The Question of Self-Storage Capex: A Strategy for Mitigating Financial Risk While Maximizing Investment ReturnThe Question of Self-Storage Capex: A Strategy for Mitigating Financial Risk While Maximizing Investment Return

Self-storage has relatively low capital-expenditures (capex) requirements compared to other real estate assets, but these expenses still exist and are important. A seasoned investor explains how capex affect your net operating income and outlines a strategy for setting up a reserve fund, so you can protect your investment while maximizing return.

Mark Helm

February 4, 2025

5 Min Read
A finger touching a screen with bars that says capital expenditure

Among the foremost advantages of owning self-storage is its minimal requirement for ongoing capital expenditures (capex). That’s one of the reasons I was initially attracted to this asset class.

In my roles as property manager and commercial real estate broker, I’ve witnessed how these financial outlays can significantly reduce the distributable cash flow of an apartment or office building, for example, despite strong net operating income (NOI). Tenant improvements like fresh paint, new flooring and parking-lot repair are just a few expenses that can quickly add up and negatively impact the return on an investment. I’ve seen owners who thought they had excellent NOI only to have little or no cash left after capex.

For years, I accepted these recurring expenses as a normal cost of doing business; then I discovered self-storage and my perspective changed. I fell in love the steel walls, concrete floors and healthy rents. Still, while capital improvements are comparatively low in this industry, there are some that are critical. You’ll need a strategy for managing them if you want to be profitable.

Is It Capex?

When we measure cash-on-cash returns in self-storage, we compare the profits from our operating income to the amount of cash invested in the deal. NOI is calculated by subtracting operating expenses such as property taxes, utilities, insurance, property management and advertising from operating income like rent and retail sales.

Related:A Solid Self-Storage Operations Budget: What to Include, How to Track Progress, And Why Flexibility Is Key

Loan costs aren’t included in operating expenses. Whether you purchase the property with cash or full debt, the expenses remain the same.) Capex, which include costs for enhancing or maintaining major components like buildings, doors or pavement, are also not considered operating expenses.

It can sometimes be difficult to know whether a particular project is a capex or an operating expense. In the past, one approach was to determine whether the cost of an item could be depreciated over time for tax purposes. For example, a new roof is typically depreciated over the standard commercial property depreciation schedule. This makes it a capital improvement. However, fixing a door latch isn’t a project that’s depreciated; it’s simply an operating expense. Resurfacing asphalt is depreciated over time, but repairing it isn’t. A new furnace is a capital expense, but repairing an existing furnace is an operating expense.

When in doubt, consult your CPA. I did this regularly when I started my self-storage career.

Establishing a Reserve Fund

A smart goal for any self-storage operator is to have a reserve fund, so that when a capex arises, you can cover it with cash on hand instead of dipping into your monthly operational profit. The amount you’ll need to set aside should be rather modest in this business. Determining that amount isn’t rocket science, but it does take a little work.

Related:ISS BLOG - ‘Slate’ Article Carps on ‘Sneaky’ Rate-Increase Policies in Self-Storage, Industry Experts Debate ECRI Practices

I’m interested in buying an existing self-storage facility, I have a professional inspect the property and give me a report on the mechanicals, roof and structure, and asphalt or concrete—in other words, all the capex. Then I review each item and determine its replacement cost. If the report says the air handler is estimated to last five more years, I know I need to have a certain amount set aside for when the time comes to replace it.

I build my budget to cover all expected capex for the next 10 years. Then, I figure out what I need to set aside each year to cover those costs and pull out a portion from operational income monthly or quarterly. I do this before profits are distributed. If I’m doing monthly deductions, the amount typically ranges from $600 to $1,200, depending on the size of the self-storage facility. This usually falls somewhere between 13 and 18 cents per square foot.

I typically establish the reserve fund at closing with a full year’s worth of reserves, if possible. After that, I mainly let it accumulate, as there are generally few capex.

Related:The Secrets to Doubling Your Self-Storage Facility’s Value Through Strategic Revenue Management

If you apply a commercial mortgage-backed securities (CMBS) loan or an insurance loan to a self-storage project, the lender will go through the budget process and manage your reserve fund for you. For my last CMBS loan, I was required to set aside 13 cents per square foot per year. I would contribute to it monthly, and when I had a capex item to pay, the lender reimbursed me from that account.

The Impact on Business Insurance

When you set up a reserve fund for your self-storage capex, it frees you up to have a high deductible on your property insurance, which keeps the premium as low as possible. I usually try to set the deductible at $10,000. When I make an insurance claim, it’s always to replace or repair a capex item; then I pay the deductible out of the fund.

One time, I had a self-storage facility with a $60,000 sign that was blown down by a strong wind. When I filed the claim with the insurance company, I only had to pay the $10,000 deductible for the replacement; and that came out of the capex reserve. The insurance covered the rest, and I didn’t have to take a cent from that month’s cash distributions.

Maintaining a modest reserve fund is crucial to avoid disrupting your self-storage cash-flow distributions. It covers predictable and unexpected capex during your holding period. When you’re raising funds for a project, emphasize to potential investors that this asset class is superior when it comes to providing steady and predictable cash flow. Now you know a key strategy to uphold that promise!

Mark Helm is a commercial real estate agent and self-storage investor. He began working with real estate investment trusts in the mid-1990s to locate and purchase self-storage properties before striking out on his own. He’s the author of “Creating Wealth Through Self-Storage” and the creator of “Storage World Analyzer,” a cloud-based, financial-analysis software tool designed to help self-storage operators and investors evaluate potential real estate acquisitions or development projects. To reach him, email [email protected].

Subscribe to Our Weekly Newsletter
ISS is the most comprehensive source for self-storage news, feature stories, videos and more.

You May Also Like