Currently Under Contract, looking to build out a storage facility

[Brian Fredrick]

Hello All,

I am currently under contract on a property and am looking to build a storage facility out. I am looking at some (undetermined) mix of mini storage, boat storage and rv storage, There are many speed bumps along the way to overcome, as I realize, and am asking ONLY a few questions as to stay on topic (feel free to expand or introduce issues that I don't bring up). I am borrowing hard money for the purchase at 10%. I can subdivide the property and sell (or keep and rent - $2300/m income) a 2 bedroom house with a trailer on it. The storage land will be about 3.5 acres. PP is $635k and home value after subdivision is aprox $400k. 

1) Does anyone have experience in actually building storage facilities? 

2) Is it better to phase the build out or 'get it all done with" at one time? 

3) What are some financial strategies to building out the storage facility? Hard money to build out? SBA loan with a business plan to finance the build? 

4) What are some potential land mines to avoid?

I look forward to hearing your ideas. 

Thank you in advance for you time.

Brian

(FYI, not in Denver, but limited options for city selection.)

[Brian Fredrick]

Quote from @Neil Henderson:

So many of my answers to the above questions are going to be "it depends."

My first and absolutely the most important question I have for you is; have you commissioned a third party or performed your own feasibility study on whether or not there is demand for storage in the market where your potential facility will reside?

The days of build-it-and-they-will-come self storage are long gone. The biggest enemy of self storage is self storage. Some of the best opportunities over the years to buy a self storage facility have been because someone decided to take a piece of vacant land that they had and turn it into self storage without adequately researching whether or not there was demand in the market for self storage that would allow them to be profitable at the price that they purchased the land and built out the facility. Apologies for the run-on sentence.

The answer to question number two is "it depends". Does your feasibility study say that there is a huge unmet demand for storage in your market? If yes, do you have access to sufficient capital to build out the entire facility at one time? What are your investment goals for the facility? Would you want to leave some meat on the bone for expansion for a potential buyer down the road? Would you be more comfortable building in phases two test the market for storage demand without a huge capital outlay? Have you thought about building some fixed structures and then filling out the rest using portables or shipping containers?

The answer to question three is also I'm afraid "it depends." SBA lending can be a great option for self storage but it is a long process and you should be sure that the seller is OK with a longer closing horizon. I would be very surprised if any SBA lender would move forward without having a third-party feasibility study done on the site for self storage. You could do hard money if that aligns with your investing goals but chances are it's going to be expensive. You could use private money to finance a cash purchase with a plan to refinance into longer-term debt once the facility is stabilized. Do you believe that you have the experience and ability to execute on that kind of business plan that you wouldn't risk losing your private investor's capital? You might also consider approaching some small community banks.

The biggest land mine to avoid is building a facility in an area with not enough demand to support it.

 Neil thank you for your input. I realize I opened a wide spectrum for discussion. 

I have not done a feasibility study, but have done my own market research. (I know, all of you will roll your eyes here, but hear me out please.) There has been a moratorium on building storage units in the city (19,000 city population, 56,000 county pop.), with the last one built in 2006. I have a friend who owns/operates a "mom and pop" 12,000 sq ft facility who (semi) jokes that he continually has a 94 person wait list. I have also cold called every storage facility in the county asking for availability for boat, rv, and mini storage. That research has me believing that storage is in high demand here. (please don't hesitate to lay into me here.)

I personally don't have the capital to build out the storage facility, but have access to capital via hard money, SBA loan (believed) and/or a partnership for the build out (which could complicate things if i own the land, but partner on the build out). Great question about the investment goals; firstly I want to build equity in building the facility out (I'm a contractor by day) and secondly I am looking for passive income. That being said I would certainly consider selling (with leaving some meat on the bone) down the road. 

I do believe that I have the experience and ability to execute without losing my private investors money. He is protected by having first lien on the deed.(I realize that banks won't want to loan money on a property that has a lien. I can subdivide an existing 2/1 house and recoup about $400k and buy the hard money lender out with personal capital.)

I appreciate your, and everyones, perspectives and experience. 

Thank you, Brian