How Small is Too Small When it Comes to Self Storage?
I’m often asked, “Mike, do you have a ‘minimum size’ storage investment that you will get involved in?” And my response is admittedly a conditional one. The truth is, my ideal investment (whether we are talking about facility size or some other characteristic) will differ from yours. Simply put, we all have different investment objectives, risk tolerances and resources available to us as we pursue our next asset and this will color what types of facilities we go after. That said, I think the discussion that follows will provide some good insight into how facility size affects your self storage investing experience.
Facility size is an important consideration. Generally speaking, I like to invest in storage properties that are at least in the 10,000 to 12,000 square feet in size. On top of that, if those smaller properties have no room (or demand) for expansion and are as big as they are going to get, I am not that excited about investing in them. By the time I am “done” with a property, I want it to be at least 15,000 to 20,000 square feet or bigger. My reasoning behind this is two fold. For one, I only have so much ‘bandwidth’ that I can dedicate to operating my portfolio. And if I am spending time on a property that’s too small, I will be precluded from pursuing a larger property that very well may be more profitable. The truth is, it takes about the same amount of effort to “turn around” a small 10,000 Square foot property as it does to turn around a 25,000 square foot facility and there’s a lot more money to be made on the larger one.
Beyond that, I also don’t want to get stuck owning a property that is not “worth” owning long term. By selecting larger properties, I position myself to win regardless of whether I hold the property long term or flip it for a quick equity windfall. Many smaller properties, on the other hand, would ‘require’ me to sell them in order to achieve the ROI that I seek. To me, it’s just not worth it to own a property long term, halfway across the country if its only generating a couple thousand dollars of cash flow per month because I know that, with the same effort, I can own a larger property that might generate me $10K per month in cash flow.
One other critical consideration to keep in mind is the fact that larger facilities offer you the chance to tap into some economies of scale that smaller properties might not. As we’ve discussed in previous articles, the industry standard operating expense in self storage is 33%. That is to say that we anticipate spending 33 cents of every dollar of gross revenue on our day to day operations. Properties that max out around the 12,000 square foot mark often run a bit heavier than this (perhaps 36-39%) because of the fixed costs associated with running a storage facility. In other words, as you move from small properties to larger properties, the revenue grows FASTER than the expenses!
As true as what I outlined above may be, I want to emphasize again that your investment objectives, risk tolerance, resources and current situation may very well mean that a smaller property is a BETTER bet for you. For one, there’s a lower barrier to entry on these small properties and they also allow you to “get your feet wet” on something that might feel more manageable. You just want to have a full awareness of the trade-offs you are making when choosing your ideal or minimum facility size.
I would also encourage you to keep in mind that facility size is just ONE characteristic that you need to consider and there is considerable interplay between all these decisions that we make. As just one example, a smaller property that is in your back yard might be a better choice when compared to a larger property that’s 5 hours from home, especially if it’s your first deal.
The take home message here is that while, property size is an important consideration you will always want to look at the facility as a whole. There is no one hard and fast rule that qualifies or disqualifies a facility as being good. You want to create a list of both advantages and drawbacks about any potential deal and see which list is longer. At some point during your investigation the scales will tip either for or against the deal.
My hope is that you’ve found some value in this little article! Don't forget to comment and ask questions below...its how we all learn and is what this blog and forum was designed for!
And if you are interested in learning more about self storage, I’d encourage you to take an entirely FREE look at The Storage Rebellion University where we host Live Storage Trainings Every Month! CLICK HERE to Learn More