Everything You Need to Know About How to Start a Self-Storage Business
From Alaska to Alabama, roughly 50,000 self-storage facilities are scattered around the country. That’s about the same number of McDonald’s, Starbucks and Subway locations across the U.S. combined. These facilities are the foundation of the U.S. self-storage industry, which was projected to generate $37 billion in revenue in 2019.
At each of these self-storage facilities, people pay rent — usually by the month — to store their stuff in units of various sizes. They could be stashing furniture, art, appliances, TVs, documents, holiday decorations, wine, vehicles, boats or RVs. Many small businesses rely on self-storage units to keep business equipment, inventory and supplies. Some customers even have converted self-storage units into high-end “man caves” and “she sheds.”
Each of those self-storage properties is not only a warehouse for our wares — every facility also is a small business. And it can be a lucrative business, at that. By one estimate, the typical profit margin of a self-storage business in the U.S. is 11%. That’s well above the profit margins for many other types of small businesses; for example, the typical profit margin of a restaurant ranges from 3% to 5%.
Given those numbers, starting a self-storage business sounds pretty appealing, doesn’t it? It sure does. However, anybody looking at starting a self-storage company must look beyond the profits and weigh the practical considerations:
- How much will it cost to start a self-storage business?
- What kind of research and planning do you need to do before starting a self-storage business?
- Should you buy an existing self-storage facility?
- Should you build a self-storage facility from the ground up?
- How will you manage and market your self-storage facility?
Those are big questions, of course, but then starting a self-storage business is a big undertaking. Follow along as we guide you through what it takes to start a self-storage business.
How Much Will it Cost to Start a Self-Storage Business?
Before scouting locations for a self-storage facility — no matter whether you’re looking at buying an existing facility or building a new one — you’ll need to crunch some numbers.
At the outset, you’ll need a good sense of how much it’ll cost to get into the self-storage business. The numbers will vary widely based on a variety of factors, such as location, acquisition costs, land costs and facility construction costs. (We’ll get into the details later.)
Not only must you think about the costs to purchase or develop a facility, but you also must examine where the money will come from:
- Do you have enough liquid assets to buy or develop a self-storage facility on your own? Can you afford to earmark those assets for a self-storage facility?
- Do you need to take out and acquisition or construction loan?
- Do you need to recruit self-storage investors to help finance an acquisition or development deal?
After you’ve come up with answers to those questions, you’ll need to figure out how much it’ll cost to operate the facility once it’s yours. Are you and your family going to run it on your own? Will you have to hire staff to operate it? Would it be best to leave the operations side to a third-party management company? Do you need to install self-storage management software such as SiteLink? In the end, how much time do you want to spend running a self-storage facility?
Remember, a self-storage facility is more than a structure. It’s a business.
To get into the storage business, you’ll almost assuredly need to carve out millions of dollars to purchase or construct a facility, and to cover various operating expenses, particularly payroll and taxes. A report released in early 2018 by commercial real estate company CBRE shows real estate taxes accounted for 28 percent of all self-storage operating expenses, with on-site and off-site management costs eating up another 38 percent of operating expenses.
What Kind of Research and Planning Do You Need to do Before Starting a Self-Storage Business?
Once you’ve done some high-level thinking about starting a self-storage business, it’s time to do some research. All of that research will go into a feasibility study that will, as its name suggests, tell you whether the business idea is feasible. You might be able to do this study on your own, but you’d be better off hiring a self-storage consultant to perform it.
Whichever route you go, you need to answer a critical question:
If I build it or buy it, will they come?
In other words: if you invest money in a self-storage facility, will you generate enough revenue to cover debt service and operating expenses, and still make a profit?
Performing market research is crucial. This exercise will help you pinpoint the demographics of the customer base within a one- to five-mile radius of the facility. A three- to five-mile area is the typical size of a market for a self-storage facility.
You’ll want to nail down the median income in the market area (self-storage renters tend to be in the middle-income and upper-middle-income brackets), along with the median age (self-storage tenants are normally in their early 20s to mid-50s).
In addition, you’ll want to review the following aspects of your proposed market area:
- Current population (anywhere from about 20,000 people in a rural setting to 100,000 or more in an urban setting, as a general guideline).
- Projected population growth (more people means more prospective tenants).
- Daily vehicle traffic (the majority of self-storage facilities depend heavily on drive-by traffic to attract customers).
- Competitive landscape. Which self-storage facilities already are operating in the area? What is their occupancy rate? Are there any facilities that are under construction or are planned within the trade area?
Other components of the feasibility study normally will include an overview of the self-storage industry; long-range projections for rental rates, income, expenses and property value; and details about the storage project’s zoning.
Writing a Business Plan
Every business should have a business plan. Simply put, a business plan can help propel a business toward success, letting you realize your goals and manage issues that might arise. Most lenders will want to see a business plan before extending a loan.
Lots of online templates are available for writing a business plan, so you certainly can try tackling it on your own. You also can seek assistance from a nonprofit like SCORE, which offers free business mentoring, or you can hire a writer who specializes in business plans.
Keep in mind that a business plan for an existing self-storage facility will look quite different from a business plan for a proposed facility.
Each business plan should be tailored to your own needs, but a business plan for a self-storage facility usually will feature information such as:
- Mission statement.
- Vision statement.
- Ownership structure.
- Business structure (such as an LLC, or limited liability corporation).
- Staff roles and responsibilities.
- SWOT analysis (strengths, weaknesses, opportunities and threats).
- Market analysis.
- Competitive analysis.
- Marketing and sales strategies.
- Pricing strategy. Roughly speaking, monthly rents for a self-storage facility in a high-population area can be anywhere from 50 cents to $4 per square foot.
- Menu of product and service offerings, including a rundown of the unit sizes, like 5×5, 10×10 and 10×20.
- Sources of capital.
- Revenue streams.
- Revenue and expense projections covering several years. Financial modeling will enable estimates of revenue and expenses on a per-square-foot basis.
One factor in making sure revenue projections are met is marketing. While drive-by traffic delivers lots of customers, marketing — particularly online self-storage marketing — can’t be ignored. Self-storage consumers increasingly are turning to the internet as their first stop when shopping for a storage unit.
Any smart internet strategy should ensure your facility can be found on search engines like Google as well as through online self-storage marketplaces like SpareFoot. In addition, your facility’s website should be up to date. Companies like storeEDGE specialize in developing, revamping and maintaining mobile-ready websites for self-storage operators.
Should You Buy an Existing Self-Storage Facility?
In terms of buying an existing facility, prices are all over the map, just as the self-storage facilities themselves are. As you might expect, an existing self-storage facility in New York City, NY, likely will go for tens of millions of dollars, whereas an existing facility in rural Iowa likely can be purchased for less than $1 million.
A spot analysis of storage facilities for sale in March 2019 found that asking prices generally ranged from $1 million to $10 million per facility. Some facilities on the market also were bundled for sale as a single portfolio.
Unless you’re a licensed real estate professional, it’s wise to hire an experienced self-storage broker to help you find and eventually buy a facility. A seasoned broker knows the market and knows how to negotiate the price.
If you’re going to be running the facility, you, of course, will want to buy a facility in the region where you live. But if you’ll be handing over operations to a third-party management company, then it doesn’t necessarily matter where the facility is. Just be sure you and your broker have a good grasp of the local market.
Should You Build a Self-Storage Facility from the Ground Up?
This should come as no surprise, but location also plays a big part in the cost of building a new facility. You might be able to put up a single-story, 40,000-square-foot self-storage development in a small town for $1 million or less, whereas a two-story, 80,000-square-foot facility in a more urban setting could set you back $6 million. Keep in mind that these are rough estimates.
As a rule of thumb, you can expect to spend anywhere from $25 to $75 per square foot on new construction. However, that’s merely an approximate range. Again, the location of the facility — including the cost of the land — will dictate the price tag for construction.
Here are some statistics to keep in mind if you’re developing a self-storage facility:
- Facilities range from 10,000 square feet to 100,000 square feet or more.
- The average self-storage facility encompasses 46,000 net rentable square feet (the amount of money-generating space that can be rented by tenants).
- A facility typically covers 2.5 to 5 acres.
What follows are six things to take into account when you’re building storage units:
- What will the mix of units be? If the facility is in a trade area that’s populated predominantly by apartment renters, then you might want to include more small units, such as 5x5 or 5x10. But if the residents of the trade area are mostly homeowners, more 10x10 and 10x20 units might be in order.
- Should the facility consistent only of drive-up units or only indoor-access units? Or should there be a blend of drive-up and indoor-access units. The answers depend on the demographics of the trade area.
- Should there be only climate-controlled units or only non-climate-controlled units? Or should there be a combination of the two? The local climate will come into play regarding this decision, as will your construction budget.
- Should you limit the facility to one building? Or will you have enough room — and does it make sense — to spread the units across several buildings? How much land is available, along with how much demand is projected, will influence the configuration of the facility.
- Should space be set aside for storage of boats, RVs and other vehicles? The answer hinges, in part, on market research indicating how many boat, RV and vehicle owners live in the trade area.
- Should you look at converting an existing structure, such as a shuttered retail store, into a self-storage facility? A number of self-storage developers have successfully transformed unused and often overlooked spaces into tax-revenue-generating, job-creating storage facilities.
Aside from what the facility will look like, another key factor is zoning and entitlement.
A huge issue will be how the property is zoned. If the property is already zoned for self-storage, then that removes a huge hurdle. But if the property needs to be rezoned, then you could devote months or even years to seeking approval for a zoning change.
In some places, government officials and local residents vigorously oppose self-storage facilities, based on the ill-informed notion that these facilities are magnets for crime and traffic, and that they’re eyesores. The reverse is actually true. Self-storage facilities don’t cause a rise crime or traffic, and many modern facilities are being designed to fit into and even accentuate neighborhoods.
Additionally, there’s the issue of entitlement. This involves obtaining approval from government entities for your development plans. As with rezoning, an entitlement case could drag on for months upon months.
All of that being said, keep two things in mind:
- Development of a self-storage facility takes time and patience (and, of course, money). Aside from the zoning and entitlement, construction can be delayed by bad weather, shortages of labor and limited supplies of construction materials.
- Development of a self-storage facility requires expertise. A development team should include seasoned legal, real estate, financial, construction and design professionals. Few people who are new to the self-storage industry can go it alone when developing a new facility.
Financing a Self-Storage Facility
Just as there is with any business, there are some hard truths about self-storage, no matter whether you’re talking about a newly constructed or newly acquired facility.
For one thing, you’ll need money to launch the business and keep it running.
As we mentioned before, the amount of money you put into a facility varies greatly, based on location and myriad other factors. But before you spend a dime, you’ll have to decide how you’ll go about financing an acquisition or a new development.
For instance, will you need to take out a loan? A number of options are available, such as acquisition loans, construction loans and SBA loans. Many of these loans cover terms of 10 to 25 years. Work with a lending professional who’s well-versed in the self-storage industry to point you in the right direction.
To qualify for a self-storage loan, here are four things you’ll likely need:
- A credit score of at least 680.
- A credit history clear of recent bankruptcies, foreclosures and tax liens.
- A cash down payment of 10 percent or more.
- A business track record of at least three years.
Perhaps you don’t need to take out a loan and, instead, have enough liquid capital to buy or build a facility. However, do you have enough money to operate the facility? You don’t want to drain your retirement fund to purchase or develop a self-storage facility.
Or you might consider teaming up with other investors to buy or build a facility. This can be done through:
- A debt partnership, which is a lending relationship that does not assign an ownership stake to the person or entity you are borrowing the money from.
- An equity partnership, with each partner chipping in a certain amount of cash and owning a share of the business.
- A joint venture with, say, a self-storage developer. Each partner owns a certain percentage of the business.
- A syndicate of accredited investors assembled for the sole purpose of buying or developing a facility.
- A tenant-in-common arrangement, which allows at least two people to own a property and enables the relatively seamless transfer of an ownership stake to another party.
How Will you Manage and Market Your Self-Storage Facility?
While storage facilities traditionally generate healthy, stable cash flow, anyone entering the self-storage business must realize that this won’t be a get-rich-quick operation.
Generally speaking, the occupancy rates of self-storage facilities range from 70% to 95%. With a facility that’s newly constructed or that’s being repositioned, a new owner often will face a lease-up period of 18 to 36 months before a facility reaches occupancy stabilization. Positive cash flow also could be years down the road.
However, the good news is that the breakeven occupancy rate for a self-storage facility falls well below other asset classes. By one measure, the breakeven point is 40% to 45% occupancy in self-storage, versus 60% or more in the multifamily sector. Furthermore, self-storage facilities boast some of the best shorter-term and longer-term returns in commercial real estate.
When it comes to buying a self-storage facility, one investment number that’s essential to note is the capitalization rate (cap rate for short). “Capitalization rates are always the over-arching consideration for both buyers and sellers in the self-storage industry,” according to self-storage brokerage firm SkyView Advisors.
As explained by SkyView Advisors, the cap rate is the ratio of a property’s NOI (net operating income) to the value of the property. For example, if a property sells for $1.5 million and its NOI is $120,000, then the cap rate is 8% ($120,000 is 8% of $1.5 million).
“In the simplest terms, the cap rate reveals to an income property investor what percentage [he/she] can expect to earn if he buys the property with all cash,” SkyView Advisors said.
For example, if an investor thinks a property is worth a cap rate of 8%, then he or she expects a cash return of 8%.
In the third quarter of 2018, cap rates for self-storage facilities ranged from 4.5% among Class A facilities to 8.5% for Class C facilities, according to CBRE.
At the end of the day, buying or building a self-storage facility will most certainly consume time, energy and money. However, the payoff can be substantial in a continually growing industry. Evidence of that growth abounds:
- In 2018, self-storage occupancy rates and rental rates in a number of U.S. markets reached record highs.
- Demand for self-storage keeps going up thanks to an array of trends, including the overall downsizing of baby boomers’ households, the general preference among millennials for renting apartments versus owning homes and the sustained mobility of American workers.
- Over time, self-storage has demonstrated that it’s a recession-resistant sector.
In short, self-storage furnishes a wealth of reasons why acquiring an existing facility or building a new facility can open the roll-up door to attractive investment gains.
“Storage facilities need little capital outlay or upkeep, their property taxes are modest, and net acquisitions in that sector have surged,” Forbes.com contributor Brad Thomas observed in November 2017. “And so, in good times and in bad, kind of like marriage, good old storage units are like a trusty … spouse.”
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