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Increasing Self-Storage Property Value Through Rental-Rate Increases

Article-Increasing Self-Storage Property Value Through Rental-Rate Increases

If you aren’t regularly assessing and increasing your self-storage tenants’ rental rates, you’re leaving money on the table. It’s time to take the emotion out of rate adjustments and increase your property’s value through smart revenue management.

Operators of independent self-storage facilities often cringe when they hear “rent increase.” Let’s face it: When you run a smaller business, you likely know many of your tenants personally and have built a relationship with them over the years. You know all about their families, struggles and successes because you talk to them when they visit. This can make it hard for you to even consider raising their rates.

Well, it shouldn’t. You need to get comfortable with the concept of rent increases, because you could otherwise be leaving a lot of money on the table and negatively impacting your facility value.

Remember, a self-storage property is an investment. Any savvy investor needs to maximize the return on that investment when it comes time to sell. If you purchased your site at an 8 percent capitalization (cap) rate, then every $1,000 in net operating income (NOI) is worth $12,500 in value. Just thinking in these terms should make it a little easier to start raising those rental rates now. Here are a few additional considerations and strategies to ponder.

Consider Your Costs

Think about your operating expenses, such as utilities. Have the prices stayed the same since you purchased or opened your facility? What about your property taxes? Have you made any sort of capital improvements such as new lights, unit doors or pavement?

All these goods and services have costs, and they inevitably go up every year. This is the reality of running a business. At the very least, you need to maintain your NOI year over year. The easiest way to do this is to share rising expenses with your tenants by implementing rent increases.

Create Churn

You also need to create churn in your tenant base. What does that mean and why do you need to do it? Churn is customer turnover. While we’re always looking to acquire new customers, it can be good for some to leave, too. It opens opportunities to re-rent units to new tenants at a higher price.

Some self-storage operators are 100 percent occupied and wear that as a badge of honor. However, this is one of the worst inhibitors of revenue in the self-storage industry, especially if you’re not using a rate-increase plan for existing tenants. If you’re fully occupied, your income remains flat. You instead need to follow occupancy-based pricing strategies, which will stop you from leaving a lot of money on the table with that stagnant tenant movement.

Catch Up to Street Rates

Finally, you need to aggressively manage your rates and raise them as demand increases. For example, let’s say a customer rented a 10-by-10 for $100 per month while that unit size and type was 85 percent occupied. A few months later, that unit type is at 95 percent. Demand is strong, so raise the street rate to $125. Of course, that means the tenant, who moved in at the $100 rate is paying $25 less than one who moves in today. Time to raise his rent at least part way.

As an independent self-storage operator, you need to set standards for rate increases. Many larger operators have a strategy to raise them at six months after move-in, and then every nine months after that. Sometimes they also raise them at the one-year mark. Take some time to figure out your strategy, then use your management software to automate the process and take the emotion out the equation. By implementing a rate-increase plan for your existing tenant base, you’ll be able to increase your property’s value.

As a brokerage advisor for Investment Real Estate LLC (IRE), Justin Quinto is responsible for listings, sales, buyer representation, due diligence, financial analysis and feasibility studies in Connecticut, Massachusetts and New York. IRE brokers the sale of self-storage facilities in the Northeast and mid-Atlantic. For more information, call 860.936.1117; e-mail [email protected]; visit