Whether I’m building or buying a self-storage facility, I always run a cost estimate to help determine whether I can or should invest. Every owner has his own return threshold, and every project is unique; but I thought I would walk you through my “back of the napkin” thinking for weighing project decisions, which I sketch out in a simple spreadsheet. I’ve used this method to successfully open eight locations in five cities.
To give you some perspective, six of my family’s locations are in towns of less than 5,000 people, while two are in metro areas of 1 million people. Once we complete two additional sites, we’ll have built 47 buildings.
Creating Your Own Estimate
First, download a copy of the spreadsheet, so you can manipulate it for your own purposes. The project list on the “Summary” tab is for traditional, drive-up self-storage. It includes items like HVAC, fire sprinklers, building façade, frost-free footings, storm-retention ponds, road type, fire hydrants, etc., and their associated costs. The spreadsheet isn’t meant to be all-encompassing, but it’ll show you some the items that can hurt you financially if you don’t do your homework and perform a proper analysis.
I’ve been at this for a while, and I’m still learning. For example, on the project reflected in my sample numbers (see below), I thought I was done with my estimate, not realizing I’d missed a “wet” spot in the middle of the property. We actually needed to install a $30,000 drain tile that wasn’t reflected in my initial costs, which was a pricey mistake. To be safe, you might want to enter a SWAG (sophisticated, wild-ass guess) factor up front, say in the neighborhood of 5 percent.
Work your way through the list, filling it in with your own costs. For the building quote that’s currently at $0, you’ll want to get an estimate from someone local.
If you don’t know yet know your specific location, you can actually use this template in reverse. Simply leave the land amount blank and plug in the rest of the numbers. This’ll give you a range of how much you can pay for the land.
How Much Should I Build?
A common question self-storage owners have is how many units/structures should be built in phase one. I always use my first set of buildings to pay off the land, fencing, initial groundwork, electrical and plumbing. I use a 65 percent breakeven factor. This is a cash-flow estimate of how many units need to be filled to cover all expenses (except depreciation), plus principal/interest payments.
For example, if you know you need 150 units to pay the above costs, that’s your breakeven point. But you never want to build only enough units to break even, or you won’t make any money! If you set your breakeven point at 65 percent of your total unit inventory, you actually need to build 230 units (150 divided by .65 is 231). From there, adjust as your site layout demands. If you need to instead build 200 or 240, then that’s what should happen.
Whatever you do, don’t build “just enough.” I know it sounds counterintuitive, but it’s depressing when you hit 90 percent occupancy. Why? Because then you have to decide whether to erect another building!
Once you enter phase two, you’ll find your breakeven is closer to 35 percent. This is when the money starts to roll in and your occupancy risk starts to decline.
Play around with the spreadsheet and see what the numbers do, particularly with respect to cash flow. The second tab deals specifically with building estimates. Adapt it to your needs, but don’t trust anything I’ve provided; you need to own your data. As you become more familiar with how the numbers work together, you’ll gain confidence in your estimates. Anything in the self-storage business can be validated. My advice is to start small and make your big mistakes early.
Henry Clark is owner of Clark Storage LLC, which operates six facilities in Iowa and one in Nebraska. The family-run business also includes Clark’s wife, Sandy, and son, Ryan. For more information, call 402.618.6595; visit https://clarkstoragellc.com.