Ask Scott: Estimated Expenses

“Hey Scott! When elevating Storage Units what rule of thumb do we use for estimated expenses?  50% rule?  60% rule because it is commercial?  When calculating vacancy and bad debt, do these have rule of thumb too?  Thanks!”

Hello!

An existing Facility that’s being properly managed should have an expense ratio of 32 – 35%, that is the industry standard.  Certainly some factors, e.g. size of the facility, occupancy, geographic location (property taxes, hurricane or flood insurance) can effect this percentage.

We consider a “stabilized Facility” to be 85%.  (It’s a range as some folks say 80% and others 90%, so I split the difference.)  Meaning if it’s below that you need to increase occupancy, and if it’s above that then your rental rates should probably be raised.

“Bad debt” is typically lumped into the industry term of “economic occupancy” and which includes delinquency, free units, rates lower than street rate, etc.  To answer your question, 93% is a good indicator of the number of accounts that should be current and in good standing.

Please note that Minico puts out a guide to underwriting self storage every year with industry norms across the nation on all of the expense categories.

I hope this helps.

Scott

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