Economic Occupancy...the best kind of occupancy.

"You can't manage what you can't measure." – Peter Drucker

Six month ago my business acquired our first self storage facility. A small facility on the industry scale. But a much bigger property than I have ever managed. Just shy of one hundred storage units. I felt like a huge mogul after buying it. But I just got back from the International Self Storage Expo and I feel small again. Yes, I was only one of two owners in their twenties to attend the show. But it was still humbling to meet the other owners who owned five, ten… fifty-five facilities. But hey, we all start somewhere.(And I think now is the best time.)

What I Focused on at First

When I bought the storage facility, occupancy rate is what I focused on. I wanted a property in a market that would consistently be full. You can make A LOT of money buying a facility that is under managed with huge vacancy and turning it around. And I plan to do that on my next one. But my first storage was purposely a cash-flowing land play, and in an area that I cannot rent the units fast enough. We have a waiting list.

But sometimes it can still take a few weeks to get a unit filled. And I try to keep about 5 units empty, so I have a solution for the person willing to pay full market rent that rolls into town with a U-Haul!

Two Kinds of Occupancy

After attending the ISS Expo, I learned many concepts and industry vocabulary that I didn’t know I didn’t know. Like that there are two kinds of occupancies in large commercial properties. Physical Occupancy, meaning that someone has signed a lease and occupies a unit of mine. And then Economic Occupancy, meaning that the occupier of my property is PAYING.

If one of my residential residents doesn’t pay my rent on time, I’m going to know really quick! Each tenant accounts for an average of 1,000 bucks hitting my bank account. I notice that!

But in self storage a unit can be anywhere from $80 to $200 at my facility. Easy to go unnoticed if you aren’t paying attention to the data.

What I Focus on Now

I certainly still focus on my physical occupancy, marketing and customer service are a major key in this. But after returning for the show, I decided I was going to take a break from a lot of the “big picture” tasks that I spend most of my time on. After all, I live by the 80/20 rule. However, it is important to check on 20% of my revenue from time to time…

I started digging into the books, tenant by tenant at my storage and realized there were two tenants who had not paid rent in four months. So even though my storage was at 95% physical occupancy. These two tenants were eating up 3% of my revenue!

That may not seem like a big deal. But my facility will produce $8,000 a month at full occupancy. (physically and economically full that is) That 3% is $2,880 annualized. I want that, thank you.

Small Numbers Mean Big Value

In residential real estate, you value is based on sales appraisals. Commercial property is all about performance. My facility capturing that $2,880 a year could mean about $41,000 in value when using a 7% cap rate. Which is worth my time and attention.

When I purchased my facility, it was about 12-15% below market rents for the area it was in. By paying attention to the market, I can see that raising each unit by $5 a month will still leave me about 7% cheaper than everyone else. Which keeps me competitive. But $5 a month on 100 units equates to $500 a month, and $6,000 extra a year. I will gladly give myself a six thousand dollar raise, thank you. BUT more importantly, $6,000 more in Net Operating Income equates to $85,000 more in value, and/or equity. Meaning I can capture that when I go to sale, or refinance.

Conclusion

My residential real estate portfolio is very streamlined. My venture into commercial real estate, and especially the self-storage industry, has caused me to exercise my analytical muscles again. I must constantly dig into reports and understand the numbers that make or break my properties income. I heard another investor say that self-storage was a collection business. I could not agree more. A storage unit might be the third or fourth bill that is paid on a customer’s “hierarchy of important bills” if you are lucky. So making sure your economic occupancy is 100% is vital to success. So, in conclusion, I will be having my first storage units auctioned off next week and getting those losers out of here!