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.******