Build or buy self-storage?

Question

I am considering adding self-storage to my portfolio, but would actually like to treat this as a business and operate it myself. Does it ever make sense to build a new facility or is buying an existing facility generally the better way to go? I am looking to generate cash flow with this purchase.

Henry Clark · Answer

@ Austin;  You owe me a King Cake.

Buy or build:  read my post.

Take both approaches and which ever one works first is the best.

a.  Buy- you take out competition.  Faster path to controlling rental rates in the area.  Your looking for a good deal.  Look for extra land to build, if you have the market.  This is where you make your easy money.

b.  Build- location/location/location.  Most Mom/pop locations did not build for the customer.  They built because they had extra land.  If they are 1 mile out of town, then you build in town, you have outmaneuvered them.  Be careful buying, you don't get a location that can be outmaneuvered.

Financial targets- We go for an 8 to 12 year payback; on a 20 to 25 year bank amortization.  We can always pay off early.  We are in positive cashflow.  If we screwed up along the way, we have band width to take the hit.  This guarantees Cash Flow.

Financing- Whether buying or building, we are going after SBA loans 2.xx% rate.  20 to 25 year fixed rate.  10% down.  With the partner bank doing 5 year increments.  If building do a Construction loan with the participating bank for interest only to conserve your cash.  Ask for either 18 months interest only, or 65% occupancy, which is what we build to for break even, including principal/interest.  Once done then roll this over to the SBA loan.

Stupid Money-  Stick to local B/C/D properties.  Don't do indoors.  You can't compete with the national firms either Financing or SEO power.  Look for a spot that is is really hard for you to get into, this makes it harder for other people to build near your.  Zoning/hilly ground/land price to high/etc.

Look at our website how we do Self Service.  Make sure it fits your life style.  Can easily do with a full time job.

If you have more questions read all of my posts on Self Storage.  Then I will be glad to help.  After I get a King cake.

Start small and Make your Big Mistakes Early.

Scott Krone · Answer

@Austin Works  Both strategies work.  To answer your questions:

1. Does it ever make sense to build new. Yes. Does it make sense in every location. No. The market will determine if it makes sense to build a new facility. In each of the locations we have built, we moved forward with it because there was unmet demand in the market combined with attractive rental rates to justify the building. We have elected to convert underperforming commercial spaces into self storage to make this even more financially attractive. The reason, we are buying the building far below replacement cost. With our conversion cost, it is far less costly than a brand new facility (but has all the amenities of a new facility).

2.  Or is buying an existing generally the better way to go.  If the market is saturated, then probably - assuming you also don't over pay for the existing facility.  In either situation, understanding the market at that specific location is the key to understanding self storage.  In either scenario, the goal should always be to generate cash flow!

3.  Why is a build longer path to cash flow.  In a build or conversion, as you noted, you have the construction time.  In addition, there is the lease up period.  Typically, lease up is 3% per month - similar to new apartments.  After one year, you typically cover your operating expenses, and by year two the goal is to cover your interest payments.  After that it should cash flow.

Greg Dickerson · Answer

It's really about availability of properties and demand in your market. Storage is the one property type that you can generally build cheaper than you can buy in most markets right now depending on the variables which creates also more equity quicker but it's a longer path to cashflow. When you buy existing you are buying an income stream but you will pay a premium right now.

Scott Krone · Answer

@Austin Works  I got into self storage because we had a client that wanted us to help them find a distressed self storage facility.  By definition, we could not find one.  Most were trading in 8% to 9% cap.  If  you are looking for an advertised 12%, I believe you will be looking for a long time.  Now, if you see a 8% or 9% cap, and the economic occupancy is below street rates and levels, it may equate to a 12% valuation on the purchase.  So, to answer your question, it depends!  It will also be hard as most operators know that self storage thrives in recessionary markets, and are now choosing to sell.  We are currently seeing many trade below 6% which is consistent with the data Marcus and Millichap recently published.

That is one reason we develop, because our acquisition is 12% + but with the completed project we can create the added value to lower the cap to 6%.

Austin Works · Answer

@Scott Krone I greatly appreciate this. I realize that we are currently facing low cap rates on buying existing facilities right now, so what is a good target range for existing self-storage facilities? If 12 or over is unrealistic, then timing may not be right for me.

Austin Works · Answer

@Henry Clark Thank you for the incredibly helpful information here! I will get busy on reading the articles... PM me the shipping address....King Cakes won't be on the shelves until mid January most likely, FYI.

Seriously, this is a huge help.

Austin Works · Answer

@Greg Dickerson why is it a longer path to cash flow? Are you just referring to the timeframe of while the units are being built and then before they are filled? I generally capitalize all of this into my long term financing anyway

Build or buy self-storage?

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