How to Start a Self Storage Business in Today’s Market

You’re about to discover how to start a successful self storage business in today’s market. You’ll learn the 3 keys to establishing a profitable self storage operation as well as meet a self storage business owner named Dean who, starting in 2019, has acquired 3 self storage properties and now has a thriving storage enterprise. Plus, you’ll find out how Dean got started, the details of how he bought those 3 deals as well as his top 3 tips on starting a self storage business:

 

3 Keys to Starting a Self Storage Business

Key #1: Find Self Storage Businesses that Qualify for the Best Loans

Look for self storage businesses that cash flow enough to qualify for the best loan options. The property doesn’t need to cashflow tremendously, but at least enough to qualify for a 10% or 15% down payment using either an SBA Loan (Small Business Administration) or a local lender.

Key #2: Self Storage Sellers Open to Owner Financing

When you concentrate on off-market properties, you can work directly with the owners. That allows you the ability to potentially structure seller financing. And there are 3 versions of owner financing that you can negotiate:

• Master Lease Agreement
• Seller Financing 1st Mortgage
• Seller Financing 2nd Mortgages

Key #3: Self Storage Properties with Opportunities to Increase the Income

Rather than seek out a turnkey self storage facility that is already at its peak financial potential, look for properties with opportunities to increase the income. Examples would include; sites with vacant land or unfinished space that you could add more units; or adding climate control to some of the units; or even adding a cover to previously open RV or Boat Storage. When you increase the income, you raise the NOI and that ultimately increases property value.
 

How Self Storage Business Owner Dean Got Started

Dean started his self storage business in 2019 after spending months learning about self storage investing online. Dean tells it this way,
“I’d watched probably every video that you had ever sent out. And it was something about you, Peter, that I liked. There’s lots of people out there that want to mentor people in the commercial real estate world, but it was you and your approach and your content that appealed to me. So, I made the call, probably about this time in 2019, and Holly and I, we signed up, and six months later, there was an opportunity that came about with my company where I could exit the business and get out all my equity and start a self storage business.”
Dean followed our instructions on how to find the best deals and shortly after getting going, he locked in his first deal:
 

Dean’s 1st Self Storage Deal: Distressed with Expansion Potential

Property Description: Distressed 9,100 square feet, 52 unit self storage facility with an extremely motivated seller. The owner was a school teacher who had taken her life savings and invested it into this property. Since she was living off the income from the business, she didn’t reinvest in any improvements and over time, deferred maintenance took its toll. For example, during one of his inspections, Dean encountered two raccoons walking along a desk in the office space. It was a jungle, with overgrown vegetation growing into some of the units!

Purchase Price: The asking price was $495,000 and it was roughly 20% occupied, so it wasn’t generating much income at all. Dean was able to negotiate the purchase price down to $274,000.

Financing: Dean negotiated owner financing, specifically the Seller Financing 1st Mortgage version. Dean put down a sizable down payment and she financed the remainder at 4.5% interest on a 30 year amortization but it also came with a 3 year balloon.

Stabilization: Dean invested $20,000 in repairs to get every unit rent ready. He was surprised to learn that he was able to get tenants for all his vacant units very quickly after he got it cleaned up and the space usable. He also implemented software that specializes in supporting a self storage business to help automate the rental process. Once all 52 units were fully leased, his net cash flow was about $3,000 per month and the property value increased to $500,000.

Expansion: This self storage property also had room for expansion, including converting the office space into storage as well as adding 10 climate controlled units, which could add another $2,000/mo in cash flow. Dean did a cash out refinance, paying off the owner financing 1st mortgage as well as providing him the money to expand the property (and buy another self storage business). As of today, Dean’s 1st deal is fully optimized and earning more than $5,000 per month in net positive cash flow and is valued at more than $700,000.

 

Dean’s 2nd Self Storage Deal: Stabilized with Expansion Potential

Property Description: Stable, 15,000 square feet, 115 unit self storage facility with owner eager to sell the property. The owner had a total of 4 storage facilities and this property was much further away, geographically, than the others.

Purchase Price: $995,000 and it was 80-87% occupied. During negotiations and due diligence, the property went to 100% occupancy. Some of that was because Dean’s other property was full, and he was referring customers who would call him looking for space.

Financing: For this self-storage deal, Dean used a conventional loan with a local community bank. The catch with this property was that all the seller’s rental agreements and transactions were handwritten on small note cards. Dean knew this would present a problem with financing, so they put together rent rolls electronically and presented a nice package to two local lenders and SBA. In the end, they decided to go with one of the local banks which offered a 85% loan to value with a great interest rate over a 25 year amortization.

Monthly cashflow: Cash flowing $7,000 from day one.

Expansion Potential: This self-storage property has the potential to add 19 or 20 10×15 climate controlled units. And he can charge a monthly fee of $150 per unit, which is $3000 a month. That is an increased cashflow of $36 000 per year. At a market cap rate of eight, he will add $460,000 in equity and forced appreciation to the property when this expansion project is done. And it’ll cost him a fraction of that upside to complete.

 

Dean’s 3rd Self Storage Deal: Master Lease Agreement Opportunity

This deal came about through relationships. The husband of one of the owners of this property, was someone Dean had known for many years working together through a nonprofit organization. He found out about the property and that the family might be interested in selling through another relationship. So, Dean approached them about a year ago. Then a couple of weeks ago, he received a telephone call out of the blue and they said, “We’re ready to talk and we’re coming to you first.”

Property: 119,000 square foot warehouse facility, adjacent to one of Dean’s other properties.

The father recently passed away and the family inherited it but they are nearing retirement and have other interest and are wanting to sell. Another motivating factor for them is that they are losing their largest tenant.

Purchase Price: $2.5 million

Financing: Dean knew early on that this property would be a prime candidate for the master lease agreement. Because the sellers were losing their largest tenant that would create 32,000 square feet of vacancy, the numbers wouldn’t support a purchase price of $2.5 million. In addition to losing this one tenant, there is an additional 30,000 square feet of vacancy. There was no way that this property will qualify for a commercial loan. After inspecting the facility, Dean presented the master lease agreement. The terms were 10% down ($250,000 down payment) and 5% interest for three years.

Upside Potential: Dean will be losing his largest tenant, but he already has a tenant in mind to fill it and he has a $34,000/month upside in rent if they utilize the 30,000 square feet of vacant space. Also, the rents are under market value right now so there’s upside potential there as well. The potential for forced appreciation is mind blowing!

Exit Strategy: For this property, the first goal is to fill the space of the largest tenant. Then Dean will focus on raising the rents, utilizing the additional 30,000 square feet and stabilizing the NOI. Once the warehouse is stabilized he will take it to the bank, take out the $250 000 down payment and hold long term.

 

Dean’s 3 Tips on Starting a Self Storage Business

Tip #1: Buy it Right

Overpaying for a self storage business can be very hard to recover from. You need to buy it right. Which means the financials need to be good and the potential needs to be strong. And when the numbers do work, when you do find that opportunity, you need to jump on it quickly.

Tip #2: Automate with EZStorage Software

Dean uses the same software that we recommend to anyone establishing a self storage business. It’s called EZStorage, and it’s a software that does your marketing, sends out late notices, does full accounting and reporting, enables you to sign up tenants, collect rent, open the gate for them or lock them out, and all right on your keyboard. Everything is done online when using this software.

Tip #3: Get a Mentor

Dean said that he couldn’t have done it without mentorship, “I knew that, when I left my career, that I couldn’t afford to make any mistakes. And I knew that I had to bring a mentor into my life, and I’m certainly glad that I found you.”

 

The Right Way to Start a Self Storage Business

The right way to start a successful self storage business is to get a mentor to guide you step by step. That’s how Dean did it and it’s how you should do it too. Get your mentor here: Self Storage Business Mentor