How to do Financial Planning for a Self-Storage Business?

A self-storage business is one of the real estate investment options you can invest in. When you build from scratch, you have to do environmental scanning to know the demand in your target area and the existing competitors. You need to know the population in the area and the number of small businesses since it will be the basis when projecting the demand.

Before you start building or buying an existing property, you have to first establish the viability of your project by preparing a financial plan. It will save you time, effort, and resources when it turns out that the project is not feasible.

Preparing a financial plan will include revenue projection, estimating expenses, preparing financial statements, computing financial ratios, and doing entry/exit analysis.

Presented below are the critical points to consider for your self-storage financial plan.

1. Projecting Revenue

There are different factors involved when projecting revenue: the leasable space, occupancy rate, and rental rate. Additional earnings may also come from ancillary revenue.

a. Forecasting Leasable Space

Leasable space is the total space available for rent to customers. Space can be rented by volume (m3) or by area (sq ft). Also, sizes per leasable units of various self-storage facilities may differ depending on the business’s target clientele’s needs.

b. Occupancy Rate

The occupancy rate is zero at the beginning of a new self-storage facility and around 60%-70% when buying an underperforming self-storage property. It is crucial to do advertisements and promotions, especially for a new facility. It will help you to reach out to prospective clients to fill the vacancies. The sooner the facility is filled up, the better for your cash flows.

c. Rental Rate

The rental rate can be charged per square foot or square meter. Do your market study how much your competitor is charging given their facilities offered. Of course, your operating expenses also play a critical role when deciding how much to charge for self-storage rentals.

d. Ancillary Revenues

To have added cash flow, you can also sell items related to your operations, such as boxes, tapes, locks, bubble wraps, and other moving and packing supplies. Making sure that your ancillary products are high-quality can help gain trust from your customers, knowing that you only offer durable supplies. Plus, it is convenient for them to buy at the facility rather than going somewhere else.

e. Collection Losses

In every rental property, such as self-storage, you should allocate for collection losses. It can be a percentage of total revenue. Allocating for collection losses will provide more accurate projections and not overstate the estimated revenue.

2. Estimating Expenses

There should be enough cash to cover operating expenses to run the business smoothly, including administration, promotions, maintenance, utilities, supplies, insurance, pest control, and other related expenses. Operating expenses should be within the budget. Once the manager becomes familiar with the ins and outs of the operation, the business can start cutting costs without sacrificing quality service.

3. Preparing Financial Statements

You can analyze the business transactions by preparing the three financial statements (income statement, balance sheet, and cash flow statement). The income statement shows how much net operating income you can earn. Then after deducting the depreciation, interest, and taxes, you can derive the net income. Would there still be left after considering all those expenses?

The balance sheet entails how much of your total assets are financed by debts are equity. Is your business highly leveraged? It means you are financed more by debt than equity.

Cash flow statement record all cash transactions and whether the cash inflows are enough to cover all cash outflows. If you have a stable stream of earnings from rentals and ancillary revenue, you will be able to cover all these expenses.

4. Computing Financial Ratios

To better understand the financial statements, you can utilize financial ratios. When assessing self-storage, key financial ratios are profitability ratios, growth ratios, efficiency ratios, and leverage ratios.

Some profitability ratios you can use are Return on Equity and Return on Asset. These two profitability ratios calculate how much income is earned by the equity and assets.

Then there are growth ratios such as sales growth, Net Operating Income (NOI) growth, net income growth, and property value growth. Are these growth indicators increasing year after year? These are suitable measures whether your business is growing or stagnating. If your business is stagnating, what measure should you take to see growth?

The efficiency ratios such as total assets turnover and fixed assets turnover depict how much every dollar of total assets and fixed assets translates to revenue.

Leverage ratios you can utilize are loan-to-value (LTV), Debt/NOI, Debt Service Coverage Ratios, Interest Coverage Ratios, among others. These leverage ratios evaluate if you can pay the financial debts and therefore raise outside funding.

Shown below is a sample computation of financial ratios for self-storagae business.

5. Doing Entry/Exit Analysis

Entry/exit comparison is a vital analysis when deciding to engage in a self-storage business. One of the metrics considered is the Cap Rate, which can be based on industry-standard or recently sold comparable property. An Exit Cap Rate higher than Entry Cap Rate means high capital gains on the property upon trade sale. You can compute the Cap Rate by dividing the Net Operating Income (NOI) by the property value. NOI assumed that business transactions were paid in cash.

Other key metrics to look at when doing entry/exit analysis are the rental performance and financial results.

You can study the sample analysis in the table below to better grasp entry/exit analysis.

Presented above are the components when preparing a financial plan in engaging in the self-storage business. It is critical to prepare first a financial plan for your self-storage. It will help you be more familiar and know every aspect of the business and the industry before diving into it.

If you need a financial model template, you can find it on the eFinancialModels.com website. On this leading platform, you can find quality financial model templates for self-storage along with other industry-specific financial models.