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Determining the Right Path to Self-Storage Ownership: Should You Buy a Facility or Build One?
If you’re seeking a path to self-storage ownership, you’re likely contemplating whether to build a new facility or acquire an established business. Each has its pros and cons. Let’s explore what they are, plus additional considerations that apply to both avenues. These important questions and factors should help you decide the best route for you.
Bob Copper
November 4, 2024
6 Min Read
One of the questions I am most commonly asked by aspiring self-storage owners and investors is, “Should I buy an existing facility or build a new one?” My answer is it that it depends. Buying is almost always the easier path, though not necessarily the most profitable. Let’s explore the challenges to both ownership avenues, so you can determine which is right for you.
Buying Self-Storage
When considering whether to purchase an established self-storage business, you must weigh the pros and cons. First, let’s look at the advantages:
When you purchase an existing facility, it already has tenants and cash flow. There’s no lease-up to worry about (unless the site is still very new). That said, it may require an operational overhaul or physical upgrades before it reaches its full revenue potential.
Buying a facility is typically faster than planning and constructing a new project. Just be sure to invest the appropriate about of time and effort in due diligence.
You may be able to quickly increase the value of the site by improving site condition, management or marketing. That said, you must know what it’ll cost to add value in these areas and how to do the work.
You may qualify for favorable financing on an acquisition, as the bank will appraise the site and will generally loan 75% to 85% based on its value and cash flow. You still need equity and good credit, but asset performance is key. You may also be able to get seller financing, which is not an option with new development.
On the other side of the coin, you may pay a premium for an established self-storage facility. In fact, the cost may exceed that of building a new project, due to the existing cash flow. Just remember that your time has value, too. Also, most sites will come with challenges, whether it be outdated systems or deferred maintenance. A thorough due diligence should uncover these issues and allow you to decide whether to take the risk.
An important aspect of purchasing an existing self-storage facility is to understand the market in which it’s located. It’s important to do your research. Find out, why is the owner selling? Is that decision related to market challenges such as declining population, incoming competition or town plans to do disruptive construction in the area? While a value-add property can be a good deal, you need to understand the nuances of the area. You can fix the facility; you can’t fix the market.
Building Self-Storage
The more complicated but likely more profitable way to get into the self-storage business is to build a new project. Let’s start with the pros:
It may be less expensive to build. With an acquisition, you’re also paying for the facility rent roll, cash flow and potential to increase asset value.
When you develop, you can design a project that better meets current consumer demand. For example, you can build in climate-controlled units and the latest facility technology. Just make sure you understand the needs of your market.
Self-storage design is constantly changing. Building new will allow you to implement all the latest and greatest property features, whereas retrofitting an existing site can be cost-prohibitive and logistically challenging.
In most instances, there’s more potential value in a new development than an acquisition. The difference between the cost of development and the project’s value at stabilization will likely be higher than the purchase price of an established facility and the more incremental value that can be added to that asset over the same period.
All that said, self-storage development can be time-consuming. The process to get from concept to completion to opening and then on to stabilization can be excruciatingly long. Getting through the planning phase with zoning and permitting can sometimes take years. You need to clearly understand the course from a both a cost and timing aspect before moving too far along.
Further, new self-storage development has more inherent risk than an acquisition. There’s zero revenue generated at the start, and it takes time for the business to generate positive cash flow. In fact, it’s important to budget for negative cash flow during lease-up.
Given how long it can take to bring a new self-storage development to fruition, it’s possible that the market and economic outlook can change between the time you start building and when the facility actually opens. For example, more competitors may turn up in the pipeline, or the local population could decline.
Finally, the process for financing a self-storage development is often more onerous than when purchasing an established property. When obtaining a loan for construction, the obligation is more about the borrower, as there’s no asset to serve as collateral.
Critical Aspects to Consider
With all of the above to consider, it’s easy to see why choosing between a self-storage acquisition or new development can be difficult. Each of these pros and cons will carry a different weight, depending on your individual circumstances. However, there are a few important considerations that apply to both situations.
First, you have to thoroughly investigate the market you’re looking to enter. What do the demographics look like? How many competitors are there, and what are their occupancy levels? Are there any new facilities in the development pipeline? If a study reveals that a market isn’t a good fit, be grateful that you found out sooner than later.
Second, as you contemplate the road ahead, you must know how much money (or equity) you have and how much you can borrow. Work “within your box.” There’s no point in pursuing a project you can’t afford. All of us have limits, so determine yours.
Know your goals. If you aren’t clear about your long-term objectives, you’ll never achieve them. Is this a legacy project or a flip? Want one large one facility or several smaller ones? Want to own and manage, or own and let someone else oversee daily operation?
Finally, what’s your risk tolerance? If you have the expertise, time and capital (and a good market), then a new project might be your best option. On the flip side, acquiring a self-storage business might be less risky, takes less time and potentially provide a quicker return on investment.
It’s difficult to beat the financial prospects of self-storage, so now you just need to determine the best route for you. Whether you buy or build, you can find long-term success.
Bob Copper is owner of Self-Storage 101, a consulting firm specializing in self-storage, and Copper Storage Solutions, a provider of third-party management services for automated self-storage facilities. Bob and his team have worked with hundreds of owners 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 or email [email protected].
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