There’s a small group of real estate investors making a killing by accommodating the American public with our propensity to store junk. You won’t find these folks at your local REIA meetings or seminars. Your most likely chance of meeting them is on the golf course or a cruise ship. They are quietly enjoying their growing cash-flow and building their net worth through the virtually unknown investment arena of self storage or mini-storage. What keeps the common real estate investor from joining this exclusive club?
Exposing the Myths
Perception is not always reality and this couldn’t be truer than with self storage. I believe there are false perceptions among the real estate community that keeps investors from diving into the self storage business. Test yourself and see how many of these were embedded in your mind about self storage.
Myth #1: There is a self storage facility on every corner. I can’t make money with all of that competition.
It’s true, self storage is a business that has grown from out-of-sight garages in industrial areas to modern multi-use facilities. A billion dollar industry has sprung up in the past twenty years all geared toward development and building. There are more than 45,000 facilities nationwide which equates to over 6 square feet of storage for every U.S. citizen. However, there are investors making phenomenal returns even in overbuilt markets. The key is in purchasing an existing facility at the right price based on actual income and increase the cash flow by operating the business effectively and efficiently.
The very first facility I purchased was in an overbuilt market in Florida. Every facility in town was running in the 75 percent range in occupancy. After a short 18 months, the occupancy was at 92 percent with an increase in cash flow of almost $6,000 per month. Meanwhile, my competitors were still in the 70 – 80 percent occupancy range. Don’t let anyone convince you that you can’t make money in today’s market.
Myth #2: I either need to build a new facility or buy a newer one to make money.
Most people think that self storage buildings must be cheap to build since they are just metal buildings with doors. Yes, they are cheaper to build than most other commercial buildings, but there is much more to developing and building than meets the eye. In most cases, it’s a laborious process that takes months, if not years, to complete. Then all you have is an empty facility with a large debt service. It may take several years to break even and this is definitely not a fast track to success.
The smart investors are buying existing, older facilities that are poorly operated and need minor repairs. These properties are not on the radar screen of the big companies and can be picked up at great prices. With these facilities, you often start with a positive cash flow and once the repairs have been made and you operate it professionally, the money really starts rolling in.
Myth #3: It takes a lot of money to get in the self storage business and financing is difficult to obtain.
In many cases, you can purchase a 30,000 square feet, 20 year old facility for less than a single-family home in California. Sure, it is going to be more expensive than most rental houses, but financing is extremely easy to obtain. There are an abundance of lenders nationwide who are fighting for self storage loans and will even finance up to 90 percent of the purchase price. Self storage has some of the best loan programs available in the commercial market with great interest rates and terms. It is due to fact that this asset class has the lowest default rate among all commercial real estate types.
It Doesn’t Get Any Better Than This!
Now that we’ve dealt with the most common myths that keep investors from looking at self storage, let’s concentrate on the benefits of this business. Once you grasp these strategies, you will begin to understand why few, if any speakers have ever showed up at your real estate club exposing this great investment.
The powers of numbers…An average size self storage facility has 300 units and let’s say that a 10 x 10 unit rents for $60 per month. I typically increase the monthly rental price by five percent each year at my facilities. So, the $60 unit would increase by $3 to $63 per month. $3 times 300 units will increase the cash flow by $900 per month or $10,800 per year. If there were no increases in expenses, the value of the facility just went up over $100,000 due to a $3 per month rental increase. How many jobs out there allow you to increase your income over $10K and add $100K to your retirement every year? What if you could do this every 8 months instead of annually?
Better late than never…Late fees are unbelievable in the self storage business. It’s not uncommon for many tenants at my facilities to pay an additional $20 in late fees each month on documents storage a $35 per month 5 x 10 rental unit. I have one facility that averages 8 percent of the gross income each month in late fees. This particular property averaged $1,165 per month in 2006 in late fees. Talk about free money and cash flow, it added up to almost $14,000 last year. Not only was it found money (the previous owner didn’t charge late fees), it also increased the value of the property by over $140K.
Give them something for FREE and still make money…One of the easiest profit centers to set up in this business, as long as it is done correctly, is the administration fee. I charge every new customer a $15 administration fee, but give them a new, sturdy cylinder lock as a gift. This lock would most likely cost them about $15 if purchased at a local store, but my cost is only $3 since I buy them in bulk. I have very few customers complain about the fee because they feel like they received something of equal value in return. Bottom-line is I make an additional $12 every time someone moves into a unit. At one facility, we get 15 new customers each month which equates to an additional $180 per month in income from administration fees. This adds another $2,160 per year in income and over $20K to the value of the facility.
These are only three of more than 30 profit centers that I can generate from a self storage facility. Some of the others include record storage, eBay consignment, mailbox rental, moving supplies, outside RV/boat parking, packing and shipping services, notary services, fax services, copy services and the list is as long as your imagination.