One of the first steps to ensuring your profitability as a storage facility owner is to determine fair market rental rates. But understanding how much to charge for storage rental is easier said than done, as it’s not as simple as deciding on a number. You’ll need to consider a range of factors to determine the right rental rates for your storage facility and make it the most profitable business possible. One of the biggest factors in determining rental rates stems from an overall evaluation of your facility and operations.
Why Is a Full Storage Facility Valuation Necessary?
It’s hard to determine rental rates for your storage facility without first understanding its total value. To better set your rental rates, you’ll want to conduct a comprehensive valuation of your storage facility. This will help you better understand your business’s value, including the real estate on which it sits. It is important to recognize what your business is capable of before deciding on fair market rental rates.
Here are a few reasons why a full storage facility valuation is necessary:
- Understanding your value: A comprehensive valuation of your storage facility business will tell you what your company and real estate are worth, helping you determine fair market rates. Professional companies specializing in self-storage real estate investments will conduct a thorough evaluation of your local market. You’ll then have information regarding competitor rates, which will better inform your facility’s rental prices to attract tenants.
- Funding your business expansion: If you’re looking to expand your current property or acquire new properties in another market, a complete valuation informs that process. Self-storage facility owners can accurately set future goals when they know how much their business is worth.
- Selling or refinancing your business: An evaluation performed by an experienced professional provides useful data when you’re trying to sell or refinance your facility. The self-storage industry is experiencing a surge in demand fueled by different factors, such as urbanization, an increase in rental properties and advanced developments in safe storage solutions. Be prepared to sell a profitable facility by knowing your business’s value and pricing it competitively for buyers.
Determining Your Storage Facility’s Value
Your net operating income (NOI) will determine your storage facility’s value. Why? Self-storage facilities are a form of commercial real estate, meaning buyers are only concerned with current and potential income associated with your property. Buyers are looking at your net operating income as the primary factor for your business’s value.
Determine Facility Income
To determine the income for your self-storage facility, you’ll want to account for income from all sources, including:
- Tenant rent.
- Truck rentals.
- Retail sales.
- Late fees.
- Administrative fees.
Your revenue is a valuable number to keep in mind. The amount of income your business brings in is the primary way you can measure whether you’re meeting expectations.
Determine Operating Expenses
Another equally important aspect to determining your self-storage facility’s value is accounting for all operating expenses, including:
- Repairs and maintenance.
- Complete payroll.
- Any other costs associated with generating revenue.
Your operating expenses should not include any debt or amortization of loans. Having a clear understanding of both your NOI and operating expenses combined will give you a better picture of your company’s total value and gross income. You’ll want to examine income statements from multiple years to get a broader sense of how profitable your facility has been and better predict how it will perform in the future.
Examine the Local Market
The demand is rising for self-storage options, but despite this increase, you’ll still want to examine your local market to determine if you should raise storage rental prices. Consider the following points when performing your market research for utmost accuracy:
- Reach: The first step to researching your market is determining your facility’s reach. In the self-storage industry, you can expect most of your tenants to live within three to five miles of your facility. Tenants won’t typically travel more than five or 10 miles away to their storage units. You’ll want to establish a radius to further examine other areas of your market, such as population.
- Current population: Examine the current population of your local market by identifying the number of people who live within three to five miles of your self-storage facility. For facilities in rural areas, 20,000 people is a good number. For facilities in more urban settings, 100,000 people living within three to five miles of your business is suitable.
- Population growth: Part of your market research needs to involve expected population growth. More people means more potential customers who need your services. Population growth is an estimate, but it can be accurately predicted. To forecast this number correctly, you can look at the rate of growth in your market over the last five to 10 years. A steady growth rate over the previous few years is a great indication of what to expect.
- Exposure: This aspect refers to the amount of organic exposure you can expect from vehicle traffic. Are you in a highly traveled area with a lot of drive-by traffic? Or are you situated away from the road in an inconspicuous location? Answering these questions will help you better understand your market and realize what you need to do to reach potential tenants.
- Competition: Look at your competition. Are there other self-storage facilities your potential tenants can choose from? If so, what are their prices and occupancy rates and how do they reach potential tenants?
Consider Your Storage Facility Cap Rate
Your cap rate is short for capitalization rate, or the rate of return an investor can expect to see after accounting for gross income, operating costs and other expenses, and it is expressed in percentages. If you’re looking to raise storage rental prices, you’ll need to know this number.
A 6%-8% cap rate is considered the market average in the self-storage industry. In 2020, cap rates in the self-storage industry were at 6.1%, which was a little lower than their long-term averages. You can expect cap rates to generally linger between 6%-8%, but with the unusual landscape of 2020, these numbers came in lower than normal.
Keep in mind that all local markets are different, meaning an investor in location A should not expect the same cap rate as an investor in location B.
Contact Investment Real Estate, LLC for a Self-Storage Facility Valuation
A thorough valuation of your self-storage facility is important in determining rental rates. For a task as vital as accurately valuing your facility, you’ll need industry professionals you can count on. For decades, Investment Real Estate, LLC has specialized in self-storage facility valuations, property sales and property management. We’re one of the few companies in the United States that deals exclusively in the self-storage industry.
Our knowledge and expertise in this sector can help you build your business and grow your investment. With over $1 billion in listed properties and transactions, our team of dedicated professionals has the answers to your questions.
Ready to start improving, selling or managing your self-storage property? Contact the professionals at Investment Real Estate, LLC today! Want to speak with someone right away? Call us at 717-779-0804 to speak with one of our trusted representatives.