By Mark Helm
There’s a way to make sure you don’t ever encounter a surprise expense for a major repair at your self-storage facility. By incorporating the following method, you’ll have peace of mind knowing you’ll never need to fund these costs out of pocket, which can reduce your business’ cash flow. Bold statement, but true.
At the top of the list of the fantastic attributes of self-storage, and there are many, is the ability to accuractely project cash flows. I mean very accurately. The main reason is there are so few capital expenses that will affect a facility’s cash flow. There are no improvements to make when a tenant moves out, such as in the apartment or rental-home industry. There are no commissions to pay to agents to rent the unit again. Capital improvements that are common for other real estate assets—painting, replacing flooring or adding new appliances—don’t exist for self-storage operators.
But there are capital improvements in self-storage, right? What are they? The biggest expenses are blacktopping, HVAC replacement, office remodeling, new signage, etc. But here’s what I’ve discovered. I’m fairly sure when the HVAC is going to need replacement. I know we need new blacktop every four years, and must resurface our lots every 10. I know my deductable on our insurance policies is $10,000.
What if you maintained a separate account that you contributed to each month so that when you have a capital expense the funds won’t need to be pulled from your operating account? It’s really that simple. We allocate $1,000 per month per facility into a capital-reserve account for that specific facility. So far, I’ve never had to take money out of operations to pay for capital improvement.
Here’s an example. Last year we had a large sign that was visible from an expressway destroyed in a wind event. The sign originally cost more than $60,000, so it was going to be pricey to replace. However, we never missed a cent that month or even that year because replacing it—even upgrading it to LED—was completed without a penny from normal operations. Our deductable was paid from the capital reserve account and we didn’t miss a beat.
This simple practice has allowed me to grow our business exponentially. Just set aside money each month in a capital-reserve account so your cash flow is never used to fund capital improvements. By doing this, there will always be enough money to handle any surprises and anticipated capital expenses for your self-storage business.
Mark Helm is a commercial real estate agent who began to specialize in self-storage in the mid-1990s. By 2000, he had purchased his first self-storage facility. He’s the owner of Helm Properties and author of “Creating Wealth Through Self-Storage.” For more information, e-mail [email protected]; visit http://creatingwealththroughselfstorage.com.