How Much Money Do Self Storage Facilities Make?

May 25, 2022

 

All right let's get down to it. How much money do storage facilities make? If you're going to go out and invest or buy a storage facility, how much do they make? What is the profit and how does that work? This article is going to cover everything about thatsmall, medium, and large facilities. We're going to get down to the numbers and we're going to go through what you should expect as far as revenue and profit. There are a lot of variables when we're talking about how much storage facilities make and I’ve got a bunch of examples and I’m going to go through a lot of scenarios so you can see what the net profit would look like under different types of facilities location, charge, size so you can have a better understanding of the process. 

When you're going out into the market and you're looking at facilities, and you’re wondering, “How much does that thing make?” It can be all over the board. Obviously, I can't consider every single variable. I can't even try to do that because that would be way too much. One of the parts I’m leaving out is financing. The reason I’m leaving it out is that it depends on many factors. Factors that depend on interest rates that depend on other variables: 

  • Where things are going. 
  • What the economy is doing. 

And these things change all the time. So, I’m leaving that part out and we're just going to talk about how much it makes before you pay the loan. Simple math can show you what your net profit after your loan will amount to. Let's get to it! I break these things down into three categories. I’m breaking them down into small, medium, and large. To give you context to what that means in self-storage, everything is done by square footage. I’m going to give three examples of revenue associated with a certain size and the expense ratios that can be expected and what that looks like as far as net profit goes or how much you would make. If we're looking at a small facility, let's say it's 20,000 square feet at that facility. You can charge on those 20,000 square feet roughly 50 cents per square foot. At that rate you're going to make about $120,000 a year. $120,000 in gross income. Now the real question is expense ratios. 

There are two ways to go about it, but I’m going to go the standard way to start out. The smaller the facility is, the larger the expense ratio percentage of income that you need to cover those expenses. Why? Because there's not as much revenue. It's 40 to 50 percent of the expense, maybe even more. Sometimes the big trend, and what I suggest and what most people are going towards is the automation of small facilities. That's the reason why that expense ratio is just so large and with automation, you can take out a lot of the expenses that are involved with people manually managing those assets. That is really the way to make small facilities work, but we're going to keep and show you how you may be underwriting a small facility. You may be looking at it as a 45 percent expense ratio at $120,000 gross revenue that leaves you with roughly 54,000 dollars in expenses. That gives you sixty-six thousand dollars in profit. Now small facilities can be even cheaper than fifty cents a square foot. You can see these in third and fourth-tier markets at 30 cents making a lot less money, but that should give you an example right there of what that may look like. Now the three categories I go into as far as revenue per square foot are 50 cents per square foot, a dollar per square foot, and two dollars per square foot. This is generally associated with marketplaces. The bigger the markets go, the higher density of the population, the higher demand, and the higher the charge are. So, if you are charging a buck per square foot on 20,000 square feet, you're going to make around $240,000. That leaves you with about a hundred thousand dollars in expenses so you should be expecting a hundred and thirty thousand dollars right around there to be making at a buck a square foot. 

The key to this is to lower that expense ratio. You can see it takes a lot out of that gross revenue and with small facilities that are the name of the game. The next example at two dollars a square foot is kind o uncommon. When you're dealing with small facilities that take you all the way up to $480,000. So, with a $256,000 expense ratio on that, you're left over with $264,000. That is generally not what we see in small facilities. That two dollars a square foot charge, the reason we use square feet and the reason we charge on a per square foot basis is that in storage facilities, size ranges all over the place. I may have 20x20s and 5x5s a 5x5, I may get $2.50 a square foot but at 20x20 I may get 20 cents a square foot depending on the market and the demand. So, we want to even out and I’m targeting all the square footage to even out above a certain point. I can measure it and look at the upside and the ability to move those rents up. Overall, that's the game we play. 

Now we're going to go up a size and talk about that. In medium-sized facilities, these can still be automated. They're not traditionally, but they can be. The reason being is when you're dealing with 50 to 100,000 square feet which I’m going to use as a middle ground around 80,000 square feet. So, if you think in terms of traditional drive-up storage, five acres gives you around 80,000 square feet let's say that's around 600 doors. Now, in this facility that you have that are a lot of people coming in and out. That's a bigger property. There's usually on-site management. Even if you co-manage it with streamlined technology that allows for automation, there still needs to work. You can lower your employee count through automation, but because it's bigger the expense ratio is lower. 35 percent expense ratio is what I underwrite at. That's probably what you should be underwriting too. Okay so, we're sticking with a 35 percent expense ratioit may be higher and lower when you're looking at it and underwriting. The real key for me though is what my expense ratio is and that's what I understand, what I know and that's how I underwrite. Now, if I’m looking at an 80 000 square foot facility and the seller says that they have an expense ratio of 20 that's not that's laughable I’m not going to underwrite it at that because that creates their cap rate which is based upon a percentage of what you'll make off what you're paying for it. It inflates the value of that because if you take all that expense, that goes to net profit which changes how much you'll make. So, you can take a facility and by lowering that expense ratio you can add hundreds of thousands of dollars, if not millions of dollars, onto the value of it by artificially lowering that expense ratio. We see it all the time. I was working with the facility that a broker took to market on that facility. Their expense ratio was 10 percent. They included no labor, in which they had labor, their taxes hadn't readjusted for the new price which was a hundred percent increase in the total tax. They didn't include labor taxes as well and a lot of other things that weren't included. When you include it all in, it was 35 percent. They had all these people that were trying to get this facility. They were looking at it. After we showed them how to underwrite it, they went back and added in 35 percent. It dropped it by a million and a half dollars and then the seller took it off the market and didn't want to sell it anymore. So, you need to make sure that you don't get trapped buying something at an expense ratio that is artificially low. 

Alright, if we're dealing with 80,000 square feet and you're charging 50 cents a square foot, you're going to take around 480,000 to 500,000 dollars. You're going to have about $170,000 worth of expenses associated with that. That gives you a net profit of $315,000 or approximately 300 thousand dollars plus. This is great cash flow. The margins on these you can make, and can be very large. That's why buying them correctly is so important though because that's where you can get trapped. 

Now, I’m going to jump past the dollar scenario and we're going to go all the way up to the two dollars scenario. We find this more often in first-tier markets coastal expensive markets than on 80,000 square feet you're talking almost 2 million dollars at that point. You must understand though we're also including things like insurance that can boost the level of revenue per square foot. I’m not going to get into too much detail about that, because we have other videos and articles for that. 

At two million dollars though, your expense ratio starts to lower because most of those expenses are fixed. Just because I added on 20,000 square feet doesn't mean I need another person. It doesn't necessarily mean our utilities are skyrocketing or anything else. That's the benefit of scale. That's the benefit of going better. So, off those two million dollars you're probably going to make approximately 1.3 maybe 4 million dollars if you're maximizing it and that's kind of why we left the small ones and got into the big ones. The expense ratio helped us. It gave us scale and more revenue to play with and reinvest. It also diluted risk through unit numbers. 

Alright everybody, the Big Berthas! These are the big boys, the hundred thousand plus square footage facilities. We like these. We have a lot of them. With a hundred thousand square feet, you're typically seeing 50 cent revenues in much smaller markets. That is a lot of square footage at a low rate. The thing is you can still make good money. You can make $800,000 off 130,000 square feet with $250,000 worth of expenses. You're going to make six hundred thousand dollars off that, but the power is that revenue being pushed upwards. You go up to a dollar and you're already at $1.5 million in gross revenue. Once again at this size, your actual expense ratio starts to shrink. Go up to two dollars and you're already over three million dollars in revenue. That gives you a net profit of $2.2 million to $2.3 million off that. 

Once again this is before financing because of all the reasons but your expense ratio starts to lower so the thing you need to remember is that middle ground facilities usually need some type of automation plus management. So, they tend to have around a 35 percent expense ratio. With smaller facilities, the expense ratio is higher so if you can get it to lower that's great, but you want to underwrite it at a higher ratio because when you lower it and automate it you want that profit. That's how you make these small facilities so profitable. I’m buying it at a 45 percent expense ratio but I’m running it at a 35 percent ratio and I’m taking the rents that were at 50 cents generating $120,000. I’m taking them to a dollar. That's $240,000 and dropping my expenses down from $100,000 to $50,000. You just added a lot of money to that facility and a lot of revenue into your pocket. That’s a lot of cash flow. With the big ones, this is much more professional management. This is a lower expense ratio but it's higher intensity on what you need to do as far as dynamic pricing, modeling out units, playing with demand, skilled set marketing to get people in, value presentation offering, all of that because you're trying to get that per-unit price up.

At the end of the day, no matter what market you're in if you're in 50 cents a square foot market or a two dollar a square foot market the goal is to find the opportunity at the lower revenue per square foot and get that revenue up. I also combine this with expansions. I may buy at a low revenue per square foot in vacant land so that I can up the revenue and expand the facility increasing the facility size. Those are home runs. I love those types of assets. no matter how you do it though it's all determined by demand. Demand determines everything so you may be asking, “How do I get that increase? What do I do?” Luckily, we have a great article and video on that. It's called, “How to Double a Self-storage Facility's Value”. we go over all the supply, demand, and the things that you need to do to increase the facility revenue. Check it out and all the other videos and articles on making self-storage a profitable wealth-creating venture for you.

 

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