Anatomy of a Self Storage Facility Purchase
Last Friday I closed on my 3rd self storage facility that I have bought in the last 5 years. This gives me a portfolio of 340 storage units, a duplex, triplex and 6 single family rentals. Since self storage is a topic that many real estate investors on Bigger Pockets are interested in I thought I’d write a post that covers the hype and realities of what owning a self storage is all about.
Overview of Purchase
The latest storage facility we purchased has 152 units with potential gross rent of ~$8,000. Since I own two other facilities in the same town I am very comfortable on the rental comp rates. The purchase price was $400,000. When purchased the facility it had locks on ~50% of the units. Only about 25% of the units were paying customers. The 25% non-paying customers were anywhere from 6 months past due to over 2 years past due. There were also about 20 units that had locks on them that the prior owner wasn’t sure who was in the unit. Short story is that there is going to be a lot of work to do just trying to get in contact with the tenants and get the abandoned units cleaned out so they can be rented. This will take about three months.
Steps taken since the purchase last week to get the facility back on track.
Step 1: Prior to closing I set up my storage software and ordered new signs for the facility. Our storage software allows customers to rent online, pay online via credit, and receive automatic texts and emails alerting them of rent being due each month.
Step 2: On the weekend after closing I took a full inventory of the units. This is a good CYA move just to document which units were missing locks/contents prior to me taking ownership. This included determining which units had locks, which needed repairs (doors, latches, springs, etc). About 10 units had no locks, but had abandoned items in them.
Step 3: Renumber units to fit our number scheme.
Step 4: Prepare letters to all customers that I had address information on. For customers that are over 6 months past due, we sent certified mail return receipt letters. For units without address or contact info, we put letters on each unit notifying that we had no documentation of them being tenants and they were considered squatters since they had not paid rent during the last 90 days. This also notifies them of our plans to auction contents off in 60 days. Our goal is to get these tenants to move out so our unit can be rented to a paying customer or have the content owner call us and get set up as a paying customer. We never want to auction someone’s contents off. It’s not good for them and it’s bad for us, because there is the potential of backlash from an angry tenant, a potential baseless lawsuit to defend, or just bad press. We do everything we can to avoid an auction.
Step 5: Call every customer individually in addition to the above letters to inform them of the ownership change. Let them know that we need them to sign our lease and get paid up.
Step 6: Install a new sign and begin marketing. Set up the address with Google Business, Bing Business, Yelp, etc to improve search engine optimization. Search engine optimization is critical for self storage. Almost everyone that rents self storage will Google self storage to find a facility to rent. No one goes to the Yellow Pages to look for self storage anymore. Therefore, I have to be on page one of Google when someone searches for self storage in my town in order to keep my facility fully rented.
Operations Going Forward
Going forward will require the basic “blocking and tackling” of running our business systems to get the facility operating at full capacity. I consider full capacity in self storage to be 85%. We typically range between 80% to 97% occupancy depending on the time of the year. Spring and summer is stronger than fall and winter. Based on our last two facility purchases it will probably take 6 to 12 months to fully rent the facility.
So how did I find this storage facility?
A yellow letter. I prepared a list of all of the self storage facilities in my town. Then looked up the address of the owners via property tax records. Took a yellow lined piece of paper and wrote, “I am interested in buying your storage facility. I own two other facilities in town. If you would like to sell or would just like to network with another facility owner in town, please give me a call.” I received one call and was able to work out a deal. Due to a few issues with the access road to the facility it took five months to close, but we got it done.
The Self Storage Myth vs. Reality
The big myth about self storage is that it is easy. All you have to do is buy a facility and people will come and pay each month. There are no repairs since there aren’t toilets, kitchens, carpet, etc. If a tenant doesn’t pay, well that’s great. I can auction off all the treasures and expensive collectables that they left behind for thousand of dollars just like on the tv show Storage Wars.
This just isn’t the case. Operating self storage successfully requires discipline and determination. You have to have systems and place and then follow them. There is lots of collections and each state has different laws on the steps that must be taken to auction a delinquent tenant. If you miss a steps or make an error you are exposed to potential liability. What auction tenants typically leave are old tvs, used mattresses, Christmas trees, old furniture, etc. You don’t typically get anything of real value.
To generate $8,000 in residential real estate you just need ~10 units. To generate that much in self storage you are looking at closer to 150 units. That means you have 15 times as many tenants with 15 times as many issues and collection problems. Tenants also turn over more rapidly in self storage vs residential properties. Most of my residential tenants will stay 18 to 24 months. Self storage turnover is much more frequent. Each time a tenant moves out you have to have someone go inspect the unit and clean it out. Oftentimes people leave trash that has to be hauled to the dump. Good luck getting the tenants to pay for that.
If you don’t have systems in place and someone managing the systems to ensure things are running smoothly things can quickly spiral out of control. Rents get late, trash gets left out around the facility, break-ins occur. This causes you to end up with only bad, non-paying tenants. The good tenants will move-out of a poor performing facility. This is the death spiral of renting self storage.
The three storage facilities I purchased were under-performing due to lack of tight oversight and management by prior ownership. The opportunity for me is that I was able to purchase these facilities at deep discounts because of this.
Moral of the Story
Self Storage, like residential rental property can be a wonderful investment and it has been very good to me. You just have to buy it at the right price and not pay too much. Then you must have systems in place and someone to manage it to ensure it operates at optimal performance. I hope this information is helpful to you as you consider if self storage investments are right for you.