Where to Start in Creating Your Self-Storage Business

If you’ve managed to stay in-the-know about the latest trends in real estate for 2023, you know that self-storage investing is on the rise. Between record high returns, low management costs, and sustained renter demand, investing in self storage facilities is proving one of the most lucrative moves for investors this year. 

But what does it really take to start your own business in self-storage? 

In this article, we break down eight simple steps to start your own self-storage rental business and start capitalizing on this lucrative market. 

Step 1: Conduct Market Research  

As with any type of investing, step one is doing your homework. You must decide whether starting a self-storage business will be sustainable in the location and local market you’re interested in. 

Here are a few factors to consider: 

• Local Demand – If you start a self-storage business in a particular location, will there be enough demand to reliably fill units? Think about where a self-storage facility might be particularly well utilized (e.g., next to a university, off the highway exit, etc.). Investing in any property involves some level of risk, so you want to be sure you’ll be able to generate enough revenue from your customers to cover construction expenses, mortgage debt, and your monthly operating expenses.  
• Local competition – Have the owners of nearby storage facilities been able to fill their units consistently? If not, a second facility in close vicinity is unlikely to fare any better. 
• Expected Revenue – What do storage units typically rent for in the area? You should use this information to calculate your expected revenue based on the number of storage units you plan to rent out, as well as an estimate of what your self storage investment returns could look like. 
• Seasonality – The range of seasonable variability in demand is something to consider as well when starting your self-storage business. According to Neighbor.com, the state with the most seasonable volatility is North Dakota and the state with the least is Arizona. Consider how seasonal variability will affect your ability to generate revenue. 
• Target Demographic – Keep in mind that self-storage renters tend to fall in the middle- and upper-middle-income brackets and generally range from people in their early 20s (think college-aged) to those in their mid-50s (retirement age). The customer base of a self-storage facility is also typically within a three- to five-mile radius, so a facility located in a secluded area with few people is unlikely to generate sustained interest. 
• Vehicle Traffic – Research shows that drive-by marketing attracts most self-storage customers. High vehicle traffic = more exposure = more filled units. 
• Population and Job Growth – The projected population and job trends in the area are also a strong predictor of how small businesses will fare in future years. 

Include these factors and other relevant ones in your formal cash flow analysis, or feasibility study. You’ll need this estimate of your predicted cash flow for your next step: the business plan.  

Step 2: Create a Business Plan 

After you’ve done the preliminary research, your next step is writing a self storage business plan. Any small business owner needs a sound and well-reasoned plan for implementing their ambitious goals. 

A business plan should include the highlights from the market research you conducted, organized in a readable way for future partners, lenders, or other parties involved. It should describe the structure and type of your business, detail important financial metrics, and explain your overall market strategy and approach for keeping your business profitable based on the supply and demand in your chosen market. 

Ultimately, your business plan should lay out a convincing proposal and the steps you intend to take to start a successful self-storage business. 

For more tips about what to include in your business plan, see our article on the basics of self-storage investing. 

Step 3: Secure Financing 

Now that you have a plan, you need the means to accomplish it. Whether you decide to build or buy a self-storage facility, you’ll probably need some level of financing to fund your small business.  

There are a variety of loans available for self-storage investors. Some of the most common financing options for self-storage include SBA (Small Business Administration) 504 loans, SBA 7(A) loans, or conventional loans. If you’re building a new facility, you need a construction loan, which usually requires at least 25% down.  

SBA 504 loans are ideal for those who don’t qualify for conventional loans, and they offer 10-, 20-, or 25-year fixed-rate mortgaging for up to $5 million. To qualify, however, you’ll need to meet some criteria set by the U.S. Small Business Administration, including: 

• Operating as a for-profit company with a net worth less than $15 million 
• Having an average net income less than $5 million 
• Demonstrating some management expertise 
• Showing that you’ll be able to pay back the loan (This is where your business plan and feasibility study come into play) 

SBA 7(A) loans also assist small business owners. The maximum amount is again $5 million for standard loans. For this type of loan, you’ll work closely with your lender to negotiate an interest rate, typically between 5.5% and 8%. To qualify, you’ll need to demonstrate a need for the loan, be paying off any existing debt obligations to the government you may have, have invested equity into the business yourself, and meet various other criteria.  

New construction loans are short-term loans, usually around one year in duration, that finance a new build (such as a new self-storage facility) during the construction phase of the project. Construction financing typically has higher interest payments and rates than a traditional mortgage due to the riskier nature of these loans. Closing costs may vary for construction loans, depending on the lender and scope of the project. Some developers may be able to save on closing costs by using a construction to permanent loan. Construction to permanent loans are construction loans that convert into more traditional mortgages after the building part is completed. These loans require only one down payment and set of closing costs, and during the construction process, the borrower will often only be required to make interest-only payments. Once the loan converts into a permanent mortgage, they’ll begin paying off the principal balance while continuing paying interest.

Remember, having a sound business plan to present to lenders is your biggest asset when securing a loan and negotiating a low interest rate. 

Step 4: Build or Buy Your Storage Unit Facility 

Next, it’s time to put your plan into action. Your next steps will obviously depend on whether you’ve decided to build a new self-storage facility or purchase an existing one. If you’re building, you’ll first need to check with local city planners about zoning requirements to verify that you can operate your facility on the plot you were intending to. You may need to get your plot re-zoned and wait for approval before you can move forward with construction. And don’t forget to get your new facility insured with a comprehensive policy to protect your business against potential disasters or liabilities. In total, you can expect to pay around $25 to $70 per square foot on construction costs. 

If you plan to buy an existing facility, you’ll focus instead on getting your new acquisition appraised, inspecting it, and negotiating with the seller on its price and the conditions of the agreement. Just like any other property, you’ll want to analyze the property’s prior cash flow, tax returns, and other financial and risk information you have. The price of a self-storage facility will depend on its square footage, number of units, and location. 

Learn more about the pros and cons of each option here.  

Step 5: Install Security 

As a storage business, security should be one of your main priorities and selling points for your units. If your storage units aren’t secure, customers will have no reason to entrust you with their belongings.  

Installing smart technology can enable you to monitor and manage your self-storage facility remotely, which can benefit you personally while also serving as a great feature to advertise and use to draw in clients. Some security features to consider include electronic/keyless entry, mobile entry, smart padlocks, or door controllers. Many security companies (like this one) also offer custom locks solutions, so you can create a security system unique to your facility’s particular needs and design. 

Step 6: Market Your Storage Units 

You won’t make much progress filling your storage units without targeted marketing. You should cater your listings, advertisements, and website content toward those renters you’ve identified as your primary customers. There are many options for self-storage marketing that you can explore in our article on the topic, but a few include pay-per-click ad campaigns, billboard ads, and referral programs. 

Step 7: Write a Detailed Self-Storage Rental Agreement 

Before you can rent to any tenants, you’ll need to write a thorough self-storage rental agreement template. At minimum, a self-storage lease should include: 

• Contact information for both parties 
• The monthly rental rate and payment schedule 
• The start and end dates of the lease 
• Amount of the security deposit 
• Grace period and late fee policies 
• Responsibilities of the lease 
• Responsibilities of the lessor 
• Any rules about which items can and cannot be stored 

If your units are climate-controlled or offer additional amenities or features, you’ll also want to clearly explain the terms and details of the arrangement for these features and any corresponding fees or costs. And if you have any legal questions about your self-storage agreements or the laws surrounding them, don’t hesitate to get in touch with an experienced real estate attorney in your area. 

Step 8: Use Software to Manage Your Units 

Implementing smart strategies for managing your storage units is perhaps the most important thing you can do to ensure long-term success for your business. Using storage unit software to manage your rental offers several benefits, including: 

• The ability to sign and store leases digitally 
• Lease tracking 
• Online rent collection capabilities 
• Tenant screening tools 
• Financial reporting, accounting, and tax documentation resources 
• Tenant communication tools 

What’s more, you can use property management software like Innago to manage storage units just as you would traditional commercial or residential properties. You’ll have access to all the same features on the platform you’re familiar with, or if you’re a new user, you can easily set up yourself and your tenants on a platform with a simple and intuitive interface and exceptional customer support. 

Conclusion 

While the process of setting up your self-storage business may seem overwhelming at first, a significant payoff is waiting for you at the end of the start-up period. With a carefully thought-out business plan, skillful team members, and an eye toward technology that can ease management duties, you can take advantage of this niche but rapidly growing industry.