Sometimes, I like to get in my car and just drive with no particular place to go. No map, no directions; just go and go until I run out of gas. One time, I got in a boat and headed out to sea until I couldn’t see land, and just floated around until I got a severe sunburn and ran out of food and water.
Actually, I’ve never done either of those things because, despite what my kids say, I’m not an idiot.
The foolhardiness of casting about without a plan is the same reason we should never operate our self-storage facilities without a budget. Whether you own one self-storage facility or multiple sites, functioning without a financial plan is like driving around without a map or destination in mind. It’s irresponsible and could be dangerous. Also, how will you know when you’ve “arrived”? Without goals, benchmarks or parameters, you have no clue.
So, how you create your operational roadmap, so to speak? Let’s dig into some key considerations for preparing—and sticking to—a budget.
Money Coming In
First, consider your self-storage facility income. It’s important to know where revenue is expected to be gained and lost. Here are the most common drivers of revenue:
Rent (street and tenant rates). Your street rates should fluctuate over time in tune with your facility occupancy levels. Using a dynamic pricing model will help you determine necessary increases and decreases in gross potential. It’s important to note that these rates should reflect your own occupancy levels and performance, not what competitors are doing (or not doing) down the street. If you’re full, raise your rates, even if the competition doesn’t.
If your self-storage property is stabilized, your primary revenue driver is increases on existing-tenant rates. There’s far more opportunity to generate more income on the 90% to 95% of units you already have filled than the 5% to 10% that are vacant, no matter what your street rates are. If you’re hesitant to raise rates, don’t be. Tenants will not move out because of a modest increase. You need manage your site as a for-profit business.
Profit centers. Your budget should also include projected revenue from ancillary products and services, which include things like truck rentals, retail sales of packing and moving supplies, boar/RV storage, and tenant-insurance programs. Maybe you offer records or wine storage, or lease land to a cell-tower company. You should also factor in sources like administration fees, late fees and other items that enhance the revenue side of your pro forma.
Just don’t forget to account for factors that detract from the above income. For example, if you offer move-in specials or promotions, or a long-term discount or referral program, that’ll decrease your income. You also need to account for bad debt and any other profit loss.
Money Going Out
On the flip side of income is expenses, and your self-storage budget needs to account for all of them. Make sure you include the following.
Payroll. This is generally one of a facility’s largest costs. Consider whether your current payroll is still relevant to your operation and if some investment in technology would allow you to decrease it. For example, do you still need to have someone sitting behind the counter at your facility six or seven days per week? For many operators who have implemented contact-free move-in services, the answer may very well be “no.”
A good budget also accounts for staff turnover because it’s going to happen. It’s expensive to find, recruit, onboard and train new employees, so be prepared for that expense.
Commercial insurance. Expect annual increases on your policies and contemplate shopping for a new provider. Don’t get complacent in this area. Premiums and deductibles can vary widely.
Property taxes. This is one of the most important costs to watch. When was the last time your property was assessed? For budgeting purposes, you need to know if your taxes will increase and if they’re worth contesting.
Utilities. Consult your past bills to predict monthly expenses for electricity, water, phone, etc.
Repairs and maintenance. The older a self-storage property gets, the more important it is to anticipate costs in this category. Doors springs and latches go bad; gates and fences eventually need mending, etc. Don’t be caught unaware. Keeping your site rentable is important to increasing revenue. In fact, it may be time to prepare a capital-expense review of your property, which brings me to our next item.
Capital improvements. Contemplate a campaign for future improvements. Take a hard look at each site to see what’s beyond simple repair and maintenance. Perhaps a site needs repaving or a new roof. Large-ticket items like these must be anticipated and prepared for within the budget, not done out of desperation.
Advertising and marketing. When’s the last time you reviewed these expenses? Look at what you’re spending and determine what is and isn’t working. What’s the return on investment for all of your various channels? If you’re experiencing high occupancy, you may be able to decrease spending in some areas. Of course, if you operate multiple facilities, make sure your marketing expenses are effective and appropriate across the portfolio.
Other miscellaneous. A lot of stuff can be dumped into this category, but it’s important to review it all the same. For example, when’s the last time you shopped around for credit card processing?
Follow the Guidance
Once you’ve prepared your self-storage budget, think of it as a GPS device for your operation. My GPS, sometimes obnoxiously, continually reminds me where to turn, tells me what’s coming up, and corrects my route when I err. This is also what a sound budget does.
Running your business without a budget—and equally important, regularly reviewing that budget—is like going on a long trip without ever using your GPS for guidance. If I drive the wrong way for a couple of blocks before correcting my route, not much harm is done. In contrast, if I drive 1,000 miles off course, I’ll miss my destination by a wide margin and probably be hopelessly lost.
Review your budget regularly and compare it to your actual results. When you tally income and expenses each month, compare those numbers to your financial plan to see if you’ve met expectations and adjust accordingly. If you know after only a month that changes are required, you still have plenty of time to correct your course; but if you wait several months, or worse, an entire year to assess your progress, it’ll be too late to figure out where you veered off course and fix it. Don’t wait until year-end to figure out why costs got out of control.
Whatever you do, don’t run out of gas on the open road. Prepare your roadmap, keep your tank full, and enjoy the drive!
Bob Copper is the owner of Self-Storage 101, a consulting firm specializing in self-storage. Bob and his team have worked with hundreds of owners, operators and managers to maximize asset value, conducting countless due-diligence audits and helping owners position their facilities to sell. To reach him, call 866.269.1311; email [email protected].