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29 May 2019

How to Develop Your First Self Storage Facility with Only $500K Cash Equity


Marc Goodin


Land: You need five acres plus or minus of usable land excluding steep slopes, wetlands, easement areas, flood planes or other restrictions. It should be zoned for self storage because zone changes or variances cost money and time and are often turned down. The purchase price of the land cost must be under $900,000.

Location: The property should be on a main street in town/city with typically 10,000 vehicles a day or more. The property should have easy access and great visibility. If it is too far off the beaten path for a grocery store it may not be the right spot for a self storage. Remember, around 70 to 8O percent of self storage rentals are by women. If the location is not in an area they would go to on their own day or night, it may not be a suitable location. Self storage in industrial areas are a thing of the past.

Facility size: In order to make a good six figure income and be large enough for the REITs and larger players to purchase for a good resale value, it should be between 50,000 to 60,000 net rentable square feet. In order to keep the cost down to fit the $500,000 equity model, it will be a single-story facility with a total cost of approximately $5.5 million built in two phases. Multi-story facilities cost more to build and typically cannot be built in phases.

Demand: There must be sufficient demand in the three-mile radius and no other new or proposed facilities in the three-mile radius. There could be a large needed demand in the area but if you have multiple facilities renting up at the same time, the rent-up period (and associated carrying costs) can double or even triple. Typically, in the U.S., there is an average of almost eight square feet of existing self storage per person with the average capacity at 85 to 90 percent occupancy. So, until we do research and understand a specific area, we often use a total demand of existing and proposed self storage of eight square feet of self storage per person in the three-mile radius as equilibrium for a quick demand review until we study the area and demand in more detail.

Further competition review and feasibility study: Not all self storage is created equal. Many self storage facilities are ancient, poor shape, have no pavement, no security and are not open much of the time. Often these facilities will not be your competition. Your goal is not simple to be full but to be full at premium rates. So, it is important to visit your competition to determine rates, occupancy, the quality of the facility and management. If all your competition is charging $85 a month for a 10’ x 10’ unit this is not a good sign. Either there is too much competition, so rates are depressed, or the owners simply do not raise their rates. Either way a bad sign for future development.

In Houston, the average existing square feet or self storage per person is over double the national average and in New York the average is less than half national average. And in both places, there are good and bad locations. Unless you have the years of expertise, a feasibility study by a self storage expert is highly recommended.

Loan: A typical bank loan will require 25 to 35 percent down and will not provide any working capital. A traditional loan would often require one to two million dollars or more cash equity. Many new developers are going with an SBA loan that only requires 10 to 15 percent down. With an SBA loan the numbers can look like this:

$5.5 million project with phase one being $3 million.

Fifteen percent down is $450,000 leaving $50,000 out of your $500,000 cash equity for phase two, soft cost before the phase two loan.

Often phase two will not require more than the $50,000 equity because there is equity in phase one to provide for the SBA 10 to 15 percent owners cash equity.

Team: While listed here last, it is the most important item and should be done before you make an offer on land as they will help you review the land, make the offer, complete your initial due diligence and then move on to the design and construction phase efficiently. Your team should include a land use attorney, banker, a land broker, civil engineer, architect and a contractor.

Secret Sauce: There are thousands of questions to be answered in the development process. In addition to the team members above, you will also need a self storage mentor who has built and owns multiple self storage projects. None of the previous experts listed are all-around self storage experts. If you do not have a mentor, it will be important you hire a self storage expert to help answerer those thousands of questions and go around the land mines so planning, design and construction mistakes do not cripple you. Your mentor or expert must also be there to make sure you hit the ground running with a detailed operational plan and the execution of a premier marketing plan.

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