What’s a Self Storage Business Worth?

Views: 37 Comments: 0 0 Post Date: October 6, 2020

Rule No. 1: Never lose money. Rule No. 2: Never forget rule No. 1. – Warren Buffett

This rule is applicable to very few businesses, and even fewer bricks and mortar businesses. Most businesses are at the whim of the economic cycle. A handful of non-technology businesses do well when times are dire.

Let’s see what a self-storage business is worth…

Self-storage is one of the most profitable and stable real estate investment there is. No wonder there are over 50,000 self-storage facilities in the US, with $40 billion in annual revenue, and 80% of them are owned by individuals or private investors. With globalization, this business is growing rapidly in Asia and Eastern Europe.

Here are the FOUR BIGGEST TRENDS in this business –

  1. Technology – is making this 70 years old business come to life. New apps that are like Uber for storage coming online. Marketing being done 100% online. Automated kiosks are saving on operational costs. The latest security advances are making it easy to control theft, damage, and reduce insurance costs. Management software making it easy for investors to see their cash flow minute by minute. Online retailers wanting ever-expanding warehouse space with big financial commitments.
  2. Aesthetics – gone are days of driving up to a dilapidated storage building. Self-storage builders now work in tandem with local municipalities and leaders to match their buildings to neighborhoods and comply with zoning laws. Since over 60% of customers are women, bright colors and good landscaping project cleanliness and safety.
  3. Millennials and Boomers – both demographics are about 22% adding to 44% of the population. Millennials don’t believe in buying homes and prefer renting and being transient. While baby boomers are downsizing and living in smaller homes.
  4. Valet and portable self-storage – customers are now looking for white glove services. They are used to getting things done with the push of a button. Many new portable storage companies have propped up that bring the storage to you, and haul it away until you are ready for it to return.

 

 

  • Remember V = B/C from Episode 1?  This is where we use it.
  • B for self-storage businesses is NOI (Net Operating Income).
  • NOI = Revenue – Expenses.

Expenses include everything that is required to operate the business. Including property taxes and excluding any loan payments.
Revenue is Gross Revenue after any concessions or discounts.

  • C is the capitalization rate. Or the cap rate. Which in simple terms is the cost of owning the business. The lower the cap rate, the higher the value.

In the self-storage business, the cap rate can vary between 6.5-8%. New buyers beware that the NOI will adjust after the transaction, especially since property taxes will be reassessed. Smart buyers appeal tax assessments and get them reduced.

Three tips that can help increase the value of an existing facility –

  1. Maintenance and aesthetics – a simple paint job will go a long way. $20k spent on paint contract can increase your business’ value by 50-100k.
  2. Good records – keep track of your tenants, cash flow, bank statements, tax returns, property documents. Renegotiate leases. Increase the economic occupancy of your business.
  3. Security – add biometric and keypad entries to the compound and buildings.

Who knew the simplest businesses can be so stable and profitable. This business is not glamorous. But if you are looking for a real estate heavy investment/business. Look no further. This investment is better than any multifamily or commercial complex.

Bharat Kanodia – Founder and Chief Appraiser

Print

Share this post