Most Americans have more stuff than they know what to do with. As a result, they need extra space to store their stuff in. This basic need is the back-bone of the self-storage industry. But just because the demand is there doesn’t mean that making money filling that void is simple and guaranteed. The self-storage industry is more complicated than it looks, and there are many important issues to understand and address.
The Right Type of Facility
There have been a number of different types of self-storage facilities built over the last four decades. However, the profitable ones are among the first variety – they are called “Generation One” or “Generation Two”. The important component is that they have all rentable units located on the ground floor, and in a manner that a car can drive right up to the roll-up door. Why is this? Studies have found that self-storage tenants want to be able to drive right up to their self-storage unit door, roll it up, throw their stuff into it (or pull it out of the it), close the door and drive off. What’s not in demand are units that are located on a second floor or higher, or that you can only reach on foot. Nobody wants to have to take an elevator to their unit, or walk down a hallway with their stuff in tow. There never really was a demand for these type of facilities – it was more a fabrication by self-storage developers trying to rationalize building facilities on more expensive land, which required a greater number of units on that “footprint”.
Just as multi-story facilities have proven to be a flop, so have “climate controlled” units. It appears that the items that most Americans store are not valuable enough to require heating and air-conditioning. If you go to most facilities today, you will find the bulk of the “climate controlled” space vacant. At the worst end of this spectrum are the California invention of “wine storage” units. I was in a facility recently that had only 20% occupancy in “wine storage”. The cheap wine refrigerator available at Costo and other retailers has replaced this concept for most people. And don’t forget that “climate controlled” areas are extremely expensive to operate.
The Right Kind of Location
It is extremely important in self-storage to have excellent street frontage and visibility. The most successful self-storage facilities in the U.S. all share this common trait. This is because many Americans rent space in facilities that they drive by all the time and have awareness of – kind of a “point of purchase” decision. When you have a self-storage facility with poor visibility and an out-of-the-way location, there is no way that anyone will “think” to rent from you, or even find you if they wanted to.
Don’t forget that self-storage is extremely competitive in most markets. Given this fact, it is important that your facility have the correct basic gifts to compete. We all enjoy the stories of underdogs who go on to victory – like the one-handed baseball player – but it is far easier to win when you don’t have a disadvantage from day one.
The Right Kind of Market
Self-storage requires a high density of potential customers. Not everyone needs it, and there are competitors who are also asking for their business. There is a general rule that there should be a population of at least 50,000 people within a three mile radius of the facility. While this is only a guideline, the key thought is that you need a heavy population density for a facility to be successful.
As important as population density, is the density of self-storage space in the market. An over-built market will have low rents and excessive vacancy. The general rule of thumb is that there should not be more than 6 square feet of storage space for every person in that market. For example, a market of 100,000 people should not have more than 600,000 square feet of self-storage capacity.
Demographics are also a key part of a healthy self-storage market. Markets with household income of $50,000+ per year are best. Why? Because the more money you make, the more stuff you buy – and the more stuff you need to store!
The Right Kind of Price and Terms
An essential part of any self-storage acquisition – probably the most important of all – is the price and terms of the deal. Even the best self-storage facility will be a loser if you over-pay for it. You should never buy a self-storage facility at less than around a 10% cap rate (return on the total price). In addition, you should be able to finance the deal with around 20% down, so that your cash-on-cash return is in the mid-teens.
The best buys in self-storage facilities are from “moms & pops” – individuals who own the property free and clear and do not provide very sophisticated management. You can normally buy from these moms & pops at very attractive prices, and they can seller-finance the purchase, avoiding the entire banking application and approval cycle.