Starting Small

Melissa Hermes Comments
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As the saying goes, “Good things come in small packages.” Twenty-five years ago, I could barely fit a computer on my desk; today, I can tuck one in my briefcase. My cell phone is about the size of a pack of Tic-Tacs and will take a picture. Video cameras, televisions and video games are all shrinking in size.

Smaller means more compact and convenient. The theory is if an item is easier to manage, more people will use it. The same theory could hold true for self-storage. For your next venture, consider the advantages of starting small.

Why Start Small?

A smaller facility may better serve the market.

Fast-food restaurants, self-serve gas stations and convenience stores have adopted a philosophy of convenience for decades. “Convenience storage”—smaller, self-serve storage facilities—are more readily accessible for sparsely populated areas or “infill” locations in densely populated metropolitan markets.

A smaller facility may be easier to manage.

While some self-storage facilities are managed by an owner/operator, most are run by an employee or management company. In either case, it’s becoming increasingly difficult to find a great manager. To add to your troubles, you now compete with restaurants and retail stores for the best employees. While the average self-storage manager makes around $22,000 to $30,000 per year, a department-store manager in the Cincinnati market earns about $32,000 to $37,000 (see www.salary.com).

To effectively manage a facility to its highest potential, you need a person with all the necessary traits and skills. Today’s self-storage manager is a marketer, salesperson, janitor, collector and bookkeeper. This is a tall order, and most people are stronger in one area or another. By starting with a small facility that is managed remotely rather than using onsite staff, you can outsource key skills, such as sales and customer service, while having a low-level hire perform routine janitorial and maintenance duties.

A smaller, remotely managed site also capitalizes on the public’s perception that all storage facilities are the same. Since most customers will call before renting a space and most sales are handled via the phone, onsite staff becomes immaterial. The important thing is that when people call, they are greeted with a friendly, professional counselor who can solve their problem immediately. The remote manager can rent the space over the phone and assign a gate code that gives the customer access to the site.

Small, remotely managed facilities also enjoy other benefits. First, they are never put in dire straights by a manager who is sick or otherwise absent. Because there are no face-to-face cash transactions, employee dishonesty is rarely a concern. In fact, with all payments handled by technology, customers enjoy greater convenience and owners have a more thorough audit trail.

Finally, even if a smaller site is not remotely managed, the owner can maximize productivity by using a part-time manager in lieu of a full-time employee. A good full-time manager can operate 500 to 700 units. What if the site has 300 or fewer spaces? The owner can economize by having a part-time manager who is available on a flexible schedule.

A smaller facility requires a smaller parcel of land.

As self-storage development increases, the task of finding properly zoned land becomes difficult and costly. Rezoning a larger parcel of 4 to 6 acres is not always feasible; however, rezoning a 1-acre lot may be more palatable to the zoning board. Smaller sites tend to be more readily available, and because they cost less, you can invest more in finding a better location.

A smaller facility requires a smaller investment.

Assuming construction costs of $26 per square foot, land costs of $100,000 per acre, and startup capital of $10,000 per month, a 60,000-square-foot facility would require a cash outlay of $790,000. This is more than the entire development cost of a 20,000-square-foot facility. In addition, by eliminating the rental office, a 20,000- square-foot site would cost less than $26 per square foot to build, saving even more money at startup.

A smaller facility rents up faster, requires less startup capital, and achieves quicker stabilization.

The payoff on a 20,000-square-foot facility is only 12 months away vs. a typical 20- to 30- month payoff on a new 40,000- to 60,000-square-foot facility.

A smaller facility yields a smaller return.

This one is not necessarily true. A smaller, remotely managed site reduces overall expenses because you don’t have to:
  • Build a rental office or apartment.
  • Stock an office with supplies.
  • Maintain a computer or software (if you use a management company).
  • Provide manager training.
  • Provide ongoing supervision or handle the many responsibilities associated with having multiple employees.

In the accompanying chart, which compares the finances of a 60,000-, 40,000- and 20,000-square-foot facility, you’ll see that a small, remotely managed site can yield the same cash-on-cash return as a larger one—without the large debt and risk. The return is even higher if you project the actual construction cost without a rental office.

CASH-ON-CASH RETURN COMPARISON

Assumptions:

1. Land cost is $100,000 per acre.
2. There are 15,000 buildable square feet per acre.
3. Construction costs are $26 per square foot.
4. Startup capital is $10,000 per month.
5. Rent on a 10-by-10 of $75 per month.
6. Debt/mortgage is 75 percent of land plus construction.

 Onsite Management Onsite ManagementRemote Management
Rentable SF60,00040,00020,000
Total # of Units500333167
Occupancy @ 90%450300150
 
Late Fees/Other Income$ 32,400$ 21,600$ 10,800
Merchandise Sales$ 1,800$ 1,800$ 1,800
Storage Rent$ 405,000$ 270,000$ 135,000
Truck Rentals$ 3,600$ 3,600$ -
Total Revenues$ 442,800$ 297,000$ 147,600
 
Advertising$ 22,140 5%$ 20,790 7%$ 14,760 10%
Administration & Misc.$ 9,000 2%$ 6,000 2%$ 3,000 2%
Off-Site Management $ 22,140 5%$ 14,850 5%$ 14,760 10%
Merchandise for Resale$ 900 0%$ 900 0%$ 900 1%
Property Insurance $ 5,400 1%$ 3,600 1%$ 1,800 1%
Real Estate Taxes$ 24,600 6%$ 16,400 6%$ 8,200 6%
Repairs & Maintenance$ 9,000 2%$ 6,000 2%$ 3,000 2%
Utilities$ 15,000 3%$ 10,000 3%$ 5,000 3%
On-Site Management $ 45,000 10%$ 45,000 15%$ - 0%
Total Expenses$ 153,180 35%$ 123,540 42%$ 51,420 35%
Net Income$ 289,620$ 173,460$ 96,180
 
Land Size4 acres2.6 acres1.3 acres
Land Cost$ 400,000$ 260,000$ 130,000
Construction Costs $1,560,000$1,066,000$ 520,000
Start Up Capital $ 300,000 (30 Mos.) $ 200,000 (20 Mos.)$ 110,000 (11 Mos.)
Total Project Cost$ 2,260,000$ 1,526,000$ 760,000
 
Total Equity (25% + Startup Capital)$ 790,000$ 531,500$ 272,500
Total Debt/Mortgage$1,470,000$ 994,500 $ 487,500
Total Debt Service (7% @ 20 years)$ 136,763$ 92,524$ 45,355
Net Cash Flow$ 152,857$ 80,936$ 50,825
Cash-on-Cash Return19%15%19%

A smaller facility represents smaller risk.

Yes, sometimes bigger is better. However, all real estate investments are a risk. In a smaller venture, you can test the waters. Until recently, operators of small sites relied solely on their own sweat and tears for success because it was not economically feasible to hire a manager to run the business. Resources such as call centers, kiosks and remote-management companies not only improve operations and reduce costs, they allow the operator of a small facility to think big.

Melissa Hermes is the owner of Crown Property Consultants Inc., a self-storage management and consulting firm in Wilder, Ky. She specializes in providing remote-management services and turnaround services for underperforming facilities. For more information, call 859.547.5409; e-mail mhermes@cpcstorage.net.

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