A common question for most investors is whether it’s more profitable to build a self-storage facility from scratch or to buy an existing one. There are many issues to consider on this topic, but here is a basic explanation of the good and bad aspects to both.
The benefits of building a self-storage facility from scratch
When you build a self-storage facility from scratch, there are some potential benefits to the investor:
- You control the entire design and quality of construction – you know exactly how it’s built.
- You only pay for the land and improvements, rather than for any goodwill or business value.
- You can build it to meet the new demands and standards of the industry.
- You have a warranty on most items so you don’t have to worry about any cap-x items for years.
These are certainly important items.
The disadvantage of building a self-storage facility
There are some serious problems with building a self-storage facility that you need to consider:
- It is extremely hard to get financing, as most banks only make loans on existing properties.
- There is a large element of risk when building any project that you will fail to do it properly and then be unable to receive the final permits to open.
- Many great locations have no available land or zoning to build on.
- You have no repeat customers as you are starting from scratch and will take a while to build a following.
These are some serious items to ponder.
The benefits of buying an existing self-storage facility
There are many potential advantages of buying an existing RV park including:
- The risk is low because you’re buying an existing asset with proven cash flow.
- It is easy to get financing as the bank has several years of property performance to loan against.
- You have lower risk as you can buy an existing cash flow and then improve it with better marketing (normally on-line).
- You already have a stable base of customers.
These are some pretty important benefits.
The disadvantages of buying an existing self-storage facility
But there are still some potential disadvantages of buying an existing storage property including:
- You don’t really know how well the original owner built it.
- It may have some items outdated as compared to new construction.
- Any warranties have probably run out.
- The property may actually have a bad reputation that you have to undo.
What of these are the big issues?
While some of these items are less important, there are still some really big issues that you can’t get away from:
- Financing. Most buyers are unable to buy a self-storage facility without bank financing. Since building a storage facility from scratch is extremely difficult to find a lender for, this is definitely a vote for buying an existing storage property.
- Risk. There’s no question that buying an existing self-storage property is significantly less risky than building one from scratch. Again, this is a vote for buying an existing storage facility.
- Odds. The odds of finding an existing storage facility to buy is infinitely higher than a successful property to build from scratch.
The clear winner for most investors is…
Given all of the above, most investors are infinitely better off with buying an existing self-storage facility than to try and build one from scratch. In fact, the answer is pretty simple given the true facts and risks. That’s why by far the majority of Americans are going to get into the storage business as buyers rather than builders.
But there are exceptions
If you can find a great location with the proper zoning, road access, and market demand, then building an self-storage facility may be possible. We’re not saying that you can’t build one from scratch, but rather that you are better off focusing on buying an existing one. But that disclaimer may not be accurate in your case. There are many valuable storage facilities built every year in the U.S., but the odds are definitely against new construction. However, you may defy the odds with your plans. If that’s the case, that’s great.
Conclusion
Building a self-storage facility from scratch vs. buying an existing one is a common question for potential storage investors. Hopefully these points will help point you in the right direction. It’s a big industry with lots of opportunity, but you have to use smart strategy to find just the right property.