Capex Are Coming! Budgeting for Big-Ticket Repairs, Replacements or Upgrades at Your Self-Storage Facility

Whether you’re repairing, renovating or expanding your self-storage facility, any significant improvements you make are known as capital expenditures (capex). These are typically one-time expenses, often related to line items such as roofs, unit doors, paint, asphalt, security components, HVAC units, elevators, plumbing and landscaping, just to name a few. In my operation, we track capex through 16 to 20 categories.

Understanding where you need capex begins by assessing your property. To prevent unexpected costs and paying more than you should, it’s important to evaluate the condition of your facility and proactively prepare for any necessary projects. Many storage properties fall into disrepair because the owner is afraid of what they don’t know. A capex endeavor can involve many unfamiliar hurdles, so some operators shy away from it.

However, capex plays a significant role in revenue management, either from a cash-reserve or cash-flow perspective. If your facility requires work, you must be able to cover that expense. You might be able to pay for it out of cash flow, or a loan may be required. Sometimes it’s a combination of both.

To protect the financial and physical condition of your self-storage operation, it’s best to plan ahead. Learn to forecast expenses and build them into your budget. Capex is a big part of that. Let’s take a deeper look.

Budgeting for Capex

To prepare for your self-storage capex needs, you must build them into your budget. This involves planning and expense forecasting. There are a couple of ways to approach it.

The first is to hire a cost-segregation (cost-seg) study. Though this tool is often used for tax-depreciation purposes, the data it provides can also be used for budget planning. To create a depreciation schedule, the cost-seg engineer determines the remaining useful life of each facility component along with an associated value. For example, they might determine that your roof has 10 years left in its lifecycle and is valued at $80,000. After confirming there are no leaks, you might schedule the replacement to occur in seven to 10 years. The value becomes the projected budget for the work.

Another way to formulate a self-storage capex budget is to create scopes of work for each intended project and get quotes from local contractors. Always get at least three bids, so you can arrive at a range. Look at each as best case, worst case and what will most likely happen. We typically choose the one in the middle, but it’s wise to consider the worst case to adjust for the rising cost of materials, or labor or product shortages, which have been much more evident the past few years. While you can use the middle number for your budget, you can still work toward achieving the lowest price.

Whatever amounts you work into your budget, you’ll also need a plan to pay for the work. Again, the money can come out of cash flow or you can take out a loan. For example, let’s say you want to beef up your site security by adding 10 surveillance cameras. You have $2,000 to spend on this project. You price it out and realize you need $3,000. How will you manage this? Will you take out a loan to purchase all 10, or will you install only six cameras now and leave the rest for when you can pay for them out of cash flow?

If you pursue a loan, a budget can help your cause with potential lenders. For example, if your self-storage facility requires a new roof, having a plan to demonstrate that you can still cover the mortgage payments can be critical.

Timing Is Everything

Current market conditions should also be considered when preparing a capex budget. Over the past few years, this has been extremely difficult for large construction jobs due to the massive and rapid increases in the price of steel and other petroleum-based products. Rising costs are at the root of why many capex projects have been shelved.

The benefit of having a cost-seg plan and budget based on historical data is being able to pick the most advantageous time to proceed with your capex initiatives. If the remaining lifespan of a component is seven to 10 years, but you see or hear that construction pricing is dropping, you may elect to implement your plan in year three or four to save money.

Construction generally eases in times of recession, and pricing usually falls in turn. When this happens, contractors seek to keep crews busy and will take jobs at cost to avoid losing team members. Thus, being prepared on the front end can save you money when the timing is right.

Planning for self-storage capex is as much an art as a science. The science is getting bids and developing scopes of work. The art is knowing when to implement the plan. There’s never a “perfect time.” There are either emergencies or windows of opportunity that tend to work out well for you!

Scott Krone is founder of Coda Management Group, which specializes in managing real estate assets including self-storage as well as multi-family, retail, commercial warehouses and multi-use flex spaces. Launched in 2012, Coda has more than $70 million invested in self-storage. In 2020, Krone co-founded One Stop Self Storage, which operates facilities across the Midwest. To reach him, call 847.272.7775, Ext. 1; email [email protected].