Putting Profits Back Into Your Pockets
By Kerri Fivecoat-Campbell
The numbers don’t lie. There’s a reason the self-storage industry has grown since 2012 to a $38 billion industry with an average growth rate of 7.7 percent. It’s profitable, there is a lot of money to be made in the self-storage industry, but only if it is done right. If operators don’t mind the business, a lot of profits can be left on the table.
“There are definitely a lot of ways in which some operators are leaving profits on the table,” says Carol Mixon-Krendl, president of SkilCheck Services, Inc., in Lodi, Calif.
In many instances, the profits being left on the table aren’t small pocket change either. Some of the examples industry experts shared for this article could add tens of thousands of dollars per month, which could easily bring a hefty increase to your facility’s net worth.
Manage Revenue
Industry experts all agree that revenue management is definitely the biggest place self-storage operators leave profits on the table. “Sometimes I’ve seen rental rates left in place for years and years,” says Mixon-Krendl. “Almost every storage operator, except for the large ones, leave rental rates the same for too long.”
James J. Hanrahan, acquisitions director for Store Here Self Storage in Orange, Calif., says fear is what drives this common mistake. “Much of not raising rental rates happens because owners take the advice of their managers who say people will move out if you raise their rent,” Hanrahan says.
Ann Parham, CEO of The Parham Group in San Antonio, Texas, notes that she’s seen some operators leave rental rates unchanged for as long as 10 years. “Operators should be looking at their rental rates at least every six months; the maximum is one year,” Parham says. “I think this became really commonplace during the recession when operators became so afraid to raise rents.”
The market is much different now, but, even during the recession, Mixon-Krendl was raising rents in the Bay area because the demand remained high. “You know what? People still stayed,” Mixon-Krendl says.
How much could this impact the bottom line? Mixon-Krendl has seen it make a very large impact in some cases. “I’ve seen it generate an extra $20,000-$30,000 per month depending on the facility,” she says.
Brenda Scarborough, business development manager for the William Warren Group in Tampa, Fla., says there are two aspects to revenue management. “The only way to increase income is through current and new customers,” says Scarborough. “If you’re at 90 percent occupancy, the only way to increase income is through current customers.”
Scarborough explains that rents should be increased on current customers at a minimum of once per year, but just giving a straight increase across the board isn’t a good way of doing it.
Scarborough uses an example of having 10x10s that hit 85 percent occupancy. “Once it reaches 85 percent occupancy for that unit size, it needs to be increased,” she says. “If you do a straight $2 increase across the board, you’re not maximizing the potential; you may be able to get $5 increase per month on that size unit because that’s what the market can bear.”
If you don’t have software that helps you do comparison pricing, your managers need to be checking out your competition to find out what they are charging. “It’s the only way to increase revenue each year,” Scarborough says, offering an example of a facility with 400 units. “If you only raised rent $5 per customer, that’s $2,000 more per year; but if you lost $10 you could have been getting on each customer, that’s a big difference in your cap rate. Bottom line, you’ve lost a lot of money.”
What happens if you raise the rents and people begin to move out? “It’s likely you won’t stay 95 percent occupied for a time. You might lose 20 tenants of 200, but you will make a nice margin just on the next rental raise,” says Hanrahan.
Maximizing Revenue Management
“A structured, consistent existing customer rent rate increase program is very important,” says Guy Middlebrooks, vice presents of third-party management at Cubesmart in Malvern, Pa. “The larger or more sophisticated operators understand the importance of existing customer rate increases and have invested in their systems to maximize revenue.”
Two ways to maximize the profits with proper revenue management:
- The lowest tech form of managing your revenue is the traditional way of having your managers “beat the streets” doing mystery shopping to find out what your competitors are charging new tenants and making sure your prices for new tenants are comparable. You then must compare your new rental rates, the occupancy for each size unit, and determine if you have existing tenants paying below rate and raise those rents.
- Revenue management and data mining systems designed for self-storage are the best and most efficient way to put into place a rental rate increase system that will maximize your profits.
“Data mining software allows for more reports,” says Paul Darden, president/owner of Storage Income Pros in Dallas, Texas. “These types of programs allow facility owners and managers to instantly track income on a daily basis and tell you where you should be.”
Darden says these data mining programs consider physical occupancy vs. economic occupancy, which is the spread that finds discrepancies.
Data mining programs will monitor concessions, accounts receivable, employee theft (ghost tenants managers may have put into a unit that wasn’t recorded in the system), and employee policies.
These types of software programs allow facility managers to mine the data of their current customers and tailor rental increases to what the customer can afford. The software also takes into consideration other factors, such as weather conditions (tenants are less likely to move in the middle of the coldest portions of winter, for example). Darden explains, “You might have two customers renting side by side and one is a stock broker and the other is an elderly woman. The market study showed an increase of $10, but deep data shows the stock broker can afford a $12 increase, so his rental rate was increased $2 more. The elderly woman may not even get a raise because the deep data suggests that she can’t afford it.”
The advanced software available to self-storage operators today also automatically tells facilities what their competitors are doing, which helps predict true demand in any given month by tracking how many calls for what type of units the facility has received. “Historical data isn’t accurate,” says Darden. “It doesn’t give the full data. You must create tracking, what the customers calls for, and qualify the person. When the qualified customer is entered into the software, it tells what the true demand is.”
- Discounts: Most industry experts also note that giving heavy discounts and concessions for the life of the lease is a way to leave huge profits on the table. “I’m not a fan of continual discounts,” says Parham. “I won’t do a 10 to 15 percent discount for the life of the customer. I try to do discounts for short periods of time; 25 percent for the first two months, as an example.”
Darden explains this is where good revenue management systems will help a store increase its cap rate. He cites a store his company purchased and raised the income $40,000 a month just by analyzing what’s being left on the table in revenue management and did it without raising occupancy. “If I can add $40,000 per month by using big data, I’ve added $800,000 value to the property based on a six percent cap rate,” says Darden. “These systems allow smaller operators to compete with the big ones.”
- Fees: Another area in which operators are leaving profits on the table is by allowing their managers to use discretion in waiving fees. “We have manager who will waive fees on everyone,” says Parham. “Right now, we have a policy that managers do not waive any fees unless absolutely necessary.” Parham goes on to say that fees are put into place for a reason: They help the facility cover the costs of the customers who are not in compliance with their contract.
M. Ann Ballard, president of marketing, training and developmental services for Universal Storage Group in Atlanta, Ga., says, “I saw one store that was waiving more fees than they were collecting,” recalls Ballard. “This means that managers and the staff aren’t confident enough in their training to follow the rules.”
Ballard doesn’t want to see fees waived more than 10 percent of what they’re collecting. She says facility operators should be able to spot that immediately just by monitoring the reports. You can see what you’re losing by looking at the late fees and other fees collected and dividing that by the late fees and other fees waived.
One way to avoid leaving that money on the table is by properly training your managers and posting the rules so that customers are aware they will be charged. “Post a time, say 6 p.m. is the time all rents have to be paid, or there will be a late fee,” says Ballard. “There was a time when we relied on snail mail and we looked at the post mark date, but with online payment, we can narrow the time. Tell your employees and customers this is what time they have to pay by or they will have a late fee.”
Ballard adds this is important because it will set a precedence for the customer’s entire lease. “You either train the customer to pay on time or the customer will train you to pay late.”
- Requiring Tenants To Purchase Insurance: “It’s still so shocking to me how many operators are not selling insurance,” says Ballard. “It not only helps the operator reap the rewards by getting a fee, but it shifts the risk of liability to the customer when disaster does strike.”
According to Ballard, all the insurance companies in the self-storage industry will provide the necessary training and help you navigate any insurance licensing requirements your state may mandate, making it a win-win for the insurance company, the facility owner, and the customer. In Georgia, for example, the statute allows the facility manager a limited line to sell insurance without being an insurance agent. Once sold, the customer is set up on the pay with rent program. The software tracks the sale and collection of the fee. “There’s nothing the facility operator has to do by collect their fee,” says Ballard.
Scarborough states that some stores even require tenants to purchase their insurance. Parham agrees that it is a good revenue stream and says it has taken many operators time to realize this. “Beforehand, during the process of leasing, managers would explain that their stored goods weren’t covered, and we’d give them a pamphlet and tell them to call,” says Parham. “99 percent of them didn’t.”
Per Parham, training the managers to properly sell the insurance is key to gaining a revenue stream. She says that many people will counter that their homeowner’s insurance will cover the cost of their goods if something happens. In her example, for $8 a month, the tenant can purchase $2,500 worth of insurance with no deductible. “By having no deductible policies, the insurance is better than making a claim on the homeowner’s policy, which may have a high deductible,” says Parham.
If the fee your store gets in selling the insurance is $4, it may not seem like much. However, when you multiply that by 400 units, it adds up.
- Maximizing Retail: This is another big way in which operators are leaving profits on the table. Ballard says that operators should be offering what their customers need for moving and marking it up at least 2.125 percent, which will give you a 55 percent profit. Ballard says her stores have averaged $36 in retail sales per move-in, which adds up to about $20 of additional profit per move-in. “We’ve been averaging that for the past 10 to 15 years,” says Ballard.
“I’ve went to many properties and they don’t sell boxes,” says Hanrahan. “They say it’s too hard to manage.” One way to manage it, he says, is to provide bundled packages and to allow the customer to return the items they don’t use. “We allow them to return it for a credit on their account; it’s easier than having managers deal with a cash refund.”
If you do have retail sales at your property, make sure to scrutinize your vendors at least once a year, re-evaluating what they are selling you the products for to keep your sales competitive.
- Becoming Complacent On Supplies: You buy a lot of supplies for your business and you can become complacent in ordering from a particular vendor. “You get used to ordering something from a vendor and sometimes don’t notice the price has tripled in cost,” says Scarborough. “You should review all of your supplies at least once a year and renegotiate.”
It may save you thousands of dollars per year. “Doing a few little things can change the ROI; when you become complacent, you lose money,” Scarborough says.
- Not keeping up with maintenance. “Have a good product,” says Charles Byerly, president and CEO of Westport Properties, Inc., and US Storage Centers, Inc., in Irvine, Calif. “Whether your facility is a brand-new state of the art one or a first-generation facility with swing doors, make sure your facility is well maintained, bright, and welcoming.” Byerly says you are likely losing customers–and leaving profits on the table–if the first impression drive-bys get aren’t as good as the first impression they get of your competition down the street. “Remember to have the best signage you can and keep it bright and up to date or it will blend into its surroundings.”
The Bottom Line
Your managers must be trained in all areas of helping your facility maximize revenues. They must be masters in the areas of knowing when to give discounts and concessions, selling insurance, how to collect fees mandated by your facility, and monitoring expenses.
“Training is very important in our industry,” says Middlebrooks. “Our store level teammates must be given the tools and opportunities to be successful.”
Kerri Fivecoat-Campbell is a freelance journalist based in the Ozark Mountains. She is a regular contributor to MiniCo’s publications. Her business articles have also appeared in Entrepreneur, Aol.com, MSN.com, and The Kansas City Star.