One of the fastest growing industries is the self-storage industry. This industry had almost $32.7 billion in revenue in 2016. By the year 2021, it is expected to grow 3.5% each year. There are numerous ways to begin a self-storage business, including one-man, low-budget operations to self-storage businesses with equity investment partners. The information in this article is dedicated to teaching you how to begin a self-storage business on a low-budget. The key to a successful self-storage rental unit business is to complete a feasibility study to help you determine the best location for your business to ensure it is profitable.
What You Need to Begin
To begin, we will assume you will not be building a new rental facility because that will cost thousands. Instead, you should think about finding an existing facility that can be transformed into a self-storage unit business. You want a storage facility that already has a sufficient number of customers to ensure that your business venture is successful. You want to ensure that your rates are fair and are what your customers are willing to pay.
This seems obvious; however, this venture has had many failures because entrepreneurs have not done their research and developed an executable business plan. Sometimes, the market is saturated with other self-storage locations and does not need another self-storage business. Another issue is that entrepreneurs did not properly research the startup and operational costs associated with self-storage units. If the market does not have strong enough self-storage rates, your venture could fail. Oftentimes, a combination of these factors is the reason that storage businesses fail. When the market is too saturated, owners lower their prices to be more competitive. Unfortunately, this often does not bring in the money needed to run a successful business.
Rental Storage Demands and Rates
If possible, hire a feasibility consultant to help solve many of the issues surrounding a startup business. If you cannot afford a consultant, do the feasibility study yourself by assessing the demand for rental storage facilities in several market areas that offer favorable zoning regulations and high traffic areas. Two questions must be answered. Luckily, you can find this information out by chatting with an employee. These questions are:
- What is the average occupancy rate? (This information will help you determine if this is the ideal location. You want an occupancy rate of 90 percent or better)
- What is the rate per square foot? (This information will help you determine your profit potential)
After you get these answers, you are ready to shop for an affordable location. When looking at buildings, remember that the conversion costs will vary and must be taken into account. The following example will help you better understand this:
You find a location that offers high traffic levels and an occupancy percentage greater than 90 percent. The average cost of a 10 ft by 10 ft facility is $200 per month ($2 per square foot). The building offers 10,000 square foot for lease at $6500 per month ($0.65 per square foot). At face value, it seems you could make a profit at this location; however, there are other things that should be considered.
- Space that can’t be leased. Storage facilities will need space for a business office, corridors, and elevators if needed.
- Conversion costs
- Operating capital
The three-story 10,000 square foot facility may require 30 percent of the square footage for these items, which will leave approximately 7,000 square foot of rental space. When you divide the rent of $6500 by 7,000 square foot, it comes to $0.93 per square foot.
If the occupancy rate is 92 percent, this should also be taken into consideration. This means that only 92 percent of the square footage will be rented. As you can see, there are several things to consider.
Understanding Net Profit
Net profit is the money left after all expenses associated with the business are paid.
Every facility will have conversion costs. Assuming you take out a loan for your conversion, you will need to take the monthly loan payment into account as well. Additionally, other industry givens should be considered, such as giving prospective tenants the opportunity to receive one to three months free when a one year lease is signed.
Advertising and promotional costs along with beginning a new business should be considered. You will not magically go from 0 percent occupancy to 92 percent immediately. You must have enough startup money to sustain you during this period, which can take six months.
All businesses require local permits and your business license. You should begin by going to your state’s Secretary of State website and register your business’s name and entity. An attorney will help you determine which type of business entity (sole proprietorship, a limited liability company [LLC], or corporation) you should choose. You will need to get a tax id number from the IRS. All of this should be done prior to visiting a bank to request funding or to open up a business bank account.