To increase your self-storage’s net operating income, you have two choices: increase revenues or decrease expenses. Let’s assume you’ve done a good job of rental rate management. That leaves us with collections of fees, charges and ancillary sales.
While most self-storage operators don’t distinguish between asset and property management, consider an asset manager as someone who focuses on value creation, not just revenue growth. This person must be cautious not to create such huge ancillary income streams that they’re discounted in the valuation process.
This is factually a problem that appraisers are going to have to address. Income is one of three approaches to valuation; appraisers begin to get conservative and will even cap ancillary income because it’s not produced by the real estate asset but by business activity.
Some of us see the day when a self-storage appraisal will have two elements of value: real estate and viable business entity. The capitalization rate would be based on real estate and a value based on “X” times gross, as many retail businesses are valued.
And what about financing a project? Ronald Pope of Wells Fargo had this to say about our example of other income exceeding 20 percent of revenues:
“Our group would look at ancillary income at those higher levels if there was a good track record from past history or strong contracts accompanied with a strong feasibility study supporting the market need. We typically will use 3 percent to 7 percent gross sales from ancillary sources. As always, we would listen to the ‘story’ and build the case from there.”
So, if there is a potential penalty for increasing revenues, why concentrate on such activities? One reason is you believe that someday self-storage valuation will be changed to account for strong ancillary. The second, and perhaps best reason, is to enjoy increased cash flow, even if the value does not increase commensurately. Third, you’ll be fully engaging your assets.
If your location meets most modern standards, you may have a property where the highest and best use of the property may not be self-storage but retail. Many self-storage sites today rival Wal-Mart, Home Depot or car dealership locations.
Enough Why ... Here’s How
Rather than overwhelm you with 20 or 30 revenue generators, let’s deal with just one: packing and shipping. Most operators see a decrease in business activity during the Thanksgiving to New Year’s period. What if you could generate an additional $10,000 during that short period?
The pack and ship business is really no more complex than self-storage, according to Brandon Gale of the AMPC. Staff will need to be trained to:
- Recognize sales opportunities
- Manage inventory levels
- Become more people focused
No ancillary-income growth should come at the sacrifice of the self-storage property. Given the levels of investment, the front counter staff must recognize self-storage is the primary and core activity, and pack and ship is a side business.
To be successful at pack and ship, you must have buy-in from the staff. If your staff resists you, they better have a darn good reason. As operator, you must provide:
- Physical space
- Some specialized equipment
- Skilled personnel
- POS policies and procedures
- Start-up energy
- Initial capital investment
The operator also will be required to set up relationships with shippers, suppliers and, in some cases, government entities. There may be zoning issues. Some of us have done such a good job convincing P&Z officials that we’re low-traffic generators we create a counter-productive scenario by increasing retail sales.
You may want to promote your ancillary business through banners or signage. If you decide to add pack and ship, formulate your business plan early. You want to be ready to go full throttle by the time holiday season rolls around. Start your plan after July, and you’re not dedicating the proper resources to be optimally successful. A half-hearted effort will yield lackluster results.
For many operators, the best solution will be to spend a few extra dollars and have a turnkey pack-and-ship operator set up the business for you. While a bit more expensive, it’s a great alternative for operators who have plenty of ideas but actually implement only a few.
RK Kliebenstein is president of Coast-To- Coast Storage, providing feasibility studies and market analyses for self-storage projects, in addition to financing and consulting with self-storage owners. This article is an edited excerpt from his book How To Make Money In Self-Storage, scheduled for 2007 publication. Mr. Kliebenstein is also the author of How to Invest in Self-Storage, available at Amazon.com. For more information, call 561.367.9241; e-mail firstname.lastname@example.org; visit www.askrk.com.