Self Storage Business Model

14 Replies

I’m considering starting a Self Storage business to find locations, build and flip Storage Facilities. In my mind the 2 or 3 Principals of the company would source the projects, raise money on a project basis, manage development and operations through lease up, then flip the cash flowing facilities to another investor. The original investors would get payout based in on a preferred return when the facility sells and the Principals would keep the land and receive rent from the new owners under a long term lease. My question is, does this seem like a feasible business model that leaves enough value to go around and have willing investors and buyers on both ends?

So, basically a standard development deal without selling the land (so the principals will have a ground lease and they will just sell the buildings/business to someone else)?  Is that what you are thinking?  As I haven't seen anyone do that, and I'm not sure how much interest you will have if you do a ground lease (unless you are offering a long term lease).  But then again, someone will bite if it is at the right price.  It seems easier to just get an equity split for doing all of that, which also gets you (as a principal) the money faster.

That being said, I'm aware of at least one syndication group doing development details in the self storage space, and they have investors.  So, doing so is definitely possible, and there are many potential ways it could work as far as returns, equity split, etc.  That being said, do the principals have any experience developing self storage, doing syndications, operating self storage, etc?  As at this point, I've seen reports that put the stabilization period at 3-4 years for new facilities (a national average, but it could potentially be shorter depending on the area; though there are more and more players in this space as well).  

Basically what McDonald’s does..... finds the right piece of land, develop/build, sell the business and lease the land. The concept should work in storage, but why not just sell the whole thing and move on? 

@Thomas Jackson the idea is to take the upside delta between the sale price and the preferred return for the investors, then also maintain a stream of passive income for the Principals. Rinse and repeat until the Principals have a suitable stream of retirement income. I’m not married to the idea, just not familiar with the standard way of working these deals.

As a storage investor, my objection to this model would be that I have no interest in "leasing" a revenue stream.  I want to own it AND the land that it sits on.  Others may very well find your offering appealing but it wouldn't be for me personally.  I bet your pool of end buyers would EXPLODE if you instead sold the property on a long term note.

Originally posted by @Jim Stout :

@Michael Wagner definitely a consideration, don’t want to scare off buyers, especially if it’s simpler and easier to just cash out and move to the next project.

That's exactly what I do Jim, but i buy them with the intention (or at the very least willingness) to own them forever.  And then I sell only when someone pays me a premium.  I've bought two in the $330-$360K range and later sold off for $1.8 Million and $1.325 Million respectively.  Of course we invested in expansion to get those sales prices but the cash flow during ownership basically paid for the expansion.  Storage is a great model because you make money whether you end up selling or not...assuming you buy right! We've got 3 in various stages of "overhaul" right now.  It truly is a great little niche.  If you haven't seen it, you might find some value in my little blog here on BP:



https://www.biggerpockets.com/member-blogs/3915-all-things-self-storage

 

I am currently pursuing something very similar to that "strategy"; I am currently developing a storage facility and will soon split off the property and place it in a holding company with some other properties and lease it back to the storage facility. 

My goal is not to "flip" as I am more of the buy, develop, hold type; but,  when I do go to sell,  I feel that I can attract a larger pool of potentials, and get a larger premium by being able to provide "staging" of the deal and finance their purchase of the operations with a clause to add it the land at some specified point in the future. 

@Bill Snyder good point. I imagine any buyer would at least want a ROFR on the land if you decide to sell. Including a purchase option would give a buyer some comfort that the land can’t be sold out from under them and allow a lower cost of entry into the storage biz cash flow. Holding the land long term holds its benefits for the storage developers because these facilities can be located in growing areas where the land has potential for high appreciation.

The problem is that there aren't many buyers for leasehold interests. So you're going to be selling the cash flow from the asset at a big discount and in all likelihood it won't make sense to do so. 

I think I'd have to agree with some of the other posters in that, as an investor, I would want complete ownership and would steer my students towards that as well.  On the other hand, I've taught for years that many small operators, for better or worse, approach self storage with the idea it's a business rather than a real estate asset.  In my experience, though, many of those potential purchasers - due to that mindset - may not have the financial means to purchase at the price a solid Class A or B facility could expect.  

Originally posted by @Jim Stout :

I’m considering starting a Self Storage business to find locations, build and flip Storage Facilities. In my mind the 2 or 3 Principals of the company would source the projects, raise money on a project basis, manage development and operations through lease up, then flip the cash flowing facilities to another investor. The original investors would get payout based in on a preferred return when the facility sells and the Principals would keep the land and receive rent from the new owners under a long term lease. My question is, does this seem like a feasible business model that leaves enough value to go around and have willing investors and buyers on both ends?

So basically whoever buys the property is doing so on a ground lease.  There are implications for obtaining financing and how depreciation is calculated with ground leases so I recommend you dig into that a bit.  You would also be thinning out your pool of potential buyers because for some it's a less desirable arrangement.  

 

@Jim Stout

Lots of opinions offered, few based on hard facts. I don’t know the mechanics of self Storage, but I am very experienced in real estate syndication. The number one thing investors look for when evaluating a syndication investment opportunity is the verifiable track record of the sponsor. Second is the profit split/return on investment evaluation. And third is the amount of their own funds the sponsor has invested in the deal. While some deals that lack one, or even more of these characteristics do get funded, the chances of a successful capital raise are greatly enhanced when these are present.

@Don Konipol thanks for the insight, I’m just learning about Syndication, because it seems like a possibility for this venture. I certainly don’t have a track record of experience in this particular area since I’ve spent the last 11 years in the corporate world negotiating oil and gas deals.