You don’t know me, and we’ll probably never do business together. So, while I’m about to give you something for nothing, remember the old proverb: “You get what you pay for.”
Seriously, though, if you’re among the throngs of investors interested in breaking into the self-storage business, I’m here to offer some unsolicited advice and observations about the industry. That said, I don't know your risk tolerance, financial situation, or family or professional life. I’m not privy to your appetite for self-storage in the long term, your stomach for change, or how much you need to be in control of a situation. Thus, my approach may not match yours.
What’s in it for me is I enjoying sharing my experiences. It helps me sharpen my own thought processes. So, please … Take what I offer in the spirit in which it’s intended, and then adapt it to your situation and make it your own.
The good news is everything in self-storage can be validated. Don’t simply take my word for things. Attend industry conferences. Watch YouTube. Read books. Find a similar investor in another market with like-minded goals and converse with them. All of these things will help put you on a path that’s right for you.
The self-storage industry is generally divided between mom-and-pop operations and large regional and national players, including the real estate investment trusts (REITs). About 70% of all U.S. locations are mom-and-pop businesses. Even still, approximately 60% of the industry’s value sits in the hands of the largest operators. These are two totally different business models and products. Here are some generalizations:
Historically, mom-and-pop facilities tend to offer drive-up units, not climate-controlled. They were built on land that was convenient for the business owner, not the customer. They’re often run in-house without professional management. There’s usually only one location, and the owner isn’t interested in expanding. In many cases, their objective was to simply use up the extra land they had next to an existing business or house.
In contrast, properties owned by the REITs tend to be climate-controlled, multi-story, 300 units or more and professionally managed. These sites are selected through careful market research, often in large towns that allow for economy of scale. The REITs build or buy multi-story because it helps make the numbers work with land costs being so high. These operators have strength in corporate management, financing, search engine optimization and investment diversification. Think about it: If you own 50 to 1,000 locations, no one property can knock you out.
My first advice is to start small and make your big mistakes early. I recommend buying an existing self-storage facility with up to 100 units, which’ll allow you to learn the operational side of the business. It’s less to bite off and chew and not as overwhelming. (Later, if you want to build, you can learn the development side.) Start by visiting all of the appropriately sized locations near you and make an offer. Keep talking to them every six months.
The majority of mom-and-pop locations will age out over the next 10 years, and the owners’ kids most likely will not be coming back to take over the business. Even if they don't know it, these operators need a way out, an exit strategy. You don’t have to sell them on the idea, as they’ll eventually come to this same conclusion. You just want to be available as a solution when they do.
Depending on where you are in the world, another approach would be to check your local zoning to see where cargo containers are allowed. Look for the ugliest, cheapest location, preferably with a lot of concrete base or roads. Even though this is technically a development, it’s low-risk and low-input. You can always sell the ground and the containers with minimal loss. You don't need to buy a lot of containers up front, and you can always add as needed.
Developing vs. Buying
Many self-storage owners are hesitant to sell their properties because it’s a great investment with good cash flow. For example, I have three projects in development ranging from $1.5 million to $2.5 million. Once full, they’ll appraise from $2.4 million to $3.7 million!
Your choice as an investor is to buy at the appraised value or develop at the cost basis. Though it may seem obvious that you should develop, you have to determine if you have the stomach for it and can control the risk. A development project will take about three years from the time you seek the land to full occupancy, thus lost cash flow. Financing is tougher and fluid, and interest rates will be different in three years.
On the other hand, developing allows you to find underserved markets. This enables you to out-position mom-and-pops and REITS who built earlier based on site convenience. You have more choices for location, which helps you identify the best investment. There are far more options in development than in acquisitions.
Accepting Failure as an Option
It helps to understand what failure means in self-storage. Typically, when I develop a new facility, I build enough units to break even at 65% occupancy. This covers all costs, plus debt servicing. The next buildings will need to reach only 35% occupancy for breakeven, since all of the fixed costs for fencing, land, most of the security and electrical, storm ponds, etc., are covered in the initial building phase.
Let’s say we “fail” during phase one and only ever reach 65% occupancy. We’re still building an asset base. If we initially use the wrong market rates and have to lower prices, which moves breakeven from 65% to 90% occupancy, we’re still building an asset base.
In this instance, for phase two, we could switch units to “contractor bays” or offer sizes for a different market. It’s still a metal building, after all. Another option would be to add outdoor vehicle storage. If none of the above works, we still win because we learn. Besides, as long as there’s a large enough market, we can always rent 100% of our units for cheap. Thus, we’re never at risk of a total loss.
Remember, mom-and-pops usually have only one location, but you want more. REITS have multiple locations, so when one property is “averaged” out against the portfolio, it may perform poorly. Failure potential is the reason most people never get into real estate or any business venture. Create a spreadsheet. Change occupancy rates and pricing. Add and reduce costs. Get to know your failure ranges on the deals you’re considering. This will get you over the hump.
Finally, when considering any self-storage investment, plan your path. Sure, things will change. At some point, you’ll run out of collateral or cash and need to pivot. Or you’ll realize enough is enough. Or you’ll have to adapt your business model to align with new trends, professional goals, family demands, etc. But if you jump in, this is your profession, so map it out.
Henry Clark is owner of Clark Storage LLC, which operates seven self-storage facilities in Iowa and one in Nebraska. The family-run business also includes Clark’s wife, Sandy, and son, Ryan. To reach him, call 402.618.6595.