The high level answer is they run out of money and that can happen if their debt service outweighs their net operating income or their net operating income is negative. The real question is why is that likely to happen to a self-storage facility? If you are a real estate investor, you might have thought about getting exposure to this space as an LP or GP. If you are either, these things are important to consider.
Relevant Templates:
- Self-Storage Equity Ramping Model (up to 6 deals over 15 years) (GP/LP views with IRR Hurdle Waterfalls and dynamic logic for each deal) This is a fund one to see how a single equity investment can grow through deals.
There could be several reasons why a self-storage business might lose money or go bankrupt. Here are some of the most common ones:
- Poor location: Self-storage facilities rely on foot traffic and convenient access for customers. If the facility is located in a remote or hard-to-reach area, it may not attract enough customers to cover its operating costs. This may seem obvious, but be mindful of where the facility is location / demographics / ease of access. I've seen crazy things where the spaces are nearly inaccessible to bigger trucks / U-Hauls just so more units could be crammed in. That is not super helpful if the customer has to lug their stuff down the isle instead of being able to pull up to their space.
- Overbuilding: An oversupply of self-storage units in a particular area can drive down rental rates, making it difficult for individual facilities to generate enough revenue to cover their expenses. Simple law of supply and demand here.
- Poor management: Inefficient management can lead to increased expenses and decreased revenue. For example, if a facility is understaffed or not properly maintained, customers may choose to take their business elsewhere. People want to store their stuff where they know its safe and clean.
- Legal issues: Self-storage facilities may face legal issues related to zoning laws, property ownership, or liability. These issues can be costly to resolve and can drain a facility's financial resources.
- Economic downturns: Self-storage businesses, like many other industries, can be affected by economic downturns. During a recession or financial crisis, people may be less likely to use storage facilities, leading to decreased revenue. Be careful about the percentage of the purchase price that you are financing and the loan terms. The ROI will go down a little, but that is better than bankruptcy.
- Competition: If other self-storage facilities open nearby or established competitors lower their prices, it can be difficult for a facility to attract and retain customers.
- Delinquent tenants: Self-storage businesses rely on tenants to pay their rent on time. If tenants become delinquent or default on their payments, it can have a significant impact on the financial health of the business.
- Inadequate security: Security is a top priority for self-storage customers, and facilities with inadequate security measures are likely to struggle to attract and retain customers.
- Inadequate marketing: Without effective marketing, a self-storage facility may struggle to attract new customers and retain existing ones. This can lead to lower occupancy rates and revenue. This can be tricky. Some people like to just name the facility based on the town they are located. For example "Boston Self-Storage" or insert 'your town' + self storage and make it simple. You will see national brands with a name, but that might not be the right approach for everyone.
Overall, a self-storage business that fails to generate enough revenue to cover its expenses is likely to struggle or fail. To succeed, a self-storage facility needs to be located in a high-traffic area, managed efficiently, and able to compete effectively with other facilities in the area.
Article found in Real Estate.
