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The 411 on NOI: Simple Ways to Improve Your Self-Storage Facility’s Net Operating Income

As a self-storage operator, you should always be looking to improve net operating income and, therefore, facility value. Fortunately, there are several ways to do this, regardless of your property size, type and location. Learn what they are and how to apply them toward a beefier bottom line.

The value of a self-storage investment is determined by the cash flow the property generates. That cash flow is realized when revenue exceeds expenses, creating net operating income (NOI). Any increase in NOI will also boost the value of your asset. If you wish to maximize this this profitable effect, you have multiple paths available to you. Let’s go over what they are and how to leverage them.

Maximize Your Rental Rates

The best place to start is to analyze your self-storage rental revenue. Are you managing it properly? Full occupancy doesn’t generally allow you to maximize NOI. If you’re renting units almost immediately after they become available, it may be time to re-evaluate your pricing strategy.

Self-storage demand is constantly evolving due to geographic, economic and seasonal factors. Your rental rates should adapt to meet demand. In addition to monitoring your own facility’s occupancy and rental activity, frequently research your competitors. You want to match or exceed the current rate for existing and new tenants. Look at your historical data to forecast seasonal or cyclical changes in your occupancy and adjust rates accordingly. If you don’t have much competition, increase rates steadily until the market reacts.
Also, consider that not every unit is equal in the eyes of the prospect. Tiered pricing allows you to more specifically meet the demand of your customers. It’ll also be more lucrative than simply charging the same amount for every 10-by-10, regardless of its amenities and location. For example, tenants may be willing to pay more for a space at the front of the property or on the first floor of a multi-story building. On the other hand, offering a lower price for an upper-floor or back-of-property unit to someone who’s unwilling to pay full market price can prevent them from walking away without renting.

While a revenue-management plan can be time-consuming to manage, depending on the tools available to you, it can result in seven-figure gains in property value. For example, if you discover that you have 200 tenants who could be paying an additional $25 per month on average, that $60,000 per year increase in NOI results in a $1 million value-add at a 6% capitalization (cap) rate.

Manage Your Expenses

On the other side of the equation from revenue is operating expenses, and you can increase your NOI by reducing them wherever possible. At a 6% cap rate, decreasing costs by just $100 per month can result in thousands of dollars of additional property value, possibly tens of thousands. Here are just a few ways to trim the fat:

  • Establish service contracts with vendors in advance for things like maintenance, snow removal and landscaping, so you aren’t faced with upcharges when sudden needs arise.
  • Regularly shop around and renegotiate with your service contractors to ensure you’re getting the best deal.
  • Appeal your property-tax assessment to ensure you aren’t being overcharged.
  • Reduce your staff hours.
  • Invest in technology, which can result in greater productivity and efficiency and possibly reduce your onsite staff needs.

Add Profit Centers

Another way to create positive change in your self-storage facility’s bottom line is to add new products and services to your offering mix. Profit centers are a smart revenue strategy, as they expand your customer base and open the door to previously unavailable revenue. Her are a few popular ones that make sense for this industry:

Vehicle storage. When considering ways to generate more income, it makes sense to start with any unused space on your property. In most cases, a self-storage facility is already equipped with a gate, fence, security system, and a paved or gravel lot. These are precisely the features that are desired by those looking to store boats, RVs and other large vehicles. Adding parking spaces for these tenants can result in a considerable return on investment. Sometimes, the only labor needed is the painting of lines on the ground.

Even a small amount of space can yield great value. Let’s say you have room for five 10-by-20 parking spots that you rent for $75 per month. These spaces don’t involve the same effort and cost as maintaining a typical storage unit, so there are few, if any, new expenses. Assuming you can keep them full, these rentals can produce $4,500 per year. At a 6% capitalization rate, that’s $75,000 in property value.

With this profit center, the market determines the type of product you need to offer. If no one else in the area is offering paved vehicle parking, asphalt is probably unnecessary; but if you add it, you may be able to charge more than competitors. If you’re in an area prone to harsh weather, consider putting up canopies, three-sided buildings or completely enclosed units to shield vehicles from the elements, as customers will probably pay more for it.

Commercial tenants. If you have space at your self-storage property that could easily be used for warehousing, offices or retail, consider how it might be repurposed to serve local businesses. Commercial leases will allow you to earn residual income, often increasing the visibility of your facility and earning valuable referrals.

Billboards. If your self-storage facility is adjacent to a well-trafficked road, advertising companies will often pay handsomely for billboard leases. If your traffic count is in the thousands, you could earn thousands of dollars per month in residual income! These leases often require the tenant to provide their own maintenance, so there’s minimal ongoing effort. All you need is a bit of land and the proper zoning. If this interests you, reach out to billboard companies in your area to discuss options.

Cell towers. Your storage site is likely close to tens of thousands of residents, and nearly all of them need cellular service. Depending on your location, you could earn four to five figures per year in additional revenue by allowing a cell-tower company to lease land from you. Contact local or national providers to gauge their interest. This can increase the visibility and value of your business for very little investment.

Tenant Insurance. Your renters have needs beyond physical space, such as a way to protect the value of their goods while in storage. Tenant insurance benefits all parties. You can partner with a third-party provider and earn a commission for selling their product to your customers. Many specialize in the self-storage industry and can help you implement your program. These plans add just a few dollars per month to your tenant’s rent, but with potentially hundreds of units, it can have tremendous value to your NOI.

Truck rentals. To alleviate the headache of moving in and out of a storage unit for your tenants, consider offering them the use of a rental truck for a fee. If you don’t wish to purchase and maintain your own vehicles, you can lease them from a provider or partner with other self-storage operators to rent their trucks. You could also obtain more rentals by offering new tenants the use of your rental truck for free, which can give you an advantage over competitors.

Every incremental change, large and small, can greatly increase your NOI and the value of your self-storage property over time. I’ve outlined several avenues to explore, but there could be even more opportunities in your market. Pursuing them allows your hard work, diligence and the resources already invested in your asset to be incredibly rewarding.

Erik Peckmann is manager of financial planning and analysis for Investment Real Estate Group of Cos., which brokers the sale of self-storage facilities in the Northeast and mid-Atlantic states. He supports the operations team by conducting detailed underwriting transactions for investors, owners and lenders, as well as regular performance reporting for the portfolio stores managed by the company’s portfolio. To reach him, call 717.929.8427.

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