THE BEAUTY OF SCALE WITH SELF-STORAGE CUSTOMERS By Frank Rolfe

One aspect of self-storage facilities that gets little attention is the fact that it’s made up of tens or hundreds of little customers. This is not a source of frustration but actually an asset for those who own them. So what’s so great about having a ton of tiny customers?

No reliance on one huge customer

The pandemic has already demonstrated the danger of reliance on one big tenant. Shopping malls, office buildings, retail centers and industrial buildings all rely on one huge source of rent income. And when that one big customer goes broke, you are left holding the bag in a big way – often leading to bankruptcy. Self-storage offers a highly diversified client list of many small players so there is no stress or risk of losing that one big account.

Plenty of units makes even small rent increases powerful

If you have a 200 unit self-storage facility and can raise rents just $5 per month, that’s $1,000 per month of cash flow in your pocket. And the potential for greater occupancy allows you to apply that scale from $0 to $100 or so in bulk. This is one of the key reasons that smart buyers can significantly increase net income.

Greater diversity on collections

While it may seem like a hassle to try to collect from so many different renters, the truth is that this is a blessing as far as safety in your revenues. If one or two don’t pay in any given month, it won’t have any material effect on your operations. With a retail center, that would spell insolvency. And with the superior collections strength of auctioning units if they don’t pay, this diversity acts as a shock absorber on rent that you should ultimately receive anyway.

Smaller rents mean less attention

Studies suggest that, in some markets, around 95% of storage customers never visit their unit until they cancel their lease. For example, if someone downsizes their home, they have no real reason to check on their stuff as they have no place to put it. While that would seem strange to an apartment complex owner, that’s the power of rents of $100 per month or so. That amount is not large enough to stress out your customer or trigger their interest in moving all their stuff out.

The proof is in the low default rate

The sum of all these issues is a low mortgage default rate for storage owners. This is simply the byproduct of diversity and strong collections. And the difference is accelerating as those real estate sectors that have long relied on one or a handful of large customers – even ones that were seemingly blue chip prior to March 2020 – are finding it hard to pay their bills.

Conclusion

Having a multitude of small customers is not a pain but rather a blessing for self-storage owners. This advantage will only get more obvious as other real estate sectors crash from a reliance on just a few tenants for cash flow.

By Frank Rolfe

Frank Rolfe has been an active self-storage investor for around two decades, with self-storage units in many states throughout the U.S. His nuts and bolts knowledge of what makes for a successful self-storage facility has led to a three-decade career without a single failed property.