Are Self-Storage Units a Good Investment?

The initiative behind self-storage business is to be able to provide storage services to individuals who need to store their belongings somewhere else, due to insufficient storage in their homes. This business also applies to other business that needs to store extra inventory such as furniture, office supplies, etc. Self-storage business has since become a lucrative business as it caters to the storage needs of individuals and businesses alike.

Starting a self-storage business

Getting the building. Starting a self-storage business would require at least $2 - $3 million, with a 10% - 20% down payment. This includes land purchase, construction cost and security, architecture, fees, surveys, legal expense, builder’s risk insurance, marketing, furnishing, closing cost, and interest. The cost range to build a single story is between $25 - $45 per square foot. While the cost range to build a multi-story building is from $42 to $70 per square foot. Starting a storage business means that you must either have at least two million dollars or get investor support.

There is also the option of renting self-storage facilities of about 50,000 square feet at $9 per square foot, yearly. This may cost more in the long-term than owning your own building as there are still monthly expenses that will be incurred.

Select the most suitable location. This is a crucial element in starting a self-storage business. When considering locations for your self-storage business, it will be preferable to opt for urban areas. Unless you have a market target for businesses in rural areas. The advantage of setting up your self-storage business in urban areas is the accessibility to many renters. Large billboards on freeways also serve effective tools for advertising.

Getting customers. Once the storage building or facility has been sorted out, the next step is to build a customer base. Usually, the best customers are those with long-term needs for storage and who are able to pay monthly rental fees by any automatic mode of payment. A customer can rent a 10’ by 10’ space for up to a year or more. You can charge customers as low as $1.26 per square foot for non-climate controlled space, and as high as $1.60 per square foot for a climate-controlled space. The average cost per square foot is $1.42 for a 10’ by 10’ unit. This implies that the average rental payment for a popular 10’ by 10’ space is between $126.00 to $160.00 monthly.

Include other services. You can make your self-storage business more profitable by including truck rental services. You can either partner with a truck rental business or manage your own fleet of rental trucks, moving trailers, and vans. The self-storage business and truck rental business can either operate as a single business or separate businesses. The services of using a rental truck can cost anywhere between $200 - $500 per trip.

Get legal protection. A self-storage business is like every other business that requires legal protection. The main purpose of having legal covering like an LLC prevents you from being liable as an individual if the business gets sued.

Register for taxes. Typically, before you can legally own a business in the United States, it will be required of you to register for state and federal taxes. You will also need an EIN (Employer Identification Number), a unique identification number that is assigned to a business entity for easy identification with the Internal Revenue Service. It can be gotten free of charge through the IRS website.

Open a business bank account. People feel more comfortable making payments to a business account than a personal account as it shows credibility. Using a business banking account is also essential for personal asset protection. That way you don’t get to mix personal assets with business assets to avoid loss in an event when your business is sued. It also makes accounting and tax filing easier.

Get the necessary permits and licenses. After going through all the struggles to set up a good storage facility business, you don’t want to get shut down due to licensing or permits issues. Failure to obtain necessary permits and licenses can also result in the payment of huge fines. These permits and licenses differ by state. You can look up local business licensing requirements on your state’s website. Or check the clerk’s office in your town, city, or county.

Get business insurance. There is no limit to getting business insurance as it is highly recommended for all businesses. In some states, it is a legal requirement to have some sort of workers’ compensation insurance for employees.

Note: Before leasing a space to a new customer or client, demand that they sign a services agreement. This agreement will provide clarity to client expectations and minimize the risk of legal disagreements by outlining payment terms and conditions, length of the rental, and service level expectations.

How much money can you make from a self-storage business?

The major way of making money through self-storage business is monthly rentals. However, there are other income streams such as auction proceeds, fees, sales of related products such as locks, and moving supplies. Extra money can be made from lost key fees, lock change fees, late payment fees, administrative fees, etc. There are self-storage service providers that also offer premiums for climate-controlled spaces and monthly premium to insure the items kept in storage, at extra costs.

According to Parham Group, a self-storage consulting, development, construction, and management group, an average storage facility is between 60,000 to 80,000 rentable square feet and can start to generate profit when occupancy reaches 40% to 60%. Based on calculations of the group, a successful self-storage facility will operate between 83% to 93% occupancy, with a net income of about 26% after paying for loan debt service and other expenses.

Estimated Development Cost (Parham Group)

Typically, the average rent payment at $1.42 per square feet per month, or $17.04 per year, will generate a sum of$1,022,400 to $1,363,200 in rental income per year, and $265,824 to $354,432 in ‘before-tax cash flow’ per year.

What is the growth potential of the self-storage industry?

As earlier stated, storage business is a lucrative business and it includes both locally run self-storage facilities to major national multi-storage facilities. In America, there are over 54,000 storage locations with more than $30 billion in annual revenues. In a report by SpareFoot Storage Beat on the giants in the industry by market valuation and revenues for 2015, the following figures were generated.

• Public Storage: Market Valuation $2.38 billion

• Extra Space Storage: Market Valuation $782.27 million

• CubeSmart: Market Valuation $444.5 million

• Sovran Self Storage (Uncle Bob’s): Market Valuation $366.6 million

• U-Haul: Market Valuation $211.1 million

How to succeed in self-storage

One of the most effective ways to succeed in any business is to establish good working relationships with customers and clients.

Self-storage business can be classified under commercial real estate investment because it operates similarly to warehouses. Self-storage investment has a 92% success rate compared to all other real estate investments. Based on estimates by Mako Steel, the most successful storage units range between 83% to 93% occupancy rates. Storage businesses with 70% occupancy rates can also succeed.

Usually, it takes about 8 to 24 months before a self-storage unit can operate at its maximum potential. It can be considered as a long-term investment that may take a while to unfold, yet holds a lot of promises. Don’t be discouraged if the first few months do not yield desired returns. Also, a lot of work has to go into marketing and creating a solid brand identity.

What’s the competition like? Always remember that running a self-storage business is as good as running any other business. An integral part of your preliminary work would be to check out the competition in the area you intend to set up your business. To know the strength of the competition, you can begin by hiring a professional consultant to gain accurate information about an area and the untapped potential you can take advantage of. In order to compete with other strong brands or national multi-storage companies, smaller self-storage companies may consider offering competitive rates to attract more clients. They can also offer certain discounts from time to time, by handing out flyers or through digital marketing platforms to reach and attract more clients.

Learn everything about the business. You can hire a business consultant to put you through on the basics of planning your storage business. The first step would be to learn everything you can lay your hands on about the business. This includes costs and investments, operational considerations, and other factors that make a successful self-storage business.

How does a typical self-storage facility operate?

To effectively run a self-storage facility, a team must be in place for marketing, operation, and maintenance purposes. Available spaces are advertised. Interested applicants apply and are shown the facilities. The application will be assessed for background checks and credit checks. Necessary agreements are made between the business and the new tenant. Monthly accounting records have to be in place and regularly updated.

A lot also goes into maintaining a neat and secure storage facility. The owners must always ensure that the facility is regularly supervised to prevent theft and vandalism. The team also needs to follow up on past rental payments that need to be collected. Legal processes can be taken if there is a delay with payment or disputes regarding payment. Sometimes, it may include filing court papers, giving eviction notices, or auctioning items abandoned in storage after the agreed amount of time has elapsed. All of which are legal based on the local laws and rental contract agreement.

According to Statistics Brain, abandoned items in about 155,000 storage spaces are auctioned each year, at an average price of $425, due to past due rental payments.