Self Storage Newbee - please help

[Daniel Eley]

Hello, and thank you in advance for reading this!  I am a dentist, looking to get into self-storage as an owner/operator.  I own two dental offices, so I have business experience, but no self storage experience.  My goal is to put some work in up front in order to end up with a passive income stream that runs itself with minimal babysitting on my part (bringing in enough money for me to hire people to deal with the inevitable headaches).  The following is my general plan, and some assumptions that I have, based on reading other posts/threads.  Anyone with self storage knowledge, please let me know your thoughts (feel free to be blunt), and let me know if my assumptions are wrong.  Thank you!

      I am considering buying a large piece of land (14 acres) adjacent to the highway in Florida (flat land), and building it out in phases.  Phase 1 would be 1 acre of storage units, along with boat/RV storage.  As those units fill up, I would then build out the next acre, and so on and so on.  The asking price for the land is $1.6 million.  I have read that single story storage units will have roughly 40% rentable square footage from the total raw square footage (if all 14 acres were built out it would be 244,000 rentable square feet), and that construction costs will run in the $50/sq ft range.  I am ballparking that Phase 1 ( the land, to build out 1 acre of self storage, add a large gravel area for RV and boat storage, and fence all of that in) will be around $2.5 million.  I would need to finance the bulk of that.  I am assuming 20% down payment will be needed, and that the rate for an investment loan will be in the 5 - 6.5% range.  I'm sure that there are companies that analyze an area, and let you know whether there is adequate demand for a new self storage facility.  Do you all have any recommendations for this type of service?  Also, I saw on a different post that Scott Meyers has good workshops for beginners.  Do you have any recommendations for which workshops are most beneficial?  I looked at his website, and there are quite a few to choose from.  Thank you for taking the time to read all of this!

[Henry Clark]

@Daniel Eley

Everything everybody has said is true, "but not for you".

Lets eat this Elephant, one bite at a time.  And it is an Elephant.

YOU:

A.  Why are you different?  Business experience.  Jumped off the cliff into business.  Have two locations and you own them.  Financially you should be in a good position.  Critical thinking skill set.  You already have succeeded or failed/learned from 75% of all "business" issues.  Your not starting at zero as an investor or business person.  You just need to learn Self Storage.

Every person should want to be a Doctor, Dentist, Lawyer, Engineer or Indian Chief.  Not really.  Because if they stop working, no income comes in.  If they want to get more income, they have to hire people and start a business.  They have to feed the "Animal".  You want Passive Income.

B.  I don't know you.  My cousin has two Dental practices in Houston.  Very wealthy and well to do.  He has a problem though, he has to keep feeding the Animal.  Wants to retire or back off when he is 60.  Luckily his son has joined his practice and is learning.  He will reduce his hours and at some point sell or give up his practice to his son.

C. "Don't Answer."   What is your game plan?  At what age?  Have you and your spouse asked, When is enough, enough?  How do we get to enjoy our wealth?  Etc. Etc.  Now is the time to answer those questions and put a game plan and action in place.

D.  "Start small and Make Your Big Mistakes Early".  If you read most of my posts, I end with that suggestion.  Why am I recommending you don't do that?  Read A thru C.  Existing Experience, Financial position, Age/life cycle, critical thinking skill set.

E. You already recognize there will be a ramp up stage where you personally invest more time in the development. You could start doing SFH/MFH, but it will take you years to learn it and a lot of personal time. Plus half of the Return, is the fun of hunting/landing the property, staying under budget and then getting it rented. You can't invest that much time and would not enjoy it since you have to long term trade off Dental work, which pays more and is comfortable. Doing a large storage location is a one time event over 12 months during the development Phase 1. Phase 2 thru how many, takes very little effort. You already know all of the answers and who is going to do it.

How much are you willing to lose?:

You actually have two questions above.    How much time in your life cycle are you willing to lose to reach your passive income level? How much money are your willing to lose?

Life Cycle-  how much cash flow do you need to stop being a dentist or to go part time.  At some point you sell your practice and work part time so you can invest and enjoy your life style.  How many years do you have to develop a passive income plan to hit that number?  A large storage location gets you there quicker than almost any other investment.  Remember, I'm not selling you anything.

How much are you willing to lose?-  First of all, if you don't do something in the next year, you're never doing a Passive investment plan.  Your financial life is to easy.  Its pre-set, and you know it.  Again, I don't know you.  Positive-  So how much money are you willing to lose, to achieve your life cycle on the timeline you want?  $50,000;  $100,000; $200,000  etc.  Negative-  At that number, will your kids still get to go to college?  Will you still be able to vacation?  Will you still have a profitable Dental practice? Etc, Etc.  That is the number you are looking for.

Lets go Barbecue some Elephant:

Before we get started and fire up the grill, lets see if we need to stop.  Get the following answers on the 14 acres:

a.  Is it zoned correctly?

b.  Is it in a flood plain?  No point in building if you have to get flood insurance.  Go find another piece of ground.

c.  What is the storage unit market there?  How many people in a 3 and then a 5 mile radius?  How many storage units are there?

d. How are you financing? What is your LTV%? SBA 10%; SBA 20%; Conventional 25%; Conventional 40%. You need to know how much cash or collateralization at 65% value you need.

Lets Fire up the Grill:

a.  14 acres-  your not going to use all 14 acres.

  1.  A 14 acre site is as rare as "Anodontia"., 

2. Your radius will not support 244,000 sq ft of storage. Even if it could you would have other competition in the market and have the extreme risk of a big REIT coming into your market and devaluing your operation. (High Risk),

  3.  Size of your location.  For a manager you will need at least 300 units, which is about 4 to 5 acres depending on the shape of the land.  About 120 units per 2 acres.  If doing Boat/RV's, then another 3 to 4 acres.

  4.  Again depending on the shape, size, entrances, and visibility of the land, recommend you immediately Subdivide and sell portions.  If possible you keep a large frontage and then the entire back section of the property.  Sell off the road frontages, that can use the visibility.  Basically you want an L shaped property, with the toe being your access to the highway and the storage.

b.  Lets build:

  1.  Do in phases, let the shape of the land and the driveways determine how you will build.  But plan on building out as you need them.  Can run the numbers, but at a minimum you will need to build at least 300 units to support a manager (part time, weekends you cover for now, to learn).  24 hour phone service(part timer and you).

  2.  Big cost issues.  Find out if you need water or sewer access.  Road type, concrete or rock.  Don't do asphalt in Florida.  Storm ponds or drainage.  You have to build for run off, can't have flat drives in your area, especially for the long driveways you would have on a 14 acre site.

c.  Financing:

  1.  Lets start with 4 acres of land. @$100,000 /acre= $400,000; yes, you need to finance the rest of the land.

   2.  330 units at $3,200 erected= $1,056,000;  Steel is increasing 25% now.

   3.  Concrete driveways- $400,000

    4.  Fence/automated gate- $60,000

    5.  Electric- $50,000

     6.  Security- $60,000

     7.  Office- $35,000 with furnishings

     8.  Engineering- $50,000

     9.  Dirt work- really depends.  You said flat, so go with $30,000

   10.  Is Electric/water/sewer/fire service available?  If not add $20,000 up to $250,000 more.

11. Talk with you Finance outlet and see what their LTV% is and if you have enough Collateral.

What happens if you get Barbecued?:

Land- $1,500,000;  if you sell as is, you will pay 7% commission plus holding costs (interest/property tax) for 1 year.  Estimate- $190,000; you lose.

You build out the 4 acres and 330 units.  Lets say you have $2,300,000 into it.  Your market should be good, otherwise you shouldn't have built in the first place.  Then it becomes a question of when you sell.  At 30%/50%/70%/90% occupancy.  This may sound strange, but that's the market.  The day you complete the location, it should be worth about $2,500,000 to $2,700,000 before you rent to one customer.  When you get to 90% occupancy, it should be worth about $3,000,000 depending on your rent levels, possibly more.  If your in a good market, you should be at 90% in 2 years.  Estimate- $0 you lose.  It all depends on your analysis of the market at the beginning.  Read my post, "Will they come?"

There is nothing in self storage that can't be vetted.

1.  Take the above and build an outline or get my Checklist 101 post.  Challenge the largest numbers or unknowns first and work your way down.

2.  Sign up and go to seminars or classes as soon as possible.

3.  Start valuing and analyzing storage properties.  Even ones you will not buy.  If you don't get this one, buy or build another one.  But keep doing the math.

"Don't Start Small and make your big mistakes early."  Jump in.  You are one of the few people I will tell this, and I don't know you.