When to build Horizontally and when to build Vertically?

Question

Are there any thumb rules or proven industry guidelines on when Horizontal construction makes more sense in terms of returns, branding and when Vertical one does in residential and commercial type of work?

Henry Clark · Answer

@Vijay Kurhade

Usually before I respond, I will look at the person's background and other posts.  This helps guide me on how to respond.

Looks like your looking for the Rule, the equation, the decision tree to make REI decisions.  Although you could do this to a degree there are so many variations and "if then" situations.

My background is as a CPA/Controller/CFO.  I want to know the answer mathematically and assumption based, before I make the decision.  Our first investment into Self Storage, I had never done an REI deal, other than buying our house.  Got to what I would say was about 65% of the information and I could see I would not get any farther, no matter how much more research or reading I did.  We had to make the "Jump".  Before I did this I asked myself the following questions:

a.  How much could we lose?  Say $50,000 to $80,000 loss

b.  Can we take that hit?  Yep.  Still eat prime rib on Fri or Sat.  Son still goes to college.  Don't have to sale anything to cover.

c.  If I don't do this, will I ever do a Passive investment?  Probably not.  After I had invested this much time into researching and couldn't pull the trigger.

My point is:

1.  Start small and Make your Big Mistakes Early.

2.  Address the above loss questions, then think about what you might gain.  Experience- you will learn the answer to your questions and a bunch of other ones, you haven't thought or read about.

3.  Then make the jump.

Action Steps:

A.  Narrow down your REI investment strategy.  This will help with your questions and responses.

B.  Narrow down your investment funds.  This will help in analyzing the deals you can do.

C.  Make an outline of all the major areas and start developing a Checklist.  Example:  If a SFH house, then add a structural section and put Roof/Foundation/Doors-Windows/HVAC/Ceilings/etc; another section on Financing, etc.  Have other people review to add from their experience.  This will cover the 90% of issues.  If you fail on the last 10% they will be small.

D.  Develop or use a Bigger Pockets spreadsheet.  Matter of fact go through one of the Bigger Pockets spreadsheets.  This will both force new thinking and channel your thought process.  This should fit with your approach, which seems to be analytical.

Your questions, I will address, but at this time can't be very useful:  I will use our Self Storage business as a model.  Again, narrow down your model.

a.  Horizontal or vertical.  We choose Horizontal, most National Big Box go vertical.  Decision points, Cost of land, Availability of land, Customer service- drive up versus elevator, Business model, etc.  You have to get into each model.  If you had 5 of the National Big Box locations side by side in vertical, climate controlled; they all were only 75% full after 5 years; if I could buy land next to them in my model I would and be very happy.

b.  Better Salability-  Again, pick your REI model.  We have 8 locations, in 5 towns.  When we approach a town, we both look to buy and to build.  Even if we have a deal to buy, we still go through the build approach.  This addresses how hard it is to find correct zoning, land price, availability, location relationship to neighborhoods, etc.  The harder and harder it is to find a spot, the more valuable is the Purchase or build in that town.  Less chance of "Stupid Money" coming in and building right next to us and devaluing our investment.  This makes the property more "Salable" in the future and a better investment.

c.  Project pricing, mix, branding-  Again, pick your model.

Pricing-  Our product is priced below big box due to different cost structures but also different pricing strategies.

Mix- We chose Drive up self storage.  We do Self Service and hardly ever meet a customer.  We focus on 10 by 10/15 and 20 foot unit sizes.  We have dropped 5x10 because we were having a lot of vandalism issues.  Pick a Strategy and stay with it, until you have it nailed before branching out.

Branding-  Named it using our last name.  Do You Tubes with a local touch.  Basically you "know" the owner, even though we will probably never meet.  Our market area is within a 40 mile radius.  Want them to know we are there for them and their valuables.

Action:

Narrow your REI focus and discussion.

Develop a checklist.  Will fit your personal approach.  Go find my Forum post, Self Storage 101 Checklist and adapt to your REI needs.

At some point it will be time to "leap".

Start small and Make your Big Mistakes Early.

Michael Wagner · Answer

I hope you sit with the answer above! It's riddled with GOLD. I'll just add that, from a financial standpoint, when it comes to horizontal vs. vertical, it really just comes down to the cost of land in the market. In Manhattan you build UP because the cost to do so is cheaper than buying more land to build out. In small town, USA, you build out because the land is cheaper than building up.

So some quick (and very generic math) would allow us to compare. If we can put roughly 15k of square feet of "horizontal" storage on each acres, we can use our knowledge of costs for building OUT plus our cost per acre of land to get total cost.

Then we can look at how that compares to building up. No "extra land to buy" but if our construction costs increase by 50% per square foot, we can easily figure out which option (UP or OUT) makes sense in that given market.