The approximate budget for your next self-storage development
If you’ve decided to build a new self-storage project, creating a construction budget is going to be one of your first tasks, and it will take it all. Many owners and developers end up with a classic chicken-and-egg problem: you want to know if a project is worthwhile before you invest in design work; but you have to invest in design work before your suppliers and contractors can give you a solid price for their work.
In the early stages of planning, all you need is a rough financial plan to guide your decision making. Basically you are trying to determine if you are ready to invest more. It starts with a vision of what you want to build. Like yourself:
- Who are my target self-storage customers? Are they residents at home? Companies? Boat / RV owners? Wine lovers? What types of storage do they need? Understanding this will help you determine what types of buildings to construct. For example, will the installation be on one or more floors? Will it offer drive-up or air-conditioned units? What unit sizes will it contain?
- What are my priorities for cash flow? If you are well established, you can choose to build a larger initial phase. It will take longer to break even, but starting larger can lower your cost per square foot (PSF) and reduce the number of times you have to worry about planning board approval, permits, loans, etc. If you are a new developer, this may not be an option as you may need to achieve positive cash flow as quickly as possible.
- How will the property be managed? This will have an impact on the design and, therefore, on the cost. For example, if the site will be unmanned (no on-site staff), you will likely need to install a self-service kiosk and perhaps more advanced security. If you plan to have staff, you will need an office.
Estimate of construction costs
With these things in mind, you’re ready to dig in and start building your self-storage construction budget. Your goal will be to develop rough figures for PSF costs. Many new owners and developers don’t fully appreciate the time a contractor spends preparing a formal quote. If you call and ask for a proposal but can’t come up with a project plan, you’ll be disappointed.
In this mode of initial budgeting, you are looking for simple numbers. Your line items should include, starting with the most expensive:
- Concrete foundations
- Access control
- Electric / lighting
- Public works
Additional items to consider adding are hydrants or sprinklers, office finishes, full leveling, and architectural features.
In my experience, a single story drive property will cost around $ 40 to $ 45 PSF, plus land, to develop. An air-conditioned property will cost around $ 60 to $ 70 PSF, not including the land. Keep in mind that these numbers are for the owner acting as a general contractor. Add 15 percent if you have to hire one. You’ll also need to plan for bank charges, a contingency of around 10%, and start-up cash to pay off your mortgage while renting a self-service warehouse.
The next component of your financial forecast is a revenue projection. If you don’t already have land, don’t get bogged down in the details. In rough budgeting, think in terms of costs and revenues per PSF. You can determine the latter by checking the rental rates of nearby self-storage properties. I’ve found that averaging the cost of a 10-by-10 and 10-by-15 gives you a good income figure to use in your calculations. To be on the safe side, use larger units for your estimates, as they will have a lower PSF income.
Your next task is to determine what percentage of your land will be buildable. For traditional buildings, about 30 to 35 percent of the land will become rentable space. With larger, air-conditioned buildings, you can achieve 45-50% coverage. The rest will be green spaces and walkways. Multiply the monthly PSF income by the rentable square feet to get potential income.
Forecast monthly expenses
Armed with construction costs and potential income, you will then need to estimate the monthly expenses. Your mortgage is normally the highest, so look at your cost of construction minus your down payment and use a loan calculator to estimate your monthly bank payment. Remember that lenders will be reluctant to offer you an interest rate without knowing more about you and the details of your project. You may be more likely to get them to disclose a track during a phone call than through a written communication method like email.
Your remaining expenses to be taken into account are, starting with the most important:
- Property taxes
- Payroll (if applicable)
- Credit card processing fees
- Business insurance
- Landscaping and snow removal
Kiosk service charges and software subscriptions should also be considered, if applicable.
Your monthly expenses for a finished self-storage site should not exceed 70% of income. If so, your costs are too high, rental rates too low, or you need to install more units on the property. In the initial phase of a project, the breakeven point may be higher, and this is normal if the long-term forecast provides interesting results.
Take the next step
If this preliminary analysis shows that your proposed project has failed, you can pass up the opportunity without investing in design work. This method of budgeting can also help you identify the maximum you can pay for a package while still making money.
Hopefully the results show an attractive investment. If so, your next step is to get the property under contract and then start working with your civil engineer on the detailed site planning. It is also at this stage that you should consider hiring a feasibility consultant. Having a third party weigh in on your project can help you avoid costly mistakes and may even be required by your lender.
At this point, you are also ready to start collaborating with your trades on the design and detailed proposals. As you go through the process, your goal is to replace every rough line item in your budget with a detailed vendor proposal. When you are ready to close your loan, your bank will require this documentation.
Focus on the last details
I will conclude with a caveat about budgeting and funding the final project. The cost of raw materials used in construction can fluctuate, sometimes rapidly. You don’t want to get quotes, get funding based on them, and then find out five months later, when you try to order stuff, that they’re no longer valid.
The solution is to confirm immediately before closing that all quotes are legitimate and then update your budget. Make sure your contracts with suppliers allow for delivery within a realistic timeframe. Discuss this in detail with your suppliers to ensure that the contract price includes the on-time delivery of materials to the job site. If you can, set up a healthy contingency. Once the financing is in place, execute all contracts for materials and labor.
Finally, there are online tools that can help you create a financial projection for a self-storage project, including this one provided by my company. Our tool allows you to input the variables described above and will use your numbers to produce a two-year balance and cash flow projection. Your cash flow projection is important, especially if you’re using a Small Business Administration loan program, which requires your project to break even in two years or less.
Despite all the craziness in our world today, now is a great time to build self-storage. Interest rates are low and demand remains high. Good luck with your project!
Steve Hajewski is the Marketing Director of Trachte building systems, which designs, manufactures and erects a full line of prefabricated and custom steel self-storage systems, including portable single or multi-story storage, interior bulkhead and aisle, and canopy boat / RV. He also has a self-storage facility in Wisconsin and is a frequent contributor to Self-Storage Talk, the industry’s largest online community. For more information call 800.356.5824.