Self-storage facilities continue to proliferate, and the activity appears to remain steady even in times of economic downturn. When people feel flush, they buy stuff and then need somewhere to keep it. When the economy dips, people move around or become displaced and need somewhere to keep their belongings while they move or downsize their homes.
Steel self-storage facilities are particularly durable investments in more ways than one. Besides the stability of your investment in the industry, a self-storage unit built of steel is an extremely durable piece of real property that will be rentable for decades. The default rate on loans for self-storage businesses is one of the lowest of any industry and financing is easily accessed from multiple sources.
Self-storage facilities are built to generate income from the very beginning and appreciate over time if operated properly. These are not just buildings; they are businesses to market and manage.
Before you invest, here is what you need to know about buying or building a new steel self-storage facility.
As you may have guessed, self-storage is hot right now. In primary markets, investors should be ready to pay top dollar to win the sale of an existing self-storage property.
If you choose to build, here is a breakdown of construction pricing:
- Single-story self-storage construction costs about $35 to $45 per square foot. The metal building structures represent about 25% to 30% of the overall construction costs.
- Multi-story self-storage construction, including landscaping, office, and off-site improvements will cost around $42 to $70 per square foot.
A construction loan may be more difficult to obtain than a mortgage for an existing facility simply because the construction loan is based on the financial strength of the borrower whereas a commercial mortgage is based on the cash flow of the business you are purchasing.
If you decide to purchase an existing facility, review whether the price is based on current financial performance or expected pro forma. A pro forma-based price is riskier since it is a projection rather than a historical number. Also, find out if the financial information includes a management fee and payroll; modest facilities are often owner-managed and do not have a payroll or management fee.
Since the primary market is so expensive, you may want to concentrate on secondary and tertiary markets. Once you have purchased, expect to wait four to five years for the return on your investment.
Pick your location, location, location
The adage of real estate still stands. Follow these tips to select an appropriate property to consider.
- Is there decent access?
- Is it visible to moderate street traffic at a minimum?
- Are there other facilities within a three to five-mile radius of the property?
If you are considering an existing facility, think about whether the buildings appear to be well maintained.
Analyze the local market
Self-storage has moved out of the industrial park and warehouse zone and closer to where the customers live. You need a facility, or vacant land zoned for self-storage close to the population center.
Your top two questions to ask are:
- Will the market support another self-storage facility?
- How many competitors are in the local market?
A market feasibility study will answer those questions as well as help you determine the best mix of units for the area. Will you need more boat or RV storage? Do you need to include climate controlled units?
When evaluating management and operations for an existing facility, use the economic occupancy instead of the physical occupancy. A metal self-storage facility may have high physical occupancy, but if rents have not increased for some time, the economic occupancy may be lower than you would expect.
You should learn whether other self-storage developments are already being planned in the area and if they will occupy a better location than yours. If occupancy levels at competing facilities are weak and the rental rates low, your facility will not be feasible.
Considerations when investing in a self-storage facility
As you focus on an existing property, you need to look at the potential for improvement and prepare to perform due diligence as part of the sale process. Look for deferred maintenance like leaky roofs or mold. Determine if technology upgrades are needed.
When reviewing the revenue stream, keep the following in mind:
- Have rents ever been increased or are they below market?
- Is there room for ancillary revenue opportunities?
- Is there excess land for expansion?
Additional revenue streams are always welcome:
- Truck rental
- Tenant insurance
- Moving and packing supplies
- Solar generated electricity
Determine if the facility has a professional website and an internet marketing platform as part of the purchase. Also, if the manager will be staying with the business, is he or she able to implement new plans and programs in support of marketing?
Negotiate a due diligence period of 90 days at the least and do not allow it to begin until you have received all the items and reports you have requested in the purchase contract.
First and foremost, request and review certificates of occupancy (COs). Make sure all buildings included in the purchase have received the required inspections and were legally constructed. Buildings without proof are risks you don’t want to take.
The purchase contract should include the following in the sale:
- Current operating business name so you can take advantage of existing goodwill and ensure rent paid during the transition period is paid into an account you control.
- Legal control of the website to be able to respond to internet queries.
- Ownership of the security deposits if any were collected to avoid unfunded financial liability when customers leave.
- Ownership of 100% of prepaid rentals as those have not been earned by the seller.
Before completing the purchase, perform a lease audit. Do not go by a simple rent roll of customer names and addresses. A lease audit confirms you are getting your expected tenant base, whether you have customers receiving discounted rents, that all leases are signed, and you have a photocopy of any government issued ID that was requested at the time of occupancy.
Considerations when building new self-storage units
The size of the parcel determines the amount of rentable square footage you can build unless you are going vertical, which is a more expensive proposition. Most new developments of single-story self-storage are on three to five-acre parcels. The industry average for rent is about $1.00 per square foot.
- One acre yields approximately 17,500 to 18,000 square feet of rental space with 40% coverage ratio.
- 60,000 square feet are required to support one full-time employee.
Some cities have specific zoning for self-storage, but it is best if the land is zoned as a “use by right.” Conditional permits are also common but may increase your construction costs. Be prepared with a concept site plan based on good plat map information to help a construction consultant determine a budget.
Building or buying steel self-storage is a solid investment, but you need to do your homework. Perform due diligence to avoid surprises at the end of the process, and you will have a revenue generating machine for years to come.