How to Start a Self Storage Business

You’ve probably read from Inc. Magazine or Wall Street Journal or Entrepreneur Magazine why self storage is the fastest growing sector of real estate and small business in the U.S. over the past several years especially during this recession.

I was like you several years ago, an almost bankrupt landlord in the tenant-toilet business with over 400 apartments, office buildings and single family rentals until I found self storage and the benefits that it holds, and I sold off everything I had to invest in nothing but self-storage.

There are several reasons; the first of which is the fact that there are no tenants or toilets or trash in self-storage. You only have steel walls and a concrete floor and if the tenants don’t pay you, you can lock them out and auction all their stuff off.

Also, it works in a good economy and a bad one. In a good economy, people buy more stuff and they need to store more stuff so they take it to self-storage. In a recession, people and businesses are downsizing, so they need a place to store their extra stuff until things turn back around.

The financing is also much easier to find compared to all the other asset classes. Self-storage has the lowest loan-default rate in any form of commercial real estate, about 6 to 7 percent versus 50% for apartments, which means that banks favor lending money to self-storage.

Self-storage is also very easy to run and manage. Several of our facilities are actually run by a kiosk that looks like an ATM machine. People can drive in and get their picture taken and their card or cash accepted, sign a lease, and access their unit outside of normal office hours.

There are also many additional profit centers that you can add such as U-Haul, truck rentals, locks, boxes and moving supplies, records storage, business centers, and the list goes on.

Top Three Mistakes for Newbie Self-Storage Investors to Avoid

Self-storage is one of the best new businesses to invest in today, with over 24 million units in the country and almost 1 in 10 households having rented one. Demand continues to rise, either from our insatiable need to acquire more stuff and store it somewhere or from the current recession which causes downsizing companies and families to look for additional storage space.

Also, Self-storage has higher returns than any other form of commercial real estate. The next closest investment is apartments at 8.8% compared to the national average of 34.5% for self-storage.

But you have to do your homework.  Here are the top three mistakes to avoid if you’re interested in investing in self-storage:

Improper Analysis

A lot of new investors have difficulty finding out if they’re overpaying for their units and actually knowing how much it’s worth. There’s a lot of apprehension here that can simply be solved through the use of self-storage software that analyzes deals, the most widely used being www.selfstorageanalysis.com. This software helps you get down to the bottom line so you know exactly what the important figures are for your business, all but eliminating any guesswork.

Moreover, you should also take a look at the market to determine if it will support the facility? You also  need to find out what the supply index is in a 1 to 5 mile radius around your self-storage facility. You also have to check your competition – can you beat those already there and how hard will that be? Plus, what’s the overall demand in that market – are people moving into the area, are they finding new jobs?

Plan, What Plan?

A lot of people make bad deals because they were structured incorrectly and weren’t able to create enough value in the facility to refinance it. Sometimes there’s no operating agreement between the debt and equity partners which causes the deals to go south. Investors are also wary of hiring an attorney because of the expense, so they don’t have someone to look at the deal structure or the operating agreement. Other mistakes include poor due diligence and not having an exit strategy.

It’s Not an ATM

One thing that people have been saying about self storage is that it’s a cash-cow — that once you set up, you can forget and just let it bring in the dough. It’s not an ATM, folks, it’s a business and you have to treat it that way. You need to have process-based management in place and you need systems that will help you run it such as kiosks and web-based software.

A solid marketing plan that helps you determine where you’re going to be and what you’re targeting is essential. Just advertising in the Yellow pages isn’t enough. You want to dominate your local competition – you need to get all the eyeballs from five miles around your facility to your website and your facility.

Finally, after you’ve stabilized your business, you also need to consider expanding and adding the profit centers mentioned above. Building new buildings and offering value-added services such as truck rentals, boxes, locks and moving supplies will help you improve increase value and force the appreciation of your new asset.

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