Owning a self storage property is a big investment and can be very rewarding if managed correctly. One of the most common questions asked by smaller operators or those new to the self storage industry is, “What can I do to increase my property’s value?” In this three part blog, I will discuss the main areas that can have a great impact on increasing your property’s value now. These are great items to tackle in preparation to sell your property, but also a perfect way to increase revenue if you plan to retain ownership for the foreseeable future.
In part one of this series, let’s review how to implement existing tenant rent increases.
Many smaller operators cringe when they hear the words “rent increases”. If you’re a small local operator, you probably have built a relationship with some of your tenants or may even know some of them personally. You hear all about their kids, their lives and their stories when they come in to pay their monthly storage bill. So how can you raise their rates? If you have not already processed a rate increase and it’s been several years since you have invested in the purchase of your site, the bottom line is that you have to get comfortable with this topic. You purchased your site as an investment, and as a savvy investor you want to maximize the return you will get when you exit from that investment. If you purchased your site at an 8% cap rate, every $1,000 in Net Operating Income (NOI) is worth $12,500 in value. (Cap Rate simplified is the rate of return in year 1 if you paid all cash for your property.)
Take a look around your everyday life. Have your utilities stayed the same since you invested in your property? Have your taxes stayed the same? Have you invested any amount of capital by making site improvements? The costs of goods and services increases every year and self storage is no different. At the very least, you need to maintain your NOI year over year. The simplest way is to pass on these expense increases to your tenants via an existing tenant rent increase.
At the same time, you want to create churn. What?! I want to create vacancies, you ask? All too often I hear smaller operators proclaim that they are 100% occupied and wear it as a badge of honor. Well in reality, being 100% occupied is one of the worst revenue inhibitors there is in self storage; especially if you are not already implementing an existing tenant rent increase plan. If you are following an occupancy-based pricing strategy (our next topic in part two of this series), you are leaving money on the table by reaching 100% occupancy.
When you are aggressively managing your rates on the front end during rental season, you should be raising your street rates as demand increases. So, let’s say a customer rented a 10×10 unit at a street rate of $100 when that unit type was 85% occupied, and now three months later you have increased the rates on your 10x10s to $125 because the demand was present. Now this unit type is 95% occupied. The tenant that moved in three months ago is now paying 25% less than your current street rate. You, as the owner, need to determine what your standards are. Some of the large operators have a rent increase strategy in place at six months after move in then every nine months afterwards, or annually, or a combination of the two. Once you determine your approach, you need to utilize your management software’s ability to automate this process and remove the emotional attribute from the equation.
Implementing an existing tenant rent increase strategy and plan moving forward will help you achieve your goal of increasing your property’s value. If you have further questions on how to get started, contact us and our brokerage team can help guide you. Stay tuned for part two of this series on occupancy-based pricing strategies.