How Profitable Is a Self-Storage Facility - Explained

Published on December 14, 2023

The self-storage sector continues to experience steady growth, fueled by an expanding urban population, changing consumer lifestyles, and the ongoing trend of downsizing and decluttering.



The demand for storage units has raised questions about the profitability of self-storage facilities. This is more pertinent now, with so many larger players already on the field like Public Storage.

This brief guide will assess the potential profits you can gain by investing in self-storage facilities.

Let's discuss the self-storage world, shedding light on market trends and sales growth pertaining to these useful industrial buildings.

Types of Self-Storage Facilities

Storage unit businesses provide a safe and convenient storage space for individuals and businesses, making them a potentially profitable business.

Here are some types of self-storage units your facility can hold.

Traditional Self-Storage

Traditional self-storage spaces consist of rows of units accessible via a roll-up door, ideal for storing furniture, household goods, or seasonal items indoors or outdoors.

Climate-Controlled Self-Storage

A climate-controlled self-storage unit maintains consistent temperature and humidity levels, making it ideal for sensitive items like electronics, artwork, important documents, or antique furniture.

Cold storage buildings are particularly useful for storing perishables like foods and medicine.

Drive-Up Storage

A drive-up storage unit enables easy loading and unloading of large or heavy items, making them convenient for businesses and providing quick access to inventory.

Commercial office buildings can use this type of storage unit as handy off-site storage.

Portable Storage Containers

Portable storage containers offer convenient container delivery, allowing you to load and store at your convenience, making it ideal for moving or temporary storage.

These storage containers are convenient and can store possessions from multi-family projects or during periods of relocation if need be.

Vehicle Storage

These facilities offer secure storage for cars, RVs, boats, and motorcycles, with security measures to prevent theft and damage.

GOOD TO KNOW: Public Storage, the largest self-storage REIT, is an excellent example of a lucrative business.

Growth and Market Trends in the Self-Storage Industry

Self-storage operators can draw insights from industry statistics to predict their potential facility's profitability.

The industry has experienced significant growth and notable market trends in recent years. Here are some key growth and market trends in the industry.

Increased Demand

The demand for self-storage units is increasing due to population growth, urbanization, downsizing, and the trend toward smaller living spaces, making it an attractive investment.

Established self-storage facility providers like Public Storage have capitalized on this demand, but smaller companies can do the same.

Economic Factors

Economic factors like job relocations, unemployment, and housing affordability influence the industry, with some individuals utilizing it during economic downturns to store belongings.

Urbanization and Apartment Living

Urbanization and smaller living spaces have increased the demand for self-storage units for seasonal items, extra furniture, and other belongings among urban populations.

E-commerce and Business Storage

E-commerce growth has increased demand for self-storage units, particularly climate-controlled ones, as businesses use these facilities to store inventory.

NOTE: The Self Storage Association (SSA) is a national trade organization representing the industry. Its primary purpose is to advocate for the interests of self-storage facility owners, operators, and suppliers.

Factors Driving the Demand for Self-Storage Units

The demand for self-storage units is increasing. Here are some key factors influencing this demand.

Population Growth

The growing global population needs more urban housing, resulting in a higher demand for storage solutions to store more belongings.

Urbanization

Urban living is characterized by downsizing into smaller apartments or homes with a limited storage facility, with residents often using facilities to store seasonal items and furniture.

Changing Demographics

Demographic changes, like delayed homeownership, single-person households, and aging populations, increase the demand for self-storage. This is especially prevalent among younger and older adults who need a space to store their sentimental or seasonal items.

Life Events

Major life events like moving, marriage, divorce, retirement, and the birth of a child can necessitate self-storage. These events often lead to a temporary or permanent need for extra space storage.

Lack of Attic or Basement Space

Many homes, particularly in urban areas, lack attic or basement storage space. Residents turn to these multi-million dollar businesses to compensate for this limitation in such cases.

Before delving into self-storage investing, it's important to thoroughly understand the financial performance and potential risks associated with operating and owning a storage facility.

Let's assess the financial performance of self-storage facilities through key metrics, indicators, and market dynamics for profitability, resilience, and real estate investment potential.

Key Financial Metrics in Self-Storage Business

Self-storage financial metrics include performance and profitability indicators used for decision-making.

Net Operating Income (NOI)

Net Operating Income is a critical financial metric in self-storage businesses, indicating a property's income generation after deducting mortgage, non-operating, and operating costs.

Same-store NOI is calculated through a company's reported rental income minus operating costs for properties held for at least one full fiscal year.

Formula: NOI (Net Operating Income) = Total Revenue - Total Operating Costs

Cap Rate (Capitalization Rate)

The cap rate, calculated by dividing the NOI of a self-storage property by its current market value, indicates potential return but also suggests risk.

Experts recommend using the purchase price instead of the down payment to calculate the cap rate, as the down payment can vary widely and skew results.

Formula: Cap Rate = NOI / Property Value

Cash Flow

Cash flow measures the cash generated or lost by self-storage properties, which is crucial for covering operational expenses, debt service, and providing income to the owner.

Formula: Cash Flow = NOI - Debt Service - Capital Expenditures

Occupancy Rate

The occupancy rate indicates the percentage of rented units compared to the total available units. A higher occupancy rate typically translates to increased rental income.

Formula: Occupancy Rate = (Number of Rented Units / Total Units) × 100

Revenue per Square Foot

This metric estimates the average revenue generated per square foot of storage space. It helps assess the efficiency of storage space utilization and pricing strategies.

Formula: Revenue per Square Foot = Total Revenue / Total Square Feet of Storage

Average Rental Rate

The average rental rate represents monthly rental income per occupied storage unit. Monitoring changes in the average rental rate can help owners improve their pricing strategies.

Formula: Average Rental Rate = Total Revenue / Number of Occupied Units

Expense Ratio

The expense ratio measures the percentage of total operating costs relative to total revenue. Lower expense ratios indicate more efficient cost management.

Formula: Expense Ratio = (Total Operating Costs/ Total Revenue) × 100

Debt Coverage Ratio (DCR)

DCR assesses a property's ability to cover its debt obligations. Lenders often use this metric to evaluate the creditworthiness of borrowers.

Formula: DCR = NOI / Debt Service

Return on Investment (ROI)

ROI measures the return generated from an initial investment in a self-storage property. It considers both rental income and property appreciation over a specific holding period.

Self-storage business solutions can be estimated using cash-on-cash ROI.

Cash-on-cash ROI estimates the rate of return on cash invested in a property every year.

Notably, cash-on-cash ROI only measures the cash an owner or investor has paid out of pocket compared to the cash income earned by their property.

Formula: ROI = (Net Profit from Investment / Total Investment Cost) × 100

Break-Even Occupancy Rate

The occupancy rate is a crucial metric for facilities, indicating the minimum occupancy level required to cover expenses without generating profit or loss.

Formula: Break-Even Occupancy Rate = (Total Operating Expenses / Total Revenue) × 100

NOTE: Public Storage is reporting financial results of nearly $1.75 billion in same-store NOI in 2020. Public Storage's same-store NOI increased to 11.9% in 2021, up from 9.4% in 2020. For another data point, Extra Space Storage declared an approximate same-store NOI of $770 million for 2020.

Understanding EBITDA and Its Importance in Self-Storage Industry

EBITDA is a financial metric used to evaluate a business's performance and profitability.

It stands for Earnings Before Interest, Tax, Depreciation, and Amortization.

EBITDA Calculation

EBITDA is computed by taking a company's net earnings and adding back interest, taxes, depreciation, and amortization expenses. The formula is as follows:

EBITDA = Net Income + Interest + Taxes + Depreciation + Amortization

EBITDA is important in the industry, and can be used by real estate investors and property owners for the following purposes.

Operational Performance Assessment

EBITDA is a crucial metric for evaluating facilities, which focuses on rental income generation and operating expenses management, excluding financing and non-cash expenses.

Comparative Analysis

This computation is handy for real estate investors and operators who're comparing facilities' operational performance, irrespective of financing structures or depreciation methods.

Cash Flow Analysis

EBITDA measures a property's cash flow from operations, estimating its ability to generate cash before accounting for non-operating expenses.

Debt Service Coverage

EBITDA is crucial for assessing a property's debt service capacity, particularly for self-storage facilities, and lenders can use it to assess their financial stability.

Valuation

It affects property valuation, often used in methods like the capitalization of income approach to determine the property's worth.

Financial Health

This financial metric is useful if you're planning on owning a storage unit business. It indicates profitability before considering interest and taxes, reflecting the profitability of the facility's operations.

Limitations of EBITDA

While EBITDA is a valuable metric, it lacks capital expenditures for property maintenance and improvements, both of which are crucial for long-term storage business sustainability.

Combining it with other financial metrics provides a more comprehensive view.

Self-storage companies often face significant additional costs in the form of property taxes, which can significantly impact their overall profitability.

Property taxes and operational expenses like snow removal can be major expenses for self-storage businesses, and failing to consider this can lead to serious financial difficulties.

We will examine the risks and challenges of the self-storage sector, including regulatory considerations and other factors that require proactive management.

It's important to ensure security for your storage facility is top-notch to mitigate some of the risks of running a self-storage business.

Effectively managing your self-storage facility will help you overcome some of the issues that may arise in the self-storage business, like tenant disputes and maintenance issues.

Economic Downturn and Its Impact on Self-Storage Industry

Economic downturns can impact the industry, leading to demand decline, quick tenant turnover, pricing pressure, competition, and property valuations.

Strategies include flexible lease terms, tenant retention, and targeted marketing.

Regulatory and Legal Challenges

Self-storage businesses face regulatory and legal challenges like zoning, environmental, lease, and contract disputes.

Compliance, proper documentation, and legal counsel can mitigate risks and ensure smooth operations.

Technological Disruption and Innovation

The industry is undergoing significant technological advancements, including:

• Online marketplaces
• Mobile apps
• IoT sensors
• Data management tools

These require investment in improved customer experience and operational optimization.

Learn more about the profitability of self-storage facilities here.

What Is the Average ROI in the Self-Storage Industry?

The industry yields a profit margin of 8% to 12% competitive returns, depending on real estate investment strategies, property performance, location, property quality, and market conditions.

How Much Does It Cost to Start a Self-Storage Facility?

Starting a self-storage facility can cost between $1 million and $5 million, depending on location, size, land acquisition, and additional amenities.

Determining the costs for initiating a storage business is essential when starting a self-storage facility, as it helps you establish a realistic budget and secure the necessary funding.

What Are the Key Financial Metrics to Consider in Self-Storage Business?

Key financial metrics to consider in the self-storage business include the following.

• Net Operating Income (NOI)
• Capitalization Rate (Cap Rate)
• Cash Flow
• Occupancy Rate
• Revenue per Square Foot
• Average Rental Rate
• Expense Ratio
• Debt Coverage Ratio (DCR)
• Return on Investment (ROI)
• Return on Equity (ROE)

These metrics help assess a self-storage facility's performance, profitability, and financial health.

How Can I Improve the Profitability of My Self-Storage Facility?

Boost self-storage profits with superior marketing, pricing, customer service, efficiency, security, tech, retention, cost control, research, maintenance, online presence, and market trend awareness.

Some of the benefits of self-storage automation include increased operational efficiency, improved security, and enhanced customer convenience, making it a valuable investment for any self-storage facility.

After setting up a self-storage facility, you can improve profitability with management software, which can minimize operational costs and streamline business operations.

What Are the Risks and Challenges in the Self-Storage Industry?

Self-storage demands careful management due to risks like economic downturns, tech disruptions, competition, regulation, property maintenance, and changing customer preferences.

This dynamic industry continues offering competitive returns on investment with low risk, driven by growing demand and evolving customer preferences.

Those willing to embrace modern trends, enhance customer experiences, and adapt to market shifts stand poised to harness the vast opportunities within the self-storage sector.

To stay profitable in the self-storage industry, real estate investors must prioritize staying informed, agile, and delivering exceptional service.