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The Self-Storage Investor's Dilemma - To Buy or to Build?
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This is one of the most common questions I receive when I begin working with my clients. Mostly because the common path presented in the industry is to build. And although it's profitable, it isn't the only way to get into the business, and as I've outlined below, it is feasible to do both. But first, let's briefly compare the 2 paths:
The Advantages of Buying versus Building
There are several advantages to buying rather than building a self-storage facility. These advantages include:
Quick Entry
Quite simply, buying an existing facility will get you into the business faster. Bypassing the development process will allow you to take over an existing operation without the time and hassle of building and creating the business from scratch.
Predictability
Buying an existing self-storage facility gives you a historical track record based on past operational performance. This will provide indicator to the future success of the facility all things considered.
Ease of Financing
Typically, financing an existing facility with a proven history of net operating income is much easier than construction financing which is highly speculative. There is a wide variety of products available to finance existing facilities in today's market. Financial institutions have a large appetite for well performing self-storage facilities and therefore are offering high loan to value loans at very desirable interest rates.
Advantages of Developing vs. Buying
Not Buying Someone Else's Problems
When buying an existing facility, you may be buying someone else's problems that can prove expensive to fix. Be certain to have a licensed inspector perform a physical inspection of any facility you may be interested in purchasing, and be sure to verify all income and expense reports to determine the true Net Operating Income of the property to avoid any surprises.
Choice Site Selection
Developers are free to choose a location far from competitors and be first in an area that is experiencing a high rate of development. As in most businesses, if you are first to market, you can grab onto the customers in that area, and in self-storage, customers typically don't move their stuff just because another competitor comes to town.
Low Start-Up Cost
The cost to buy land and develop a facility is usually significantly lower than the price of acquiring an existing facility, looking strictly at a cost per square foot basis.
Preferred Product
A developer can build a state of the art facility to meet market demand. It is much easier and more cost effective to build a facility with all the new industry "bells and whistles" than it is to retro-fit an older, tired facility with electronic gates, paved driveways, digital video surveillance systems, newer door/locking systems, business centers, kiosks, or adding a retail center and office.
Potential for Higher Profits
If you do your homework and choose a good site, and build a marketable facility from both a user and a potential buyer's perspective, you could reap a windfall of profits upon stabilization and ultimately the sale of your facility. Of course there are no guarantees, but history has shown that developing, and managing a facility to stabilization and then selling has proven to be considerably more profitable than buying and selling an existing facility.
I've taken the approach that it's feasible and logical to do both. We focus on buying existing self storage facilities with expansion opportunity and then construct additional buildings on the vacant land. It combines the benefit acquiring a cash flowing property with the ability to create value through the development process. This is also a much easier path to take in today's lending environment where a large amount of the development funding has disappeared.
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 | Scott Meyers |  |
Scott Meyers, CSSM, is the nation’s leading self storage educator. He travels the country revealing why self storage has become the hottest sector in commercial real estate over the past 30 years that virtually nobody has heard about. Practically every real estate investor and entrepreneur has uttered the words “I’ve always wondered about self storage, I’ve heard those things were cash cows”. It was only after becoming a penniless millionaire in the single family and apartment business, and a near bankruptcy experience managing several hundred tenants and toilets that Scott asked himself that very same question.
Scott is the owner and President of Alcatraz Storage® which operates several self storage facilities in the Midwest. Scott is a Certified Self Storage Manager (CSSM) through the National Self Storage Association and is a Certified Apartment Manager (CAM) through The National Apartment Association. He has been a real estate investor since 1993, and was an instructor of the Landlord 101 course through the University of Indianapolis. Scott Meyers speaks to investor groups nationwide but mostly enjoys spending time at home with his wife and 3 young children in Indianapolis, Indiana.
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