I'm interested in potentially getting into the self storage realm. My question in regards to that is what formula or numbers can I use to make sure it would be a sound investment. I'm having a hard time finding commercial land at a reasonable price that would make building a storage facility a profitable venture. I guess my main question is, if charging $60 per unit, how many units need to be built and how much per acre can I pay to make the number's workout after all the overhead? Thank you in advanced all you self storage aficionados!
Brian, this is a tough question to answer without ubderstanding your background. Have you done development before? Do you know anything about the storage business and how to operate it or how management works?
The cost of land is only one component to development, does the market bear $60 per unit or will it go up to $100 per unit or less? These are some key questions that would need to be answered.
Might I suggest looking into Scott Meyers trainings because he really understands the development side of things and can at least help answer some of your questions and point you in the right direction. I like him because he not only teaches but is also actively doing his own development deals on a regular basis, so he is the trusted expert in this arena
It's not just the initial purchase price of the land. It's how much to grade an acre, entitlement costs,etc.
Get on excel a write up a proforma business P&L. The numbers you could be based off your local market. If you don't know plug in an estimate.
See what the ROI looks like.
Find out costs of entitlements, building permits, design and construction, utility tap fees, cost of land, bank financing fees and interest if any.
John- thank you for the feedback. I have zero experience developing, but I think it would be an interesting direction to go. I feel anything I don't know (which is a lot..lol) can be learned. I have read some of Scott's previous posts and you are right, he definitely does seem like a wealth of knowledge in self storage and I'm going to look into that class. Thanks again!
Joel - being nee to this area, can you explain what you mean by "how much to grade an acre and entitlement costs" mean?
There will be a lot of due diligence, and consideration in this type of project. Plenty of ways to "leak" funds during acquisition and construction. Let alone when the real work begins as you put together your business systems to fill and keep filled those units. If you are investing your own funds then caveat emptor!
But if you are being trusted by an investor then ... it's even more important.
Consider putting the time in a workshop or two on the subject. Do the homework indicated to create a business plan. Plan out every cost you possibly can. Check with existing owners/investors on best practices they've found (be specific as possible please if you have questions). Tour existing sites. Consider a partnership/mentorship with a current investor. Flesh out two or three back up plans if things fall through at various stages.
This is the work required in these deals. No shortcuts or secret formula. Gotta do the work.
Stepping into a construction project such as this could have very heavy negative consequences, and isn't taken lightly. If this involves "other peoples money", you owe it to your investors and underwriters to take the time and develop your skills before putting funds at risk.
I know Scott Meyers workshops appear to have a lot of this type of information (though I haven't been to any myself) and if you're considering going the route of self storage I would recommend seeking these types of resources out before any extremely costly mistakes.
Brian Tisler ground up development usually carries the most risk for things to go wrong until you can get the stabilized asset performing.
This is why many investors go for existing value add. There is a property there and already existing. It has some income coming in it just needs some work and problem solving to get it performing again.
Ground up makes sense when there is a HUGE demand for something in the marketplace. You do not want to develop because everyone else is building an asset class and then you own and overbuilt asset that does not meet your original pro-forma numbers and income is less than expected.
Per acre grading for instance you could pay 1 million for 3 acres or 800,000 for another piece of land for 3 acres. On initial price alone the 3 acres for 800,000 versus 1 million might sound better. Then you see the 800k land is in a less desirable spot and will take 200k an acre to grade as topo is very hilly versus the 1 million for 3 acres is almost flat so 75k an acre and in a better location.
The shape of the 3 acres for site layout and design might be better with the 1 million dollar piece of land. There are tons of variables to consider in land development.
The long time developers I know own existing assets and then value add plays and they make ground up development a smaller part of their overall portfolio so if I project stalls or goes bad it does not take them down. In other words do not be (ALL IN) on a speculative development project and lose what has taken years or even decades to create in wealth. The risk does not usually equal the reward in that case.
You might look at investing a smaller share in a JV agreement with a large experience developer or invest in existing assets.
I am also wondering becuase the land is the most expensive part of my whole P & L statement.
The current rule of thumb for land cost is approximately 25-30 percent of total development cost. At $1.25 per gross square foot and assuming 40 percent coverage, net cost for land is $3.13 per rentable foot of building.
In many markets, land use is maximized by developing multi-story self-storage with two-stories and even three- and four-story facilities.
Ultimately, the rental rates in the market drive the cost that a self-storage developer should pay for the land. Often, the most common cost/operating ratio of self-storage is in line with apartment rental rates. Depending on the location, self-storage projects can generate the same income per square foot as medium priced apartment properties in the same market area. And they can achieve this income at roughly one half the construction and operating costs.
To give you even ballpark costs, we will need to know if you are planning to build a single story or a multi-story facility.
Costs for Single Story Self Storage Construction typically ranges between $25-$40 per square foot – not including land or site improvement costs.
Multi-Story Self Storage Building Costs have more variables and can range from $42 per square foot to as much as $70 per square foot. Today, there are almost unlimited options in designing a self-storage facility that will blend into the area you plan to build. The architectural details and finishes can significantly impact cost. Land costs and site improvements will also impact your initial investment.
The most common "state of the art" facility will be about 60,000 - 80,000 net rentable square feet, cost $45-65 per square foot to construct (outside of existing land costs), and have break even operating expenses in the 40-60 percent range (not including debt service) of total stabilized income. A well designed and located facility will successfully operate in the 83-93 percent occupancy range, though we have seen successful self-storage operations with occupancy rates as low as 70%.
It often takes 18-24 months for many self-storage facilities to realize its full income potential in a competitive market.
Here is an analysis I had put together for a site within the last 90 days.