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Do You Understand Your Self-Storage Business Cash Flow? This Guide Will Help You Grasp and Optimize It
If you’re a self-storage owner, you must have a firm grip on the money entering and leaving your facility. It’s the only way to ensure the financial health of the business. Cash flow is king! The author explains the key elements, why each is so important, and how to optimize them.
Bishesh Shrestha
September 17, 2024
5 Min Read
Cash flow is the lifeblood of any business, including a self-storage facility. It’s the money that enters and leaves the operation. To ensure the financial health and sustainability of your asset, you must understand cash flow and do everything you can to optimize it. Let’s explore its components and complexities as well as strategies for improvement.
Revenue
The first step to ensuring a healthy business cash flow is to establish solid and consistent revenue streams. The primary source of income for self-storage facilities is rent, but some operators offer additional products and services. For example, many sell retail merchandise like locks, boxes and other packing materials. Others provide truck rentals, tenant insurance or boat/RV storage. These ancillaries not only contribute to overall profit, they enhance cash-flow diversification.
As a self-storage operator, you can also charge various fees such as:
Administration fee: Often applied when a tenant signs their rental agreement
Security deposit: Paid during lease signing and typically refundable upon move-out, provided the unit is left in good condition
Cleaning fee: Collected at lease signing to defray the cost of cleaning the unit after the tenant moves out
Additional-access fee: Paid for 24-hour or after-hours access to the storage unit
Late fee: Charged when tenants fail to pay their rent on time
Overlock fee: Charged when a tenant fails to pay rent and the operator overlocks their unit
Transfer fee: Applied when a tenant wishes to move to a different unit within the same facility
Insufficient-funds fee: Applied if a tenant's check payment is returned or card payment is declined
Unit-reservation fee: A temporary charge to hold a unit open for a specified period
To avoid misunderstandings with tenants, you must clearly outline all fees in your self-storage rental agreement. Make sure you comply with local laws and regulations.
Expenses
Expense management is essential to running a successful self-storage business and maintaining a strong cash flow. Mismanaged and unnecessary costs can eat away at your profit. Here are some of the most common industry expenditures:
Property taxes: One of the most significant expenses for any self-storage facility, these vary by city, county and state.
Payroll: For most operators, full- and part-time staff represent the second largest expense.
Third-party management: Fees can range from 5% to 8% of gross revenue.
Utilities: Typical services include electricity, water, trash, sewage and internet. This might also include heating and cooling, depending on your method.
Software and technology: These essential tools require an initial investment and sometimes an ongoing subscription fee.
Maintenance and repairs: Costs can vary greatly depending on the project and service provider.
Marketing and advertising: This includes all activities to attract customers such as website development and maintenance, search engine optimization, signage, and promotional materials.
Insurance: Premiums can vary based on location. Facilities in high-risk areas will pay more.
Miscellaneous: Additional expenses might include office supplies, cleaning services, legal fees and other costs associated with running your business.
Debt Service
Self-storage owners often rely on financing when acquiring, expanding or renovating a facility. When taking out a loan, a critical metric is the debt-service coverage ratio (DSCR), which measures the amount of cash flow a business has to pay what it owes. It’s calculated by dividing a facility’s net operating income (NOI), which is revenue minus operating expenses, by total debt service, which includes all loan payments (principal and interest).
The resulting value indicates how many times a facility’s operating income covers its debt obligations. A DSCR of greater than 1.0 indicates that the asset generates enough to satisfy its debt. The higher the ratio, the better.
In self-storage, stable and predictable income streams are essential for maintaining a healthy DSCR. Factors such as occupancy, rental rates and tenant turnover can impact revenue stability and, consequently, your ratio. On the other side of the equation, effective expense management is crucial for maximizing NOI and improving DSCR. Controlling costs such as payroll, maintenance and utilities can boost profitability and strengthen your ratio.
Fluctuations in interest rates can also affect DSCR. When evaluating your self-storage finance options, assess the potential impact of interest-rate changes on your cash flow. A lending expert can help you determine the loan that best meets your needs. Of course, economic and market factors like demand, competition, housing and consumer spending also play a role, as they can influence revenue generation. You must adapt your operational strategies to maintain income and expenses at optimal levels.
If you aren’t convinced of the importance of DSCR, consider that lenders use this key metric when evaluating loan applications. A low ratio indicates that the business may struggle to meet its debt obligations, increasing the risk of default. A healthy ratio reassures a lender that the business has sufficient cash flow to service its debt, which can lead to more favorable loan terms.
Investors, including shareholders and stakeholders, may also use DSCR to measure a company's financial health and performance. A high ratio signals financial strength and stability, thereby enhancing investor confidence.
DSCR is a critical financial metric for self-storage owners, reflecting your ability to cover debt obligations with operating income. By regularly monitoring this number, you can identify and proactively address potential financial challenges and risks. Remember: The goal is to maintain a comfortable ratio. If you do, you can secure financing, support growth initiatives, mitigate financial risks and enhance investor confidence. It all boils down to effective management of revenue, expenses and market dynamics.
Cash Flow Is King!
Cash flow reigns supreme in the world of self-storage. Owners and investors can navigate challenges and seize opportunities by fully understanding their revenue, expenses and the critical DSCR. A firm grasp of the factors that impact the money entering and leaving your business ensures financial health and the resilience needed to weather changing market conditions. So, whether you're safeguarding an existing empire or embarking on a new venture, cash flow is the key to long-term success.
Bishesh Shrestha is the senior vice president of self-storage financing at Live Oak Bank, where he evaluates, structures and packages Small Business Administration loans. He joined the company in 2013 in the buisness-advisory group and later joined the underwriter team. Headquartered in Wilmington, North Carolina, Live Oak serves small-business owners in all 50 states. To reach Bishesh, call 910.247.4117 or email [email protected].
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