By Marc Goodin. Not too long ago the answer was clearly, near home. Running a business near home is typical, more convenient, more fun, and more profitable. But now with Feds increasing rates 9 times in a row for a 4.75% increase in the fed rate and significant inflation there is a minimum rental rate that must be met in order to make a suitable profit.
This minimum rental rate is based upon several factors such as what percent of the total cost will you be borrowing; how much the land costs; construction cost in the area; size of your project and how good of a sales and marketing program and team you have. And if you believe that rates will come down in the future you may be willing to make a smaller profit now. Many REITs have funds that take ownership vs interest so they can make a nice profit at rental rates of $1.40/sf or even less.
Where interest rates are and where they are going must be considered. Let’s guestimate a $7,000,000 loan for your next project. That amount borrowed is a $200K to $300K increase in interest payments (or loss of cash flow) since the feds started its rate increases. For every change in the interest rate of 1% is a change in the interest-only payment of $70,000.
I have run multiple profit and loss scenarios and average rental rates of $1.40/sf and often do not work if you are borrowing with 15% down with today's SBA interest rates. Rents around $1.70/sf + for a good size facility can make you a six-figure income. Better interest rates, lower construction costs, and lower land costs are some items that may permit for lower rental rates
One of your first steps is to do your own Profit & Loss calculations and vary the interest rate and rental rates. Some facilities have a mandatory Premium (insurance-backed) lease that provides $10 additional income for 80% of the renters. This is significant!
Rental rates are always moving up & down but let's call the average rent rate now $1.30. If you checked out enough locations you have seen locations charging $1.00 or less per sf. Of course, this means there must be areas charging significantly more than the national average. How do we find a location where we can charge $1.7/sf? One way to search for land in areas where the existing rates are $1.70/sf/month.
The other way is to successfully charge more than the competition.
Existing competition average rental rate: $1.40/sf
Increase for modern new facility + $0.15/sf
Increase for premium Sales & Marketing: +$0.20/sf
Proposed rental rate $1.75/sf/month
Given that you will build a new modern self-storage with all the bells and whistles on a main road, that has demand for more self-storage, you should be able to charge more than the average. This should allow you to charge at the top of your market, maybe plus $.0.15/sf over the average rate.
If your new facility is close to home and you have and implement a remarkable sales and marketing program you should be able to charge more than the competition. I estimate this to be $0.20/month increase in rates. The key here is implementing a remarkable sales and marketing plan. If you are too far from your facility where you cannot visit the site a couple of times a week and have a weekly marketing meeting in person with your manager, you lose this possible rental rate increase. Even if you live nearby your facility you need to be prepared to spend 8 hours a week making and keeping your facility a premiere facility to have premium rates.
No need to start your search in the cities with the highest rental rates unless you have a huge pile of cash, as land and construction are significantly more than many locations.
Likewise, you certainly want to stay clear of the cities with the lowest rental rates
Startrack and Radius plus are 2 apps that will allow you to see the existing rental rates for a given area. The area can be a 1- 10 mile area, a state or even the entire US.
Here is a Stortrack map showing areas where the existing rental rates are above $150. Sf/person. The danger of only using these types of maps without local recon can be significant. Often existing rates are taken from online websites so the actual rental rates could be higher. And you may need to take into consideration that many REITs have low initial rental rates with rent increases in 3 to 5 months. And they may not show areas where rents are over the requested rate because “the average” was below that amount.
Close to home is certainly the first place to start your research of existing rates. The next step would be to determine if, and how much more you can charge over the competition. Then a profit and loss review will help you determine if your local area has the rates you need. It is important to remember self-storage is a local business, typically a 3-mile market so there are local research is key to every location.
Being ready to implement a great Sales & Marketing plan is also a must.
You may want to consider where you want to be living in 5 years. As you can see in this picture we need a beach with plenty of fish to catch.
If you want to have a 15-minute call to learn how Storage Authority helps insure the above items and more are accomplished at your facility and how we help you find land and get your facility built please send me an email or call me – no appointment needed:
marc@StorageAuthorityFranchise.com or 860-830-6764
Get more information on Storage Authority Franchise at www.storageauthorityfranchise.com/opportunity3
Marc Goodin is the President of Storage Authority Franchising. www.StorageAuthorityFranchise.com He owns 3 self-storages he designed, built, and manages. He has been helping others in the self-storage industry for over 25 years. He can be reached at marc@StorageAuthority.com or directly at 860-830-6764 to answer your franchising, development, marketing, sales, and operations questions. His best selling self storage books are available on Amazon.