Insider Secrets for Starting a Successful Business

Starting a Self-Storage Business

R.K. Kliebenstein, co-author of How to Invest in Self Storage, shares insider tips about how to start a self-storage facility. He explains the different types of self-storage units, calculating return on investment, choosing a location, the planning and building process, self-storage marketing, and more. [27 min.]

Tell us a little bit about how the self storage business works.

Well, you’ve probably seen these rows of garages along the side of the road, and that’s really where our business started. It was nothing more than a couple of 10 x 20 garage size spaces with maybe a fence around it, maybe not. Early days of self storage we think of the United States in Texas or in Arizona somewhere in the Southwest, but you know, Matt, today the product has evolved immensely, and now we’re seeing it in corners of Main and Second Street, not quite Main and Main yet, but very close to it. You’ll see them located next door to Wal-Marts and Home Depots and other major retailers as we have progressed in our business, technology has helped catapult us forward, and just the entire industry has grown. In the United States there are more self storage properties than there are Wendy’s, McDonald’s and Burger King combined. So that really helps you understand how fast our business has grown, and the need to become more of a retail presence in each community.

What types of self storage facilities are out there in the market today?

You know, there’s a pretty wide variety from what we call first generation, second generation, state-of-the-art and then some new and really exciting propositions that are out there that I’ve coined NXT generation. But you know the old first generation store would be characterized as a metal building with maybe not even paved driveways, a fence around it, may or may not even have an office to it. In second generation, we improved the security by adding an access controlled gate, most of the sites are paved, they use perimeter buildings instead of chain link fences, and most of them have some kind of computerized software at least for the access control to the gate, if not the office. In state-of-the-art stores that would be represented by multi-story, climate-controlled, high security, professional offices with up to 1,000 square feet of retail sales space for boxes and locks and tape, any kind of moving supply that you might need in the use of self storage, and in addition to that you’ll often find those stores being co-located with things like pack-and-ship centers and car wash businesses, or other businesses that provide compatible traffic for a self-storage store. And the NXT generation is the most exciting. If you could imagine fully roboticized self-storage where there’s no humans working inside the building, and the storage containers are brought right down to the entrance so that you can load them and you don’t have to push your things down a hallway anymore on a cart in order to use climate-controlled storage. Very high security, very, very interesting and very expensive.

What kind of return on investment is typical in the self-storage business? What kind of cap rate can you expect?

You know today if you’re going to sell a self-storage project and let’s just use state-of-the-art, the current generation, a good fully-stabilized self-storage project should sell somewhere between a 6.75 and a 7.25 cap on real numbers, not numbers that are hypothesized by a seller or don’t include adjustments for increases in property taxes and insurance and professional management fees, but truly good underwriting for first year of operations, I’d say 6.75 is a good benchmark.

Kind of walk us through the steps most people take when researching and planning and then eventually building out a self-storage facility?

That’s a great question to ask because in our business one of the things we’re astounded at is that there are so many developers out there who build self-storage properties and don’t do any research whatsoever, and then when they get in trouble with the store they really don’t know who to turn to or what mistakes were made, but it’s that early planning stages that will really help. The first thing to do is to select a good site, and self-storage is no different than any other disciplined real estate. It definitely takes “location, location, location,” in order to make it work, and of course we can’t afford to pay too much for our locations, but certainly if you’re going to develop a store or buy an existing store, buy one with the best location possible because it will turn out to be a tremendous benefit in the future. Many self-storage stores that have been built over the last five years particularly were stores that were built on land that was already owned by a family or an investor, and they just decided that self-storage might be a good use for it. And not really thinking the thought all the way through, they’re now in what we call first generation locations, the back of a cul-de-sac in an industrial park, 200 feet off the main street, and those stores are going to have a very difficult time competing when current state-of-the-art stores are built right out on the main road that cut the traffic off to these inferior locations. So one of the primary considerations is site selection, make sure that you’re getting the right real estate even if you have to pay more for it to get it. And then it’s to build a product that’s appropriate for the marketplace. You know in Stamford, Connecticut there’s actually a self-storage property that has gold plated lions out in the entryway as you come in. There’s a product on the east coast United States in Connecticut and New York in the high-end communities like White Plains, et cetera, called Westy’s, and it’s kind of the Taj Mahal of self-storage with marble floors and granite counter tops, they’re just really exceptional buildings. But you don’t need to build that same quality at twenty miles out of Des Moines, Iowa. There, just a simple metal building with good security and lighting is all you really need to make the appropriate improvements. And that’s where most really prideful and difficult owners get into trouble is they just way over-improve the site, and the economics just don’t justify the increased costs most of the time. At the end of the day it’s really space, and when the lights are out the boxes don’t really care whether or not there’s granite counter tops and marble floors.

What about building out the self-storage? Talk about that process, hiring an architect, finding a contractor, that sort of thing.

Depends on what your level of expertise is. Whether you’ve got some of those skills in your bag of tricks. We see a lot of transitional owners into self-storage who at one time were residential builders and they’ve used that expertise to erect metal buildings and to construct self-storage properties. But really once you’ve done your site selection and you’ve found the right location, you want to decide whether or not you want to use a design-build firm who can take that project all the way across the finish line, including the entitlements, the design portion of it, and the owner or developer in that case is very low-touch on the project. They certainly can interject their personal thoughts and desires into it, but you’re using experts to get you all the way through the zoning process, the engineering process, and the construction portion of it, to get it to certificate of occupancy. For those folks who don’t have a lot of time to devote to the process, that’s a very efficient way to get it done. A little more expensive, but it’s very efficient. For those of us who have components where we’re either able to provide either the site selection side of it, or maybe we’re a contractor and we can provide the construction side of it, then you’re just backfilling in to design and management on the getting it open portion of the transaction. Keep in mind that these are pretty simple boxes from a construction standpoint. And oftentimes in communities of relatively small and few impediments to building like Birmingham, Alabama, for example, we have a store in Birmingham where we were able to get our permits with basically shop drawings from the metal building manufacturer and the office and the engineering plan. That’s all we needed, we didn’t need a full set of architecturals to get that done. Of course if you’re going to do that in major communities you’d really have to have a full set of architecturals and good design standards and all of those kinds of support to the store. So it varies very much from community to community, but down the middle of the road again I’d suggest using a design-build firm or an architect. But it doesn’t matter whether it’s site selection, architectural design, engineering or construction, use professionals in the business who have done self-storage over, and over, and over again, because the money they will save you in the mistakes, in the learning cure, will come back and just reward you time and time again. So use professionals who are experienced and have done ten or fifteen of these, not where you’re providing self-storage construction 101 to the provider.

How do you decide how many storage units to build?

Well, a demand study, feasibility study dictates that. It has to do with the population, the number of existing competitors in the marketplace, how old those competitors and how full they are makes a huge difference as well. A self-storage property that’s fully stabilized and doesn’t have any spaces to rent poses very little competitive threat to you. In fact, they’re actually a help because they’re probably running a yellow page ad and have a big sign out there, and they’re turning business away because they have no space to rent. And that’s a problem in our business. Matt, if you think about it, we’re a business of finite inventory. That is to say, if we have 500 spaces, when we rent number 499, we’re one space away from being out of business. It’s not like mobile storage where when you rent the inventory you have on hand you just order more of it, and so we have to be very careful about the planning stages and the unit mix. How many 5×5’s do I build and how many 10×20’s? And that’s largely dictated by the demographics and by the markets and each store is unique in its own manner. And a store that’s five miles from one another can be different in unit mix. So it’s a very specialized process that you go through. One thing you don’t want to do is have your builder set your unit mix, because I could lay out a building for building efficiency and put the unit mix in there that makes the most sense from a construction standpoint, but I always advise clients, you only have to build it once but you have to own it and manage it every day. So build it to the marketplace and build it for your clients, not for your construction costs.

Talk specifically about due diligence and how it relates to the self-storage investment.

There’s two avenues that you really have to carve out. One is a development project where you’re starting from a piece of raw ground which we’ve talked mostly about today, and then there’s the acquisition of existing stores. In the acquisition of existing stores where most due diligence is concentrated, it’s a matter of a good books and records inspection to understand that the seller’s representations on the financial statement from which you’re making your cap rate decision and really your ultimate buying decision, is to make absolutely certain that you understand where those numbers came from and that you verified them. It’s very, very easy to paint a rose-colored glass picture of a self-storage property, and it’s very easy to deceive a potential buyer who may not understand the ramifications of buying a project without doing proper due diligence. The books and records inspection and the on-site audit are the most important parts. Tearing apart that financial statement, understanding what the detailed general ledger shows in terms of entries, and then marking that against the bank deposits to make sure that that money actually made it into the bank, and then juxtaposing those numbers against the financial statements will tell you by the amount of variances how far off it is from what the computer says was collected to what was put in the bank to what’s being reported and the decision you’re making. Another important part is understanding the market, because you want to be able to sustain the rent stream that has been collected, and if there are a lot of new competitors coming into the market that are going to be doing some heavy discounting, you may not be able to count on the same rent stream that you’ve had in the past. Or, if there has been a progression of rent increases year after year because of the strength of that market, going forward you want to make sure that there’s not a lot of new competitors in the market that are going to be diluting those rates and causing a dimunition in your rent stream. So those are all important parts of it. And then there’s the standard real estate stuff. You know, the survey, the legal and title, and the property condition reports. All those are pretty standard in commercial real estate and should not be excluded when working with self-storage. Self-storage is more than a real estate business, this is an active business component, and because it’s an active business component you have to understand the dynamics of a retail store. You know I often tell people that if they think this is a no-brainer easy management business, they’re entering self-storage for all of the wrong reasons. This is a very active and dynamic business component that needs management on a daily basis.

What is the ideal site for a self-storage facility?

Well, I can give you almost a free feasibility study, if you will. If you think about the kind of location that would be appropriate for a community bank. I’m not talking about a Bank of America or Wells Fargo, but I’m talking about your local community bank, that’s the kind of site that’s relatively appropriate for storage facilities. Let’s forget size for right now. But that site’s going to be on a major retail corridor, it’s going to be located in close proximity to commercial and retail businesses, and very nearby those retail commercial business are going to be a large number of rooftops. It’s not going to be located within an industrial park, it’s not going to be located at the end of a cul-de-sac or down a side street. It doesn’t necessary have to be on a hard corner, although that would be nice, and certainly the big banks would require hard corners, this can be one lot off the hard corner and maybe wrapping around a CVS or a Walgreens or some other kind of use on the hard corner. A typical self-storage site if you’re going to build single story is going to be 3-5 acres. You’ll want to have about 25,000 cars per day in traffic count. You’ll want approximately 25,000 people in your primary trade market, and those are all key indicators of sites. If I had a site on either side of the road, they were exactly identical in cost, size, in every other way, I would take one on the going home side of traffic rather than the going to side of work, and that’s because when people are going home at the end of the day they are more likely to rent self-storage than they are on their way to work in the morning, but all things having been equal, just make sure that the site has good frontage. You don’t need 300 or 400 feet, 150 feet will often times accommodate a self-storage project, and make sure that it’s highly visible and that it works well within the community. Zoning is probably going to be your toughest part because many zoning codes exclude self-storage from higher and better use locations. A six-acre parcel is a good big box retail parcel and many communities would rather have the jobs that are generated and the sales tax that’s generated by a retail business rather than self-storage. But those are the opportunities that I find the most intriguing because they mean that there are less barriers to entry for myself once the deal is done, and more for the people who want to come behind me, and so it means stronger and more consistent cash flows when it’s harder to business in that community. So I like fighting for the really tough sites.

What kind of financing is usually available to people who build self storage facilities? Can you recommend any lenders that are particularly good to work with?

I can. There’s one national lender and it’s Wells Fargo’s Self-Storage Division, a guy by the name of Glen Bouchard. They have a program called a mini-perm which means that you essentially get two years of interest-only as you’re developing the project and constructing it, and then three years of increasing amortization as you hit certain debt service coverage targets. That’s a great loan. In the banking business we’d call that a mini-perm, and you don’t want to build a self-storage project without a mini-perm. The primary reason for that is is that it may take you only seven or eight months to construct a self-storage property, but it may take you between two and even five years at the maximum end to get it filled up, and as a result of that, the filling up process or getting it to stabilization and lease up is extremely important because it takes time to do that, and if you were to try and go out and refinance that property and take out your construction loan during the process, you may not be able to find a lender who’s willing to do that, so it’s important that you get the right kind of financing from the very beginning.

What about buying an existing self-storage facility. When you’re looking at financial data are the numbers pretty straight forward, or are there some pitfalls you really need to be watching out for?

Well, Matt, you really hit a hot spot there with me. We look at probably a hundred broker’s packages a month on self-storage projects, and I rarely find one that accurately represents the true financial condition of that property. There’s so much “puffing” going on in the marketing of self-storage projects today. Overstated revenue expectation, understated expenses, that that’s the part that someone has to be the most careful about. In fact, we are brokers, and we won’t take listings because we refuse to play the games that need to be played in order to get a listing today in the self-storage business, and so as a result of that we will only represent buyers because we know how to extract from the financial data that the brokers give us the truth to figure out what the true value of that property is. You want to be very careful about things like understated management fees. The standard in the industry is 6%, so if you see a broker’s package with either no management fee or a 3% management fee, immediately you’d be suspect about the rest of the expenses that are there. Also a clue for me is when I look at a broker’s package and it says that the trailing twelve or the last twelve months income and expenses, they all end in zeros, well you and I both know it’s almost impossible for every expense category to end in zero. I don’t think that it’s necessarily just because they’ve rounded up, I really want to know specifically how much that was and tie it out to an exact number. On the revenue side of it, the places that get cheated the most in terms of inching up the income is either on the level of occupancy where their economic occupancy is today, or what the forecasted rental rates are going to be. And quite frankly, the reality of the situation is just because you buy a self-storage property doesn’t mean that it’s going to go up ten or fifteen percent in occupancy, especially if it’s more than four years old, the market has stabilized. You have to ask how come the current owner wasn’t able to achieve those occupancy targets? And what’s most important about that is remember the current owner’s getting paid thirteen or fourteen dollars for every dollar of revenue based on cap rate that they have more incentive than anybody else in the world to have extracted every single penny out of that they possibly could have, so to put a proforma out there that says today the occupancy is 76% but the new owner and the proforma is at 90% immediately throws up huge red flags, and it’s just not likely to happen and so many properties have been purchased with the anticipation of that increased occupancy and it just never materializes as the brokers often report it to.

What other kind of add-on businesses can complement a self-storage business?

Well, now you’re getting me really excited because that’s what our company has been working on over the last few years is to find store-within-a-store concepts to make self storage operations more profitable, and we’ve identified some key businesses that work in nice combination with self-storage. One of them is pack and ship, another is records management, we’re working with a national provider of propane cylinder exchanges, we have a relationship with Add-It, which is an eBay seller that actually helps to set up auctions, that’s a great profit center for self-storage, and more importantly all of these products create commercial door swings which are what you’re looking for to increase that traffic at the self-storage store. Car washes make excellent co-locations with self-storage, just because they bring the exact same kind of traffic to the door that you want for self-storage.

Is there software out there that’s dedicated for the management of self-storage?

There are several self-storage software applications out there that are written specifically for the management of self-storage. U-Haul has a program which is a very good program particularly if you have U-Haul trucks at the location. It’s a browser-based application that, quite frankly, I can dial into my store in Birmingham and see payments being made real-time. A company out of Salt Lake City, Extra Space Storage, through a division of their company, has one called Centershift which is also browser-based. Then there are some good windows applications that are out there. I recommend SiteLink, SMD Technologies has a program that is very very good and standardized in the industry, and then there’s a friend of mine over in Hawaii, Mike Richards, who has a product called HI-TECH. Most of the self-storage applications, if they’ve sold more than five thousand copies in the lifetime of the company, are going to be good applications that can be trusted to help you manage the self-storage product.

Describe some creative ways to market a self-storage business.

Well, Matt, you know there are the traditional ways which have been used which has largely been dependent upon the yellow page ads, but with the advent of the Internet taking a bigger role in all kinds of businesses, self-storage has also been a beneficiary of getting into the information superhighway and learning how we can use that as a marketing tool. From very simple just putting up a website all the way through to having your inventory available online with rentals online. A number of different portals are out there. Online Self-Storage and Self Storage Advisors are some of those that are out there, where you can actually put a listing for your property there and they will help to market the site and to produce rentals for you. And so there’s a number of different ways to do that, but marketing on the Internet is becoming more and more prevalent. We choose to vest very heavily in signage because drive by and convenience is still the number one reason people choose a self-storage location, so it makes the most sense that we get that message out to as many people as possible. Now, of course, signing ordinances in different communities prohibit us from doing what we’d really like to do, but in a perfect world a good large sign with a digital time and temperature and electronic reader board would be preferable at almost every location. We opened up two stores in the Birmingham market without a yellow page ad, just with the line listings, no display ad whatsoever, and we vested that money instead in the signage out front. We understood going in that to place a yellow page ad and be with two hundred other competing stores didn’t make as much sense as it did to spend forty or $50,000 for a great sign and to use that as our entrance to the world to let them know where we are. Because it’s a neighborhood business it seems to work best. There are other methods to market self-storage properties as well. The Val-Pak coupons, local mailers, are all good, but we would make sure that we advise clients that typically newspaper advertising, radio and television advertising are not cost effective methods because they reach too many people that are outside of the 1 to 2 to 3 mile radius that might be a typical self-storage draw for customers. So there’s no use in sending the message out to 500,000 people, when really only 10,000 of them are potential customers.

Are there some good trade magazines related to the self-storage industry?

There are. There are several that are out there. The number one publication in our industry for owners is Inside Self-Storage. The second magazine that’s the most popular is The Messenger, and The Messenger is published by MiniCo, and the Self Storage Association, the national association, also has a publication they call The Globe. All of those are pretty good publications. In addition to that there’s a number of minor publications that are put out by state associations like the Florida Self Storage Association, the Texas Self Storage Association, and many of the others have newsletters that are not full publications like the ones that I’ve previously mentioned, but there are some good publications out there. We really like Inside Self Storage because they have an archive button up in the upper right corner of the website, I believe, where you can type in any subject whether it be management or marketing or development, and it’ll return back over the last three years all of the articles that have been written about that topic.

Tell me more about self-storage trade organizations and trade associations.

Well, the national association is our true representative in the industry, and they’re spending money and time and effort on legislative issues and really getting for the first time in the last few years some good statistical data about our industry, but by and large your state and local associations are really where the time is best spent, because they’re doing things right in your community and right in your locale. I think there are some thirty state associations across the country that serve not only the local owners and operators, but those who may just have one or two stores in that market but they might be headquartered someplace like Salt Lake City. The two largest associations are the Florida Self Storage Association and the largest-in-the-industry state association would be the Texas Self Storage Association.

What about websites and forums? Where do people in the business go to network and to get new ideas?

The Self Storage Association has a forum. There is a forum on our website, and we actually link to another forum which is called Self Storage Advisors, and we found it to be one of the best resources in the country for forums and so we actually link directly with them. also has a very small forum.

What are the biggest mistakes people make when getting started and how can they avoid them?

The biggest mistake besides choosing the wrong location and not performing the due diligence and the feasibility portion of a site selection, and that’s a very important component because this is a “location, location, location” business. There’s no question about it. As much as you might want to try and get away from that old axiom, you simply can’t do it in self-storage. The second biggest mistake that’s a little less thought of is the incorrect financing of your project, particularly as it relates to a development project. Getting too short of a construction loan and not having time to ramp up to get the kind of qualified cash flows that lenders are looking for can put an owner at a significant disadvantage when they go to take out their construction loan. Typically the best loan that you can get would be called a mini-perm, which would be two years of interest-only to get you through the construction and the very beginning of lease-up, and then three years of increasing amortization that gets you to a point where you have stabilized cash flows, so at such time that you go to refinance that property and put a conduit loan on a non-recourse relatively high leverage loan, the correct project, one that’s the best conceived, will allow you at that time to recoup all of your equity in the transaction, ergo now you have a project with an infinite level of return, and that is one of the perfect principles of self-storage.

R.K. Kliebenstein is co-author of How to Invest in Self-Storage and president of Coast-To-Coast Consulting, a nationally-recognized firm specializing in self-storage feasibility studies, consulting and financing. He has over twenty years of experience in the self-storage industry.