Why Is Upside Potential Crucial to Your Success in Self-Storage?

Once you know that a property works for you in size and location, then you need to determine if it will work for you in terms of profitability. One of the main reasons for being in self-storage is to make a profit. There are two ways that you can make a profit on your self-storage facility. The first way is through monthly cash flow. We will talk about how to determine cash flow in another article. The second way to make money is through appreciation. This could be forced appreciation, or it could be through market appreciation or both.

The upside potential of a property lets you know how much potential the property has to increase in value. If you are able to purchase a property at a discount because it is vacant or has maintenance issues or is distressed, then that leaves a bigger profit margin or upside potential than a property that you purchase for top dollar.

You may have a property that is underperforming and has high vacancy rates, as a result, its current value is less than what it could be. You know that you can go in, put in different management, change a few things to increase the draw to the property and change the bottom line. This in turn will change the value of the property and increase its value. Sometimes the changes that you need to make are small to increase the upside potential of a property and sometimes they require a significant financial investment.

Another way that you can increase the value of the property is by expanding. There are many self-storage facilities that think that they have reached their maximum potential when in fact they have several undeveloped acres of land. This land can be turned into more self-storage or even boat and RV storage if the area will sustain that. You can grow over time and increase the upside potential this way.

Part of what you need to evaluate is, “How much is it going to cost me to improve this property?” Whenever possible, you want to try to double your money. For example, if you are looking at a property that is going to need $200,000 in repairs, then you want to make sure that the value of the property is going to increase by at least $400,000. If it isn’t then you need to determine if it is worth your time. If the value will increase by $395,000 then it probably is. If it will only increase by $210,000 then it probably isn’t worth the risk.

Upside potential is crucial to your success when your business model is to purchase a property with investors, turn it around for a few years and then sell it and move on. If there is no way to improve or increase the value of the property, how will you make a profit for your investors? You need to be able to create that increase in value rather than depending on the market to appreciate. While self-storage is a remarkable investment, you never want to bank on market appreciation. You always want to find a way to create that appreciation by purchasing the property at a discount or finding a way to increase the value of the property. Go out and find the opportunities and look for the upside potential. As always, happy investing.