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Investment opportunities are often weighed on a risk vs reward basis. As opposed to several types of residential or commercial real estate opportunities, self-storage unit facilities are relatively stable business investments that may represent prime opportunities for those looking for a solid passive income stream.
But are self-storage unit businesses really worthwhile, or they too much of a risk given the high startup capital needed? Let’s see exactly what it takes to begin one of these businesses for yourself.
The Costs of Storage Unit Businesses
As with any other business endeavor, you need money to make money. So it’ll pay in the long run if you figure out the costs it’ll take to start up a storage unit business before you get embroiled in the process.
But just how much does a storage unit business cost to get up and running? The truth is that the overall cost can vary based on tons of factors like:
- acquisition costs
- location, which can affect the above
- cost of land
- construction costs
- labor costs
- and more
Beyond considering all these overall costs, you should also think about where you’ll be getting the money from. If you already have a small fortune to begin, great! But chances are most of you don’t have a ton of scratch lying around. That means coming up with a financing plan. You’ll need to ask yourself questions like:
- do you have the money to buy a self-storage facility outright?
- do you need to take out a loan?
- do you need multiple investors?
All of these are critical questions you should consider before moving onto the next step.
As you research your own market and prices, keep in mind that single-story self-storage facilities can cost anywhere between $20 and $50 per square foot to build in general. This price can obviously be much higher depending on the above-mentioned factors. It’s also a good idea to save between 20% and 30% of your total project budget just for land purchasing.
Here’s a good (if somewhat outdated) representation of self-storage business costs you can expect.
Should You Do a Feasibility Study? How to Know if It’s Worthwhile
Looking at all those numbers, you might be having some second thoughts. It could be a worthwhile endeavor to put together a feasibility study. This is a type of research that can give you some hard numbers as to whether a business venture will be profitable over the long-term. You can do this either on your own or hire a consultant specialized in self-storage businesses instead (this is likely the smarter choice for most).
At its core, the feasibility study will answer whether or not your self-storage facility will have a market to bring in profit when all the development is said and done.
A specialized self-storage business will usually have a market area between 3 and 5 miles away, although many studies will go past this to determine demographics for your market. It can also provide you valuable data for potential customers, like the median income for your market area, median age, and more. All this can help you set up pricing points and marketing campaigns later down the road.
Furthermore, a good feasibility study will tell you:
- how much vehicle traffic is in the area
- what other self-storage facilities might be operating nearby
- what the current and projected populations look like
All this will combine and tell you whether starting your own self-storage business in a particular market is a smart idea at this time.
What Markets Are Good for Self-Storage Businesses?
In general, markets that are generally trending upward, when current businesses are booming, new businesses are starting, and employment opportunities are increasing, are great markets for the self-storage industry. That’s because more people buy new homes or properties or move into existing spaces, necessitating more self-storage room.
While downward trending markets, which are characterized by lower employment and closing businesses, are a net negative for self-storage businesses, they’re not nearly the drastic disasters that they can be for other types of real estate investment. That’s because people don’t automatically get rid of all their stuff when they have to move – they still need a place to store it.
Both residential storage and commercial storage will still be needed even during a bad market, so self-storage businesses can weather economic declines arguably better than many other industries.
Financing Your Business
If the feasibility report looks positive, it’s time to start thinking about financing your self-storage business. By this point, you should have a specific budget already written down for proposals, particularly if you need to take out a loan.
If this is the financing path you’ll need to work with, you’ll need a generally high credit score (usually around 680), a good credit history, a solid business track record of a few years or more, and enough cash to make a down payment of at least 10%.
Naturally, all of the above aspects will vary here and there depending on the lender. But those are a good rule of thumb you should aim for regardless.
On the other hand, you might decide to pool your income with that of other investors. You can take on debt in a partnership, spreading the risk around evenly, or you can start an “equity partnership”. This is essentially sharing the ownership of the business with each investor, with the ownership amount depending on how much each person chips in.
The bottom line is that you should figure out your financing before moving on to any other step.
Decided? Great! Time for a Business Plan
The business plan can be thought of as the main document or constitution of your self-storage business. Ultimately, it’s a description of your goals, needs, and mission statement. It includes:
- the mission statement mentioned above
- a “vision” statement for optimistic growth
- the structure of the business in terms of ownership
- the business structure – is it an LLC or other type of business
- analytical data for the business, like where it’s likely to succeed or spots where special attention will be needed to ensure success
- marketing strategies
- market analyses
- pricing strategies
- and more
The business plan is a template that will help you run the business in every respect. It’s the blueprint upon which you should build the entire business, including the facility, policies, and more.
Buying the Facility
Speaking of the facility, it’s a good idea to hire a self-storage broker unless you already have some real estate experience of your own. That’s because they’ll know the market and can help you negotiate the price of your land and other costs down to reasonable levels.
For most self-storage business investors, that means finding a location in a local area – most of you will likely be running it yourselves. But you can also purchase land from farther away if you’ll be delegating most of the operation to someone else.
Prices can vary greatly, as mentioned earlier. But you should expect to pay at least $1 million for a full facility, and several more for a bigger or more advanced facility. Keep in mind that cheaper locations may require more development time and higher costs before they are ready for rentals.
Time to Develop
Buying the facility is just another step, not the end. Now you’ll need to actually develop the facility and build the units. If you need to build it from scratch (i.e. you just purchased the land and relevant licenses), you can expect to pay between $20 and $80 per square foot on construction alone. Considering that your facility can be up to 100,000 ft.² when all is said and done, it’ll add up to a hefty cost!
Average self-storage facilities are usually around 46,000 ft.² for rentable space, with a little left over for operation and movement. This covers between 3 and 5 acres on average.
As you build the facility, keep several things in mind so you don’t have to spend extra money going back over initial construction fumbles. Have all of these questions answered before you break ground:
- What kinds of units will you be renting? Smaller units are better for tenants with less stuff, so cities with more apartments and less full houses are a good match. The reverse is true if your market is primarily homeowners with more stuff to store. Your feasibility report should point you in the right direction.
- How will your tenants access their units? Can they drive up to them or can they only access them through an indoor facility?
- Are the units climate-controlled or not? Do you want to have both with different price tags?
- Do you want to have space for other vehicles, like RVs or boats?
- Can you transform existing buildings into storage facilities? This could be a good way to cut down on the overall price of the project.
Now comes the good stuff: profit. How well does a self-storage business stack up as a passive income stream?
In most cases, self-storage facilities have occupancy rates hovering around 70% to 90% depending on the market and time frame. Newer facilities usually don’t reach this cap until 1 to 3 years have passed, though, so don’t expect to be in the black for some time.
The positive side of things is that self-storage costs over the long-term are usually pretty low, so it doesn’t take much occupancy to break even. Having about 50% occupancy over the long-term is usually enough for most facilities, and anything beyond that will eventually allow you to pay back any loans (if applicable) and start turning a profit.
Consider your feasibility report and other market research to determine appropriate pricing points for your self-storage business.
All in all, a self-storage business can be an effective passive income stream and a great way to boost your capital over the long-term. It’s a stable business model that’s almost always needed so long as people need space for their spare stuff, so it’s also more resilient against market downturns than other industries. That said, you do need a significant amount of startup capital or a great loan to get started.
Don’t expect to get rich quickly by building one of these businesses. But if you have the time and dedication, a self-storage facility could be a worthwhile investment.