Let’s take a look at a case study from the sale of a self storage facility in which the team at Investment Real Estate (IRE) represented the client in the summer of 2019. This sale is a prime example of how following proper recommendations from a self storage broker can dramatically change the value of your self storage property in the future. This is essential for achieving the highest ROI when you are ready to sell your storage asset.
Our team was able to help our client increase the value of their facility from just over $1,000,000 in 2018 to a sale price of $1,775,000 in 2019. That’s over a 75% increase in value in about a year’s time! This owner was able to achieve this level of increased value by following the recommendations provided by our experienced team of self storage brokers.
2018 Gross Potential Income
First, let’s look at the 2018 facility unit mix, unit prices and potential income if all units were rented at market rate. Market rates refer to current pricing; which can also be referred to as street rates. Below, we can see the potential income in 2018 was $188,508 at $8.02 per square foot. The 2018 market rates at this storage facility were about 15% to 25% below their competitors’ market rates. The owner also had an unused 1,000 square feet of space.
- Increase market rates to be more in line with the competitors’ rates.
- Utilize unused space.
2019 Gross Potential Income
Now, let’s see how the recommendations took shape as they were implemented. In comparison to 2018, we can see the potential income increased from $188,508 to $248,274. The rental rate per square foot also increased from $8.02 to $10.14. It is important to mention that these 2019 market rates are still below or in line with the competitors’ market rates. See below.
- It is important to monitor your competitors’ market rates on a consistent basis – at least monthly. This allows you to price your units accordingly and increase current and future revenue. Constant monitoring of competitor rates keeps you up to date with rent changes and allows you to drive rates. If you are able to review and adjust on a weekly rotation, that can really make a big difference in potential income.
- Utilize any potential rental space to increase revenue. This includes parking.
Existing Tenant Increase
In this case study, the owner had not increased current tenant rates for a number of years. For the owner operator, increasing rates on existing tenants can potentially be a challenging task. The reality is your self storage facility faces increasing expenses annually and raising tenant rates on a yearly basis will increase revenue year over year. In this instance, IRE suggested a modest increase for current tenants. This resulted in an increase in revenue, which in turn created an increase in future value. For a more in-depth dive into increasing the rates of current tenants, please read this previous blog.
Managing your expenses can seem like a simple task, but it is often overlooked as a way of creating value. In this case study, it was suggested the owner should shop for better liability insurance pricing for their facility. They were able to save $2,500 per year by making a change here. This may sound like a small number in the grand scheme of things, but at the cap rate sold, this represented $37,000 in value. (Cap rate is the rate of return in year one if you paid all cash for the facility.)
Other Recommendations to Add Future Value
- Tenant Insurance
Most rental lease agreements require a tenant to have some type of insurance for their belongings. This protects the owner and most importantly the tenant. When a facility offers tenant insurance, they get a commission for providing it. This is an excellent source of revenue for the self storage owner. As seen above, even smaller increases in revenue can lead to an increase in value. Read more in a previous blog about the benefits of tenant insurance.
Do you charge late fees or an administration fee? Some of these smaller fees are a great way to provide an extra revenue source. At the very least, set up a late fee structure so you can capture that extra revenue for tenants who do not pay on time.
- Occupancy Based Pricing
Do you find that some of your storage units are more or less popular than others? We suggest charging more for a unit that fills up quickly, and less for a unit that does not fill up quickly. This may sound simple, but a vacant unit does not bring in any income. It is OK to change market rates for just one unit at a time. This goes back to monitoring your competitors’ market rates. For a more in depth dive into managing your unit mix, read this previous blog.
- Tenant Insurance
In summary, the combination of these recommendations made by Investment Real Estate and our team of self storage brokers directly influenced the substantial increase in the value of this self storage facility. One of the biggest questions we get is, why do owners need a Free Property Valuation when they are not ready to sell? The answer is clear with this case study. If an owner is not ready to sell now, we understand. But our wealth of experience in self storage allows us to provide the best recommendations to increase your storage facility’s value to set you on the right path to sell when you are ready, and get the highest sales price.