Should You Build or Buy Your First Self-Storage Facility?
Thinking about getting into self storage?
Let me be the first to formally welcome you to this fast-growing but still tight-knit, diverse, fun (and sometimes strange) real estate lover’s dream of an industry.
If you’re eager to get started on your first storage investment, but not sure whether you should buy an existing property or build a brand new one, check out some of the tips and resources below to make this tough decision a little easier.
The dilemma: Build or buy?
It’s the million dollar question: should you build a storage facility or buy an existing one? Unfortunately, there’s no solid answer. It all depends on your location and your unique business needs.
Whether you’re buying or building, prepare to spend your first year or two doing due diligence on the self storage industry, the markets you’re interested in, your current and future competition, and various vendors, partners, and technology tools you’ll need to operate your storage business. It’s a long, boring process, but it’ll save you a ton of time and money in the long run. If you’re just starting your online research, check out Inside Self-Storage and owner/operator discussion forums like Self Storage Talk, then consider heading out to a national trade show (the two largest shows are in the spring and the fall) to meet other storage owners and investors, network, and learn from educational seminars.
“Make sure to do your research, especially if you’re going to start building from the ground up. You’ve got to make sure the barriers to entry are high and someone else can’t come in and start doing the exact same thing as you next door and have a pricing advantage or scale advantage. Your model, your profitability and your breakeven point may all be based on a certain rent rate, but if someone else comes in and they’re a larger operator with a lower cost structure and lower cost of capital, you’ve got to make sure they can’t move in next door to you and charge half the rent, or you’ll be out of business tomorrow.” CJ Bardy Storage Place
Having a well-thought out business model before either buying or building is key to your success as a new storage owner. Everything from your gate security to your management style should be planned for – you won’t want an unexpected large expense to throw you for a loop and put you in the red. It might seem like putting the cart before the horse to have your business planned out before you even get a property, but it’s exactly the opposite: with a strong business model, you’ll be able to spot great opportunities for you and look at properties with a keen eye for a bargain.
Buying and acquiring self storage
As a new self storage owner, you likely won’t able to pay crazy cap rates like national companies manage to do when acquiring property, so you might need to adjust your strategies to find hidden gems in smaller, underserved markets where you aren’t competing with REITs for the purchase of a facility. When evaluating potential deals, you’ll need to look at price, facility size and geography, and potential for operational and financial improvement.
Ask yourself these questions when assessing the potential value you could add to a facility:
- Has the current owner kept rates consistent with market value? Are tenants seeing consistent rate increases?
- Are there opportunities to improve the facility’s marketing website and online reviews to bring in more leads?
- Is the facility’s original unit mix meeting the needs of the current market trends?
- Is there room for expansion on the property? Could an existing building be converted or refurbished for climate control?
- Could manager overhead be reduced or eliminated with updated technology?
Facilities that are being sold for below-market almost always have deferred maintenance like a roof that needs to be fixed, unit doors that are in poor shape, or a parking lot that needs to be paved. All costs have to be factored into your deal to ensure you’re coming out on top after repairs and updates are completed.
Keep your ideal business model in mind when looking at the geography of a storage facility. For your first self storage deal, you might not be able to afford properties in hot primary markets, and a traditional business model might not be ideal for suburban secondary markets or rural tertiary markets. Many operators in secondary and tertiary markets run unmanned facilities using online move-ins and access control security tools to allow renters to serve themselves. On the flip side, owners in primary markets often lean towards having a manager on-site to provide additional security, assist tenants with problems on-site, and manage walk-in traffic and in-office retail sales.
“With all the technology that’s available, you don’t necessarily have to have an on-site resident manager, but we’ve found that it’s really the best way to run a self storage property efficiently and securely, especially when you have over 10 facilities spread out across two states. There have been many times where, had we not had on-site managers, I would have had to drop everything to go out to a facility that is over three hours away from our Paradise office to resolve a problem on-site.” Shelby Beck Extra Self Storage
In any acquisition, be sure your deal includes a strong contract that secures your rights to the business’s digital assets (including website domain, social media accounts, historical software data, directory accounts, and more). These assets are typically undervalued and they offer tons of useful data as well as huge online branding power and marketing ROI for your business.
Building a self storage facility
With more and more storefronts closing their doors, there are tons of opportunities for self storage investors to swoop in and buy outdated warehouses and abandoned retail spaces. While you may not be building from the ground up when renovating an old Sears or Toys R’ Us store, you are entering the market in the same way as a brand-new storage build, and even though your construction costs may be lower, your challenges as a new business will be similar.
One of the biggest benefits of renovating an existing structure is location: you’ll often get a property with better visibility and ease of access and more traffic with a renovation than a new build. Since one of the biggest deciding factors when choosing self storage is proximity to home and work, you’ll want an area with high population density and lots of building potential for apartments and houses.
Your business model (including what kind of technology you plan to use to run your business) should be well-defined before you break ground to ensure everything you’re building is designed properly to fit your business’s needs and money isn’t wasted on correcting mistakes after new construction is underway.
Traditional self-storage might not be the best option, and that’s a good thing: unique self storage business models like valet storage, storage and moving combo services, and portable storage units are increasingly popular in fast-growing, affluent markets, and these services can be even more profitable for savvy self storage owners.
“I looked at portables for three or four years and finally found a company that we could work with. We bought twelve of them to start off with and I thought, ‘well, worst case scenario we can just put our names on both sides and use them as basically as billboards around town.’ They were delivered to us the first week of February 2014 and we rented eight of them out within a week. It’s just grown more and more ever since then.” Calvin Byrd Byrd’s Mini Storage
If the market you’re building in can support it, consider building a class-A self storage building with climate-controlled units. Class-A features include modern building design, high-tech access control security systems, close proximity to desirable locations, sought-after amenities, and sustainable energy operations. Keep in mind that often the only way to get zoning for self storage is to go vertical by building an attractive, multi-level storage building rather than rows of drive-up units. Cities are getting tougher and tougher on self storage and requiring lots of work from owners to obtain zoning.
“We feel (climate controlled storage) is where the industry is going. All of these Class A features make it more convenient for customers who demand more amenities and it also makes the facility significantly more attractive as a building. Not to mention we are proud of what we’re building.” Ben Hagedorn Beyond Self Storage
If you’re in a competitive market, building a storage facility can be a great opportunity to provide niche amenities like like wine storage, climate controlled RV storage, and document storage, cloud backup, and shredding can help set yourself apart from other storage facilities in the area.
“At our new Bellport facility, customers will have guest access to cameras for remote monitoring. They’ll be able to view their storage unit or vehicle from their smartphone anywhere in the world. We were also brainstorming on what we could offer that was unique, and pharmaceutical storage was an exciting new choice to us. It was an addition on our already privatized building. We provide access to utilities required to support whatever equipment they might be bringing in, such as lighting and power.” Jim Petrocelli The Self Storage Vault
Before starting your build, you might also want to consider the pros and cons of implementing green, solar energy tools at your property. The short-term return of solar energy is usually poor, so you’ll need to ensure you can stay afloat between the high-cost of installation and the five to 10 years it may take for your facility to see returns from solar energy. Eventually, you may even be able to sell electricity back to the local grid, providing your business with an additional income stream.
Before you close your first deal or start building your dream self storage property, make sure you do thorough research on the industry and conduct a market study to have a thorough understanding of the long-term housing trends and self storage feasibility in the area. There is a ton of homework to be done before jumping into storage ownership (some new investors take years researching and planning before buying!) and you’ll want to have a knowledgeable team in your corner who can advise you on financing, building, and operations.