Self-storage investing a lot like courting. Whether you choose to buy or build a facility, you may have to kiss a lot of frogs before you find your prince. To help you think this through, let’s look at some basic pros and cons and see how the options stack up.
Buying a Self-Storage Facility
On the positive side, acquiring an existing facility is kind of like dating an ex: You more or less know what you’re going to get. Everything you need to understand about the property—customer base, operating expenses, rent, property taxes, etc.—is there in black and white. Of course, you need to verify the data; but overall, you’re dealing with a known quantity. Therefore, a purchase is simpler, less risky and less daunting than building. In addition:
- You don’t need as much industry expertise or business acumen to buy a facility as you do to develop one.
- Buying may be much faster than building, if you can find a good deal.
- You may be able to change an existing self-storage facility (unlike your ex). You can possibly make improvements to rental rates, security, marketing, landscaping, technology, etc., to make the property more profitable. You might even be able to expand.
On the other hand, every self-storage property has its challenges. It’s up to you to figure out what they are. Here are some common drawbacks to buying:
- If you don’t catch deferred maintenance during inspection, you could be hit with a lot of unexpected costs. You’re buying someone else’s problems, including site limitations you can’t fix and problem tenants you’ll have to fix.
- You may not be able to buy your “dream facility” in a “perfect” primary market, particularly if you can’t compete with the biggest players. This is a pretty easy one to get over. I doubt you’re married to George Clooney or Scarlett Johansson either!
- Your return on investment is lower overall because you must pay fair market value. Remember, you aren’t just buying a building and the land on which it sits; you’re buying a revenue-generating business.
- Though you may be able to avoid increased property taxes by buying the property’s business entity, you may not. Know what the new property taxes will be before you buy.
- Expansion may be logistically impossible or cost-prohibitive. If it’s necessary to reach your desired rate of return, make sure your purchase agreement is contingent on zoning and permit approvals.
Building a Self-Storage Facility
First, let’s focus on the good stuff: Building may be less expensive than buying because an acquisition involves purchasing an income stream. When you build, there’s no cash flow yet. On a similar note, all things being equal, it’s less expensive to build a class-A facility than buy one. Here are a few other pros:
- Unlike your perfect mate, you can build your perfect facility, controlling every aspect of design and construction.
- Right now, there are many opportunities in great locations to convert existing retail structures to self-storage.
- Your facility will be new and, thus, more appealing than competitors. Because you’re starting from scratch, you can integrate technology and many other features that may be difficult for older properties to match.
- You can build in phases and keep adding popular-sized units.
- The profit to be had upon exiting the business is probably greater, depending on your market and how long you hold the facility.
Now, let’s look at some of the disadvantages to building. As with an acquisition, every development site has its challenges. Again, it’s up to you to figure out what it they are. Here are some others:
- Projections are just projections. Building is inherently riskier than buying.
- Beware of design and construction mistakes. Without careful research and planning, you can make costly mistakes. There’s a scary, long list of potential pitfalls.
- Your project will only be as good as your development team. You must carefully vet your engineer, architect, general contractor, attorney and title company. If you do your due diligence correctly, you could move this up to the pros section of the list.
- There are going to be timeline overruns. Get over it.
- Building is more time-consuming and labor-intensive than buying.
- Until your facility is 90 percent occupied, it doesn’t reach its full fair market value. This may take two to three years.
- If you decide to build in phases, there may be reasons you can’t move forward on later phases due to zoning, political or economic changes beyond your control. Your upfront investment, therefore, may not pay off.
Just Ask Her to Dance Already
This is no time to be a wallflower. Whether you think you want to buy or build, start looking at facilities for sale and learn from them. As a wise sensei once said, “In order to learn anything, first you must know yourself.” Identify your preferred business model, management approach and expected rate of return so you can objectively compare facilities or dirt for sale.
Either way, don’t get emotional about deals. Make a list of the pros and cons of each opportunity and verify everything the broker and seller tell you. Run the numbers yourself to determine the site value. Don’t just accept anyone’s word for it; the appraiser or bank sure won’t.
Depending on your market of preference, the choice of whether to buy or build may be out of your hands. You may not be able to find the right property for sale or the right parcel on which to build. No matter what, you must do these four things:
- Do your research and educate yourself about the self-storage industry and your submarket.
- Be prepared to spend money up front that you may not get back if the purchase or parcel doesn’t pan out.
- Get your ducks in a row to be approved for a loan and line up investors.
- Get an independent second opinion in the form of a feasibility study before you make your final decision.
As you evaluate the options of buying vs. building, don’t be dismayed if the list of cons is longer than the list of pros. Remember your frog prince. You won’t mind that he has a few warts if, in the end, he’s a great kisser!
Katherine D’Agostino is the founder of Self-Storage Ninjas, a feasibility-analysis firm delivering unbiased reports resulting in facilities with high occupancy and the highest possible returns. She offers a free, weekly newsletter that provides insider techniques, ready-to-use calculators, downloadable spreadsheets and data sources. For more information, visit www.selfstorageninjas.com.