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It’s easy to categorize self storage as just another piece of real estate. But it simply isn’t true. Self storage is a business. In this article, I try to differentiate self storage from traditional real estate to help others see self storage in a new light.
Before my partner and I created our self storage company and sought to acquire our first facilities, we poured over industry data, attended trade shows, examined local markets and analyzed the potential competition.
My theory was simple: self storage isn’t a real estate asset; self storage is a business.
This theory proved to be extremely beneficial in that it allowed us to look at the self storage business through a much different lens than what most others were doing.
We believed we could purchase a decent self storage facility, even if it was underperforming, and revive the business aspects.
If you’re thinking about getting started in the self storage business, or maybe you’ve already started and aren’t getting the results you’d hoped for, this article will help you to adjust your mindset on how to run your self storage business.
Viewing self storage as a business opposed to a traditional real estate asset became our working strategy and our foundation for how we made all our decisions.
We knew if the theory proved true, our efforts would be rewarded. Our goal was to prove that the financial performance of a real estate asset could be greatly improved through changes in operation, marketing, and management.
Contrary to traditional real estate assets, self storage performs more like a retail store. You have a store in which you sell products. Customers come in and out daily and have unique needs and circumstances.
In the potential self storage markets we studied, most of the product didn’t meet the needs of the client base. Over time, the customers had changed, but the businesses hadn’t. As we looked more closely at the industry, our focus was on the customer, product, and competition.
We saw that we had an opportunity to make that happen.
At the beginning of our journey, my partner and I didn’t focus on things like occupancy or price per square foot. I know, I know … How can you get started in real estate without considering those things? But remember, we were building a business, not investing in a real estate asset.
Too often, owners and managers look at square-footage (physical) occupancy as a gauge of facility success. The higher the occupancy, the better the facility is performing.
But this can be very deceiving. After all, the primary goal isn’t to have high occupancy but to achieve high revenue.
It’s not that physical occupancy should be ignored. It can be a great benchmark across a market to indicate its overall health. If there’s widespread low occupancy, that’s a pretty clear indicator of oversupply.
In other words, if you have a self storage facility with endless amounts of square footage, but all your units are empty, you aren’t making any money and your business isn’t going to be very profitable.
The size of the facility matters, but our primary focus was on making sure our units were full.
None of our potential acquisitions were similar in terms of traditional real estate metrics.
Some facilities were at 60 percent or lower occupancy, while others were at 100 percent. Some were selling for twice as much per square foot than others. Population and demographics were all unique. The facilities were even built differently. Not that those things weren’t important, but they weren’t the determining factors in our purchase decisions.
So, what were we looking for?
We looked for facilities that could be turned around, focusing on opportunities to increase revenue and force appreciation. Some of the sites we purchased had zero upside potential in occupancy because they were supposedly “maxed out”; but they had huge upsides in revenue through rate increases, collections, add-on products and services, and marketing.
We didn’t want to convert every prospect who came through the door. We wanted tenants who were looking for quality, security, and amazing service.
By changing the customer experience, we looked to bring more value. We also looked at the profit per customer. The spread between the cost of acquisition (how much you spend to get the customer in the door) and the lifetime value of the customer (the average monthly rent for the facility times the average length of stay), will tell you how much each customer is really worth.
Then the questions to ask are:
We looked to create a great experience where clients were happy to pay a little bit more and stick around much longer. This allowed us to create true passive income.
It’s important to note that each facility has varying demand for different unit sizes. We understood that these should be analyzed and priced separately.
We determine our rates from size to size and customer to customer. This can be a great tool to maximize revenue and increase the lifetime value per customer. One unit size doesn’t fit all and neither does price.
With the above strategy in mind, we could pinpoint acquisitions that met our criteria. We mined second-tier markets with lots of demand but subpar self-storage businesses where we could bring the most value to customers.
We looked for poorly operated facilities that had lost control of their collections or expenses, were giving away unnecessary discounts or waiving fees. In all cases, these businesses were losing revenue, which can have a huge impact on the bottom line.
When evaluating self storage properties in which to invest, occupancy shouldn’t be overlooked, but it shouldn’t be your primary focus.