Self Storage- Scaling

[Henry Clark]

Was having fun with a skid steer moving dirt around.  Monotonous and let my mind wander to the topic of Scaling, while driving.   Filling in a low spot just preparing if we decide to build next year.  Love doing cheap value add work.

See a lot of posters, primarily SFH and MFH wanting to make their first deal or what is next, type questions. They really should stop for a second and lay out a map to "Scale" to determine what it will take to get them to Financial Freedom, or whatever their objective is. The following is a "Scaling" path that you could use for Self-Storage. This would be different for each person's resources and Risk/Reward.

Step 1:

New to storage 10/01/2023:

"Start small and Make Your Big Mistakes Early".

If I was new to storage today, in this environment. 

A.  Would start off with 2 acres or smaller. 

B.  On one side do 1 Trip Cargo Containers.  These are 8x20 and are very clean, since they have only been used for one trip.  Delivered they are very cheap right now, about $2,900.  Another $200 to have the ground leveled, rock placed for a base instead of sinking into dirt, then to have them placed and leveled.  Since the delivery is the same for 1 or 2, always buy 2.  Risk/Reward- you can add as needed.  Easy to sale for about the same price.  No property taxes.  Traditional 10x20 or 10 x 15 units cost $4,200 erected, not counting other costs.

C.  On the opposite side of the lot, I would do surface parking spaces.  Lay some rock down.

D.  Not going to go into fencing, security systems, management software, advertising, etc.  Read posts, asks questions.  Make mistakes.  Keep scaling in mind, try to stay loyal to contractors, so they are loyal to you.  Don't shop around to save a $1.

E.  Financing- Always start with a construction loan.  Interest only during both construction and rent up phase.  So, your cashflow is not stressful, trying to make P/I payments day one with no renters.  Then switch to permanent finance.  I would switch to SBA Refinance.  SBA finance would be 10% down, SBA 45%, participating bank 45%.  SBA term could be 20- or 25-year period.  Participating bank is usually 10-year balloon, then switching to 5-year balloons.

F.  Let's do a quick financial analysis.  Say 2 acres at $60,000.  Fence $20,000.  no Gate.  Security $20,000.  Ground Excavation $10,000.  No Utilities other than Electric.  60 containers placed $186,000.  Parking spots $20,000 graveled. Electric and lighting $20,000.  Total $336,000.  Construction interest- say 7% on 1/2 or $200,000= $14,000.  Total $350,000.  

G.  Down 10% $35,000.  Say 7% 5year, 20 amort.  

H.  P/L- Revenue Containers at $70 per month, 90% occupancy; Parking $40 per month 60% occupancy on 30 spots.  Annual revenue= Containers $45,000; Parking $8,000.  Insurance- $1,500; Property tax- $2,000 (no tax on containers).  Electric $1,500.  Other $2,000.  Net Operating Income- $46,000 before depreciation expense, income taxes, principal and interest payments.

I.  Monthly P/I $2,500.  

J.  Cash flowing around say $33,000 annually after P/I, depr, income tax impact.

Actions to scale 1:

A.  Although this is your baby, you're going to sell it to get your Cash Snowball going, to do bigger deals and faster.

If you use a 7% cap rate with NOI of $46,000= $657,000 sales price. Take 7% off for commission. Pay back loan balance of say $300,000. Profit of $311,000. Let's say you waited a year to get Capital Gains versus Personal income tax rate= 15%, then after tax= $264,000.

B.  You didn't have to sale.  You could have kept, appraised and they might have given you 65% collateral against the potential valuation gain.  I would prefer to sale.

Step 2:  Say start of year 4

With $264,000 cash in hand (should have added the original $35,000 down), you can now go do either SBA 10% or Commercial 25% downpayment deal for your next deal.

$2,640,000 or $1,056,000 deals.

A.  Let's do another construction loan and SBA loan so we can scale faster.  SBA you can only do up to $5mm loan "with them".  Since the split is 10% you, 45% SBA, 45% participating bank, that means you can do up to say $11mm of deals before you cap out with the SBA.  Problem with the SBA is you can't use those assets to collateralize with another Commercial bank, you have to stick with the SBA.

Now your Cash Snowball becomes and Avalanche.

B.  With a $2,640,000 deal, we are going to do a 4-acre spot with just traditional drive-up access storage.  In a market with 10 x20's going for $130 per month.  Will have 300 units.  Mixture of 10 wide by 10/15/20 foot deep.  

C. P/L- Revenue 300 units at say average mix of $100 per unit, at 90% occupancy= $324,000 annual. Insurance- $5,000. Property Tax $40,000. Electric $3,000. Self-managed Upkeep- $2,000. Advertising once leveled out- $10,000. NOI- $264,000.

D. 7% cap rate, NOI $264,000. Value $3,771,000.

Actions to Scale 2:

A.  How greedy or big do you want to get?  What is your number or objective?  Past this number you have to develop a company.  

B.  Let's say you sale.  $3,771,000 price.  7% commission.  Loan balance say $2,600,000 left after year 1.  Income tax at Capital gain rate- let's use a flat 20% for this discussion.  Net $725,000 cash in hand plus your original downpayment of $264,000; you have say $1mm to invest.

Step 3:  Say start of year 7

A.  End of exercise.  Recap.  Decide what your "number" is.

B.  Remember SBA will only loan up to $5mm of their money.  With your $1mm, you are now at the threshold with the SBA.  You could do $11mm of projects.  After that you would need to go with Commercial loans at 25% downpayment.

C.  We only used a 7% Cap rate.  Could have been lower, thus speeding up the Scaling.

D.  Used a market for a 10x20 at $130.  Same costs, land probably would be a little more expensive.  But we could have did in a market of $180 to $250 for a 10x20.  Scaling then goes off the charts.

E.  We did not "Buy" any existing locations.  You would be paying the premiums that you are getting in cash.  You would scale very slowly based on Cash Flow versus Developer profit.

F.  Did not do 1031 exchange or Year one depreciation expense.  Since we plan to sale and pay taxes, no value in doing as part of our scaling plan.

G.  At some point you will keep some of your locations for cash flow.  Versus just seeking out Developer profits.

H.  ****** There is too much Self Storage************    There is not a town in the US, whether New York City, Los Angeles or Bill, Wyoming that I would not build new storage.  $5 Billion is a big number.  I use this number as a reference point for the degree to which I mean, there is not near enough storage.  I could see deploying $5 billion dollars in Self Storage today, even if Large REITS are taking a hit today.  The market and Margins are there.  Just be Strategic.  I would even attack the markets where the Large REITS have saturated.

Start small and Make Your Big Mistakes Early.

Its your money, your always right, even if you're wrong.

********If you're in SFH or MFH take the same approach above and use it to develop your Scale model. See where you're going before you get there.******

[Henry Clark]

@Greg C. There are many books, podcasts, posts, groups, etc you can read and join.  You will note three things I try to say in my posts.  1.  Don't trust me.  Anything in Self Storage can be validated., 2.  Start small and Make Your Big Mistakes Early., 3.  It's your money, your always right, even if you're wrong.

Just discussing drive up access and non-climate-controlled units.  

A.  Right now, the cost of these buildings is really high.  You need to be in a market for 10x20's with street rates greater than $90; preferably $110 or higher.  At $90 you still make a profit, but it's not worth the risk reward.

B.  It is better to build than to buy currently.  Unless you can find a small location of say 25 or 50 units at the right price.  There is too large a premium on existing buildings.

I am not giving you any financial advice, since I don't know your full situation.

Scenario with $10,000 and a possible $20k to $40k more in the next few months.  In the Greensboro, Raliegh, and Durham market.

1.  If you read my posts.  "Will they Come?".  I am not doing a specific location or market study for your area.  I looked at Sparefoot in those three areas.  10x20 drive up access, non-climate controlled is down in the $90 range: with some at higher levels.  So, you have to be very location specific.

2.  In the scaling post above, I recommended doing your first location and then selling to get your cash snowball for a bigger location.  Also, by doing a smaller location, your initial learning curve risk is smaller.

3.  Starting with $10,000 I would recommend the following approaches.  Again, depends on your risk/reward/resources. 

A. Buy a piece of ground about 1 to 2 acres. Normally I go with 2 acres or larger, but this is to get you started.,  Preferably with preexisting concrete or hard surface or rock.

B.  Go with Cargo Containers.  They have cut in half in the last 2 years and are affordable.  Used $2,200; 1 trip or new $2,900; Versus a new traditional 10 x 15 or 20 runs about $4,400 erected.   

C.  Risk/Reward.  You can always sell containers easily for 60 to 80% of their value or more.  You can add them as you need them.  Try to do 10 at a time, to reduce the cost of "Setting" them.  Will need an excavator or crane truck to set.  Read my posts on Cargo Containers.

Steps:

1.  Check zoning allows storage and Cargo Containers.

2.  Located your Cargo container dealers in your area and deliver price.  Get estimates on site prep.

3.  Recommend you don't do the full fence, gate, security system etc. right of the bat.  Add later for financial purposes.

4.  Normally I would say work with a local bank that can convert to an SBA loan.  But since I am going to recommend you sell this location to get a cash snowball, don't.  Also don't do the year one Depreciation right off.

5.  Commercial Lenders prefer to work with people who have experience already.  This will help since you are starting off small.  Also, you show them you are managing your Risk/Reward.

6.  Calculate the cost to install and the return to cover P/I on Land, Cargo Containers, and expenses.  You want to install or get to enough units to where at 50 to 65% occupancy you are covering all cashflow.  At this size you will have learned a lot about Self Storage and can now start to scale with your systems in place.  

7.  Calculate FAILURE:  In 6 above if you only ever reach your cash flow break even, you Failed to make the big bucks.  But you are building equity by paying down the principal.  Also, you just earned a $50,000 education in Self Storage with little risk.

8.  FAILURE: 

Scenario A.  If you had to sale the above.  Say your land was $50,000 and you had 30 cargo containers at $90,000: plus, an additional $20,000 of site prep.  Thats a total of $160,000.  Let's say worst case you sell the cargo containers for $60,000 and the land for $35,000.  Or a total of $95,000; you just lost $65,000. 

Scenario B.  You sell the going operation with 25 units rented at $60 per month.  Low property taxes since containers, say $2,000.  Low insurance (personal property coverage) at $1,500.  Rent $18,000 per year.  Less Expenses not counting your time. Will be a local person that buys.  Say $12,000 cash flow after interest expense.  Cap rate of 7.  Valuation of $84,000.; you just lost $76,000.

9.  The above Failure scenarios also tell you your breakeven in number of units has to be higher.

Looking on Loopnet for those three towns Commercial/Industrial land is running in the $100,000 per acre.  This is fine for once you learn the business, but you will want to find cheaper land in the city or on the outskirts.

Start small and Make Your Big Mistakes Early.