Is a Self-Storage Business Profitable?

John Egan Sep. 13, 2021
Blogs

 

Profitability is in the eye of the beholder. But, generally speaking, a self-storage business can be profitable. In fact, it can be more profitable than many other types of business out there.

“Self-storage has evolved from the homely stepsister to the Cinderella of the commercial real estate industry. Once relegated to sites unsuitable for other productive uses and stigmatized as unsightly metal buildings, self-storage properties historically haven’t attracted sophisticated investors’ attention,” according to the CCIM Institute, a commercial real estate network. “Yet in recent years, the segment’s solid performance and stable returns have piqued the interest of a growing number of investors.”

Starting a storage business

What makes a self-storage facilities profitable? A self-storage facility is an attractive investment because of the relatively low operating costs. It requires less upkeep than an office building or multifamily complex, for instance, and demands less overhead — namely in the form of labor — than most other kinds of income-generating real estate.

Furthermore, aside from the main business of renting out storage units, a self-storage facility can make money by selling locks, cardboard boxes, packing tape, insurance, and other products and services.

Additionally, the month-to-month nature of self-storage leases enables a facility owner to raise rent more easily than for properties that traditionally offer long-term leases, such as office buildings and multifamily complexes. This allows for more frequent pricing increases if desired.

As noted by Marc Goodin, co-founder of Storage Authority Franchising, “a properly planned, operated and funded facility can be a very rewarding and profitable business.” This includes creating and adhering to a self-storage business plan, which most lenders will want to see from someone considering the purchase or construction of a storage facility.

Pros and cons of owning a storage unit business

Among the five pros and five cons of owning a self-storage business are:

Pros

  • Pro: Great potential for profit.
  • Pro: Growing demand.
  • Pro: Low overhead compared to other real estate investments.
  • Pro: Often-minimal management.
  • Pro: Prospects for lucrative add-on products and services.

Cons

  • Con: Self-storage facility is a business, not just a piece of property.
  • Con: Possibility of picking poor location.
  • Con: Up-and-down movement in occupancy and rental rates.
  • Con: Constant concerns about hiring and managing employees.
  • Con: Stiff competition from other storage operators, particularly ones with a big regional or national footprint.

Profit margin of a self-storage business

As you’re mulling the pros and cons of a self-storage business and you’re pondering the moneymaking potential, keep in mind that there’s not necessarily one right or wrong way to look at profitability. In many cases, someone may use the word “profit” as a proxy for financial success.

For instance, one self-storage business owner might measure profitability based on the profit margin. According to one estimate, a self-storage facility generates a typical profit margin of 41%.

Net operating income of self-storage units

Meanwhile, another self-storage investor might focus on net operating income, or NOI. Owners of income-generating properties use NOI as a yardstick for profitability. To come up with NOI for your small business, you subtract operating expenses from revenue.

The five publicly traded self-storage REITs in the U.S. like to emphasize NOI when they are reporting financial results to investors.

Public Storage, the largest of the REITs, posted same-store NOI (an apples-to-apples financial comparison of facilities open at least a year) of nearly $1.75 billion in 2020. Public Storage forecasts same-store NOI growth of 9.4% to 11.9% in 2021 versus the previous year.

Extra Space Storage, another self-storage REIT, notched same-store NOI of nearly $770 million in 2020. For 2021, the company predicts NOI growth of 13.5% to 15.5% compared with the previous year.

Revenue is only one part of boosting NOI, controlling expenses for your small business is the other. Some major expenses that can hamper your facility’s profitability include property taxes, snow removal, and debt service.

Return on investment for self-storage businesses

Another way to approach profitability, in the loosest sense of the word, is to examine the return on investment, or ROI. In self-storage, there are two key types of ROI: cash-on-cash ROI and cap-rate ROI.

According to Investopedia, cash-on-cash ROI measures — normally on an annual basis — the amount of cash flow relative to the amount of cash invested in a property. Cash-on-cash ROI is expressed as a percentage. “It is considered relatively easy to understand and one of the most important real estate ROI calculations,” the website says.

Then there’s cap-rate ROI. As Chron.com explains, the cap-rate ROI is the profitability ratio obtained when you divide ROI by the purchase price of a storage facility. In the self-storage industry, you’ll often hear folks refer not to the cap-rate ROI but simply to the cap rate, or capitalization rate, of a facility.

In calculating the cap rate, “the purchase price is used rather than down payment because down payments can vary widely, which can skew the results; your cash-on-cash ROI for the identical facility using the same NOI will be a lot different if you buy a facility with a 20% down payment compared to a 5% down payment,” Chron.com says.

A cap rate in self-storage might be 6.5%, whereas the cap rate for a retail or office building might be 5%. Cap rates vary according to a property’s fundamentals and location, and fluctuate over time.

Building a self-storage facility

Of course, the profitability equation almost certainly will change if you’re going to build a new facility from the ground up instead of buying an existing facility.

The Millionacres investment website points out that developing a facility “is the most cost- and labor-intensive method for investing in this industry; however, it can be extremely lucrative if done properly. It takes a high level of experience, knowledge and resources to help make this a successful endeavor.”

Bottom line: development costs and construction costs can eat into your business venture’s profits if you aren’t careful.

Maintaining occupancy

Regardless of whether you build or buy a self-storage facility, the business’ long-term profitability and viability rests largely on maintaining healthy occupancy numbers. While a 65% occupancy rate might cover operating and debt expenses, experts generally recommend shooting for an occupancy rate of 80% to 90%. Buoyed by pandemic-driven demand, the industrywide occupancy rate averaged 91.7% in 2020.

Industry observers say the robust occupancy rates achieved during the pandemic and the accompanying economic downturn further underscored the recession resilience of the self-storage sector. The sector’s resilience likely will remain for some time to come, with one forecast indicating an annualized growth rate of 8% in the U.S. market from 2020 to 2025.

Long term outlook

In August 2021, Joe Russell, president and CEO of Public Storage, said the rise of hybrid work arrangements “gives us confidence that overall adoption of self-storage will continue to grow, and is looked upon favorably by consumers and businesses as a cost-efficient alternative to storing goods in residential or commercial space.”

The long term feasibility of the self-storage industry seems to be stronger than ever.

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