers. The last 10% comes from the remainder of our marketing and advertising. But the last 10% could mean the difference between breaking even or making a profit. And just because they walk in to your store does not mean they will rent. The vast majority of self-storage managers are clerks taking orders, some are customer service agents taking orders. The great managers are sales people.
Nine Things to Do First
- Do a personal review to make sure you have the knowledge, sufficient time, and money or the opportunity to get off to a great start.
- Join your local or state self-storage association and attend meetings.
- Subscribe to a trade magazine like Inside Self-Storage or Mini-Storage Messenger.
- Read zoning and wetland regulations for the town where you would like to purchase land. Meet with the town engineer and planner to discuss the permitting process for a self-storage facility.
- Find a commercial realtor to help you with your search for land.
- Meet with your banker and ask about self storage loans.
- Meet with a local engineer to get rough time frames for site design and approvals.
- Stop at every self-storage facility you pass by and talk to the owners. Let them you know are thinking about starting your own company. Some owners will be reluctant to say much, but many will be happy to give you tons of useful information.
- Check out the facilities in your community. You will be amazed how quickly you start learning invaluable information.
Set a Realistic Schedule
For the three facilities that I built and presently own, it averaged two years from when I initially decided to build to opening the doors. While this may seem slow, it is quite fast.
- First, you have to find a piece of land that fits your needs, and negotiate an option to buy.
- Then, your engineer has to design the project and get approval from the local municipal boards.
- After the regulatory approvals you have to do more detailed designs.
- Next, you have to choose a contractor(s) and, of course, you then have to build the facility.
The more realistic you are about your time schedule, the better prepared you will be, and certainly it will be a lot less stressful.
Important Things No One Else Will Tell You
1. Restrictive Loan Covenants From Banks
The first thing is about banks. Banks often have two very restrictive loan covenants that can be very detrimental for a new self storage business. One is a debt service coverage ratio (DSCR) that is required before they will convert the construction loan to a permanent loan. Typically a DSCR of 1 means you can pay all your bills and loan payment without putting any additional money into your business. You can look up the definition of DSCR but each bank may have a slightly different calculation.
Often banks require a DSCR of 1.25 or even 1.3 before they convert your construction loan to a permanent loan. This might be possible for some commercial real estate developments where they have clients signed upped to rent the majority of the space prior construction. Typically a self storage will not meet a DSCR of 1.25 until you are over 60% or more rented. If you do not meet this ratio they can and will ask for you to repay the loan immediately or provide significant additional money to reduce the amount borrowed so you meet the required DSCR. In your initial negotiations with the bank you need to either make sure there is either no DSCR requirements or it is low ( 1.1) and you have a significant time period ( 1-2 years) to reach it.
The second restrictive loan clause is the prepayment clause. Some banks will require you to pay them for all the losses for all the profits they would have made if you kept the loan until maturity. This can easily be in the tens of thousands. Other banks will have a prepayment clause that requires a penalty paid ( up to 5% of the loan) if the loan is paid off in the first 5 years (5% the first year…….1% the fifth year). This is typically more acceptable since it is only for 5 years and goes down for each year of the loan. There are many reasons you may need to pay off the loan including, selling the property, refinancing due to better rates or personal reasons. Or maybe you want to build phase 2 and your bank will not lend you the money because they have to much self storage loans on the books. Ask your bank early the DSCR requirements and repayment penalties early on, even before you determine interest rates.
The second thing relates to efficiency. The less detailed your construction specifications, documents and plans are, the more extra expenses you will have. If it is not specifically in the contract it is an extra. If it is not specifically detailed what materials or brand the contractor will use the lowest quality products will be used. If a construction time frame is not provided in the contract it will take much longer than the verbal time frame the contractor gave you.
If any quantities are estimated, such as for gravel, a unit price installed for extra quantities should be provided. It should be clear if design or permit fees are included. A unit price should be included for possible unknown items such as ledge or dewatering footings a unit. Detailed soil testing and analysis should be done as part of the design process to prepare a better design and to reduce surprises. All contracts should clearly state no extra work will be done unless a change order has been signed by both the contractor and owner. This will not prevent extras but at least you will know what they are before the work is done.
The third thing relates to regulations. Some town employees, elected officials, planners, engineers may give your project the nod one way or another before it is in front of the regulatory commission for approval. Beware the vote that counts is the regulatory commissions vote. Sure it is best to have the Town staff on your side, but always be over-prepared for every regulatory meeting. Have all your guns ready! I’ve designed hundreds of commercial site plans ( as a civil engineer) and brought them before the various commissions for approvals. I have seen many crazy things you would not believe. Be prepared. I always strongly recommend at least four things:
- Bring your engineer to present the project.
- The owner should always go to the meeting and be prepared to tell them a little about yourself and your self storage dream; what a good job the design team has done to answer any concerns and to tell them you are excited to be part of the business community. Sometimes agreeing to a condition that night by the owner can make an approval happen vs. a denial. A second round at commissions after a denial can take a very long time be very expensive.
- Bring as many colored plans, details, photos, samples, your lease, reports, etc. Be the professional.
- Bring as many people from town to speak in favor of the project and have them speak before the opposition!
The fourth thing relates to realtors. Real estate agents are not engineers, zoning experts, or development experts and they may or may not know specifics that can a make a property unsuitable for a self storage development. They will not be held accountable in any way if the property is not suitable for your needs. You need to do your own due diligence. You do not have to meet any minimum offer price they suggest.
The fifth thing relates to employees. It is human nature to be upset when the deal is changed. You have to be very very specific about the managers job responsibilities, duties, and your companies policies at the interview stage and it should be in writing. Too often interviews are done off the cuff and informally. While a good prospective manager may have never worked in a self storage before they have to be a business person, a people person and be self motivated. And just because they say they are does not make it true.
Any job changes or even clarifications after they are hired will be disruptive. Even things you may consider common sense like not using the computer for personal social sites during the day should in the company manual. The self storage manager has to be the jack of many trades from face to face offsite marketing, cleaning, calling for late payments, accounting, maintenance etc. The more you and your manager understands before they are hired the better. Your manager is your number one asset!
6. Self-Storage Building Manufacturers
Sixth, related to self-storage building manufacturers. They provide free conceptual site plans, but these plans often do not take into consideration all the land features and zoning regulations. A trustworthy manufacturer will tell you their plans are a starting point and you typically need a detailed site plan by a local engineer that is familiar with the local Zoning regulations and has more details about the land.
7. Your Job
It is your job to educate and teach your employees. It is your job to get the phone to ring and get prospects to stop by your self storage facility and your managers job to rent units to them.
8. Sight Lines
Finally, related to sight lines. One of the most overlooked basic site plan issues is the requirement for a proposed driveway sight lines. Typically a suitable sight line has to be provided for any commercial development. Since this is a safety issue it is hard to get a variance or approval if not met. They are typically based upon the speed of the existing traffic (not the speed limit) and start in the 250 foot to 350 range and surpass 1000 feet for greater traffic speeds. I have seen plans well underway before it was realized that the required sight lines could not be provided. I know boring stuff—but the civil engineer in me could not help it.
Answers to Seven FAQs
I do not have any self-storage background. Can I build a successful business?
Yes you can. In fact the vast majority of the 50,000 self-storage business in the USA are owned by individuals who only own oneself storage facility. They started out just like you and I with no self storage background. The great thing about self storage is that it is not complicated compared to most businesses. With research and some help along the way you can build a business that cost less than most real estate businesses and other businesses and has a very low risk rate.
And best of all it produces one the most important things that many business never produce: a residual positive cash flow that can last a life time or even for generations. And its fun! The best way to get started in self storage is with a proven system. Check out storage authority opportunity at the end of this article.
How much money (equity) do I have to have to build a self-storage and how much will the bank loan me?
Typically you will need 15- 35% of the development costs and the bank will provide a loan for the balance. There can be exceptions to both the low end and high end depending on the market and economy in your area, you business experience & credit rating, individual banks and other factors.
How much does it cost to build?
There are three main areas of cost that should be considered.The first is the pre-construction costs (or pre-loan costs). These include engineering costs for site plans and regulatory approvals; bank fees for the loan application ( loan application fee or points, appraisal fees etc.); and land option fees. While these fees are often considered part of your equity in the project you typically have to pay these fees out of pocket because a bank will not give you a loan without an town-approved project or bank loan fees paid up front.
This is money at risk because there is no guarantee that the town will approve you project. So it is very important you do your due diligence regarding the “quality” (wetlands, easements, zoning, and other restrictions) of the land and with the Town before you spend large sums for final engineered site plans. Often paying a local civil engineer to review the property and zoning regulations and provide you with a conceptual plan to review with the Town is money well spent. Typically this first group of fees can be in the range of $25,000 to $50,000 if no major problems are incurred.
The second area of costs are the land and construction cost. These fees can vary greatly depending on the price of the land, individual land improvements and size and type of self storage facility. Land can vary from $50,000 to several hundred thousand. Individual land improvements vary greatly between sites.
I own three facilities and each had distinct special land improvement cost. One site was relatively level with sand and gravel which had low site improvement cost. A second self storage was on on a sloped parcel which required an extra 3-4 feet of fill for the entire site. One property required $20,000 worth of soil testing for pollution and much more for soil remediation required by the state and federal laws.
I hate to give you a single number for construction but I know that is what you need for some preliminary investigation. So prior to reviewing and individual parcel and proposed development I would use a number of $40 per square foot. This is for your basic metal self storage buildings and does not include the cost of the land, special land improvements or other unusual cost that may be encountered.
This cost can be refined after you have a chosen a property and your local civil engineer has done a conceptual site plan. And once a Final detailed site plan is completed you can have a contractor provided you a construction estimate for a more realistic cost. It is typical to add 15% to contractor estimates for unforeseen extras that will occur. The third area of construction are the start up costs. If you did not include the office (and site) equipment & supplies don’t forget to include them here.
You are going to open your new self storage business with your typical operational costs ( loan, employee, utilities, taxes, etc.) and limited rental income. Every month you will have to put money into your business until there are enough rentals to pay for your bills. This can take several months to two or three years depending on a lot of factors. If you have done your due diligence and determined there is a need for the new storage facility, have a good location with suitable drive by traffic and are prepared to market the facility well you can significantly reduce the time to break even and make a profit.
Again I know you are looking for a numbers. I can tell you for the three facilities I own I have three different rent up times to break even – less than 1 year, 1.5 years, (and hopeful less much less than one year for the facility I just opened) I had a full time employee at each facility. Many experts in the field recommend you budget for a 2 year period to break even. Your two biggest operational cost after your loan payments are going to be your employees and property taxes. Early on you should meet with your local tax assessor or check what other self storage facilities in your town are paying for taxes so you are not surprised.
An off the wall at monthly expenses for an unknown phase 1 self storage (25,000 +-sf) could be around $15,000 + or – 5k. So assuming an average rental rate of $100 per unit means you would have to rent 150 units to break even.
How many square feet should I build and how much land do I need?
There are some business theories that should be observed when deciding how much storage to build. One is an having an exit strategy. Typically the highest self storage sales go to facilities that are purchased by reits or other large self storage operators. Typically they want facilities of 40,000 sf and larger. You don’t want to have a facility that is so small that only proves self storage is a good fit for the area and attracts a larger facility to make the majority of the profits after you did the hard work.
The exception to this is if you are considering your self storage business a side business that you built on land your already own and run out of your existing business office. Self-storage rent up is so much faster (and rents for more per sf) when you have an office with regular office hours. To pay for a manager and make a significant profit and pay for all your efforts and risk you can use a preliminary estimate of 40,000 sf (for all phases) until you have done all the due diligence for your specific project.
You do not have to buildout the entire project in one phase and in fact phasing is highly recommended. It will save you the added expenses of having a large supply of unrented units. A 50,000 Sf project could be built in two or maybe three phases depending on the storage needs of a specific area. Of course the key is calculating the square footage needed for your area and subtracting the existing square footage and already proposed storage (but not constructed).
For most areas where there are numerous self storage facilities to choose from the draw area is a 3 to 5 mile radius and the demand is typically 4 to 7 sf per person. These factors do vary significantly from place to place. You can call a local self storage appraiser (make sure they have a background in self storage appraisal) and ask what numbers they use. Your bank will typically require an appraisal of your project and your bank may give you the names of their appraisers to contact for this local information.
The amount of land you need is highly dependent on the local zoning regulations and and specific land features. Both should be checked out early on with attention. Often you may need the assistance of a local civil engineer. A single zoning regulation or band of wetlands can make a property unfeasible for self storage.
If you have no zoning constraints, no utility constraints and good land (not odd shape, no wetlands or water bodies, no easements, no steep slopes over 3%, you can use an initial estimate of 10,000 + or – sf of single story ground access self storage per acre of land. Please beware there is no such perfect piece of land – at least I have not found it yet.
What are some of the site plan design flaws you have seen?
- No office.
- No sales area in office or sales area too small.
- No easy access to customer bathroom.
- Customer has to go through the security gate to get to the office.
- No 4 foot man gate to access the storage area without opening the main gate.
- Access keypad not aligned up with gate.
- Located in industrial park or out of the way locations.
- Space between buildings less than 24 feet.
- Larger units (especially car storage units) not located to the outside of the project where larger access drives can be provided.
- Not enough landscaping provided.
- No windows or small windows in office.
- N0 or not enough site lighting. A light at the site entrance is a nice touch.
- Storage units not visible from the road.
- No security measures.
- To many dead ends.
- Loss of units due to poor layout.
- No small units and or not enough variety in unit sizes.
- No locker ( 4′ x 4′) units provided.
- To meet town approval building some architectural features actually make metal building more noticeable and unattractive.
- Phasing not provided on the approved plans requiring applicant to return to the commission for approval.
- Site signage not on the plans not requiring the applicant to return to the commission for approval.
- driveway width and or radius at the Town road to small. Minimum radius of 25 foot and a preferred entrance radius of 45 foot.
- Access for RV’s not large enough.
What are some of the most important things I need to know when we open the doors?
- It takes time for people to realize you are open for business and marketing done now will pay off more than any other time.
- Now is the time to start a consistent marketing routine.
- It is normal for the first and often the only question for prospects to ask what is the price. This does not mean anything – it is simply the only question they know to ask. Price is not the major reason most people rent.
- You need to develop you facility uniques selling features and benefits today so you can let your clients know.
- Hopefully you have a web site before you open—if not make it a priority.
- You need to “show the unit” to rent it.
- You need to be the expert and help the prospect come to their own conclusions – you can not just simple tell them.
- You need to ask prospect for the rental or the reservation.
- You need to learn people objections and solutions to these objections.
Facility Review From a Real Customer
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.