How to buy a self-storage facility correctly
Buying a self storage facility is much more difficult than you think, especially if you want to make money from it. Over the years, there are some basic traits that separate winning installations from losing ones. And that genetic code is hard to break.
There are plenty of people who will tell you all about buying a self storage facility to sell you a book, course, or boot camp. But they really have limited or no experience. The concepts that we are going to tell you about here are based on real life information (and lots of it) from the operation of one of the largest websites dedicated to the industry. And it can be very different from what you’ve heard before.
50,000 inhabitants within 3 miles of the facility.
The myth that you can build a self-storage facility in the middle of nowhere and fill it up needs to be exposed. Self-storage depends on people, people who need to store things. In the absence of population, you have no demand. You can’t build or buy a self-storage facility in a small town of 5,000 and be successful, at least not enough to make money from it. Population density is key.
Traffic count passed by the installation of more than 25,000 cars per day.
Most self-storage customers find their self-storage home by passing by. It is, in many ways, a purchase decision point. Few people put a scientific study on where to store their things. They seek convenience and often simply stop at the first one near their home or business. As a result, it’s also a myth that you can have a successful self-storage facility that’s either hidden from view or stuck on a two-lane street with no traffic.
Median household income of $50,000.
To pay for storage, to pay $100 per month or more, the customer must have discretionary spending power. If they are struggling to cover their rent or mortgage, they are not going to have the desire to add to their already struggling finances. Also, to have a need for storage, you will have to actually have excess belongings. Only people with higher incomes can accumulate enough material items to store them.
400 units onwards.
There are some major fixed costs in a self-storage facility, the biggest of which is the administrator. You must have enough units to support the personnel needed to run the complex. You cannot run a self-storage installation from a kiosk, contrary to what some people may suggest. And you can’t run it without any management. That is why the small complexes in the rural markets are always for sale.
High barrier to entry.
You may have noticed that there are a large number of self-catering units in almost every major city in the US, and in most midsize markets as well. It is extremely important that you select a market that has virtually no self-storage facility construction. Otherwise, occupancy may never go above a certain level, as there is always more supply on the market.
These barriers to entry can include an improperly zoned property, or a high price per square foot for properly zoned land, making construction of a new facility uneconomical.
No more than 6 square feet of storage space per person on the market.
A market of 100,000 people should not have more than 600,000 square feet of available space. If it does, the area is overbuilt. The best markets have ratios well below 6. Remember that market density has a lot to do with this. In areas with much more dense housing, there is less land available for self-storage facilities and a larger population to support it. San Francisco, which is extremely dense, is a huge self-storage market, while Stockton, California, always suffers from vacancies.
Rental rates around $1 per square foot on existing storage.
A healthy self-storage market will have a rental rate of around $1 per square foot. This is the number that maximizes the economy of the installation. When you find fees significantly below $1, it not only implies that the supply/ask is out of control, but that you won’t be able to generate enough returns to make the facility a winner.
Buy in a hurry, if you can.
We are entering a period of unparalleled dislocation in the credit markets, coupled with the current US recession. Many, perhaps most, commercial real estate will be in trouble for years to come, as their existing notes won’t be able to renew because they paid too much for the property. There will be a plethora of REO properties on the market, as well as desperate sellers.
This is a once-in-a-lifetime time to buy a self-storage facility, when you can buy quality property for a penny on the dollar.
conclusion
There are strict rules and guidelines for purchasing a successful self-storage facility. Once you know and understand them, you’ll already be a mile ahead of the competition. And that, coupled with the timing of the commercial real estate crash, may give you some of the highest-yielding self-storage investments of all time.