Storage Condo Trade Secrets

...the keys to a successful development

Over the last 5 years I have developed a very specific knowledge of what makes the StorageShopUSA developments work. Maybe they shouldn’t be called “trade secrets” but the things listed below had a significant impact on the success of the developments. I feel so strongly about them that it is hard for me to recommend any other way to approach a development. – enough said.

The items listed below may not “wow” you individually but the true is that all of these elements when used together have created a very successful real estate development. It has become increasing clear to me that after 5 years, talking to hundreds of people (buyers, prospective buyers, and other real estate developers), that the StorageShopUSA product stands alone in its class.

I need to say that some of the “secrets” fell upon me as I was doing my first development. I’m not sure I am not that smart – I am just that focused.

Regardless of how I arrived at trade secrets, they are it, and quite frankly, if somebody told me they wanted to change something, I would feel a twinge of anxiety. I know now how important these principles are. I am not saying that this is the only way however, I’ve learned enough to know, it is definitely a great way to develop storage condominiums.

I do realize there are other types of developments (mainly talking about “Storage Condos” an industry name that seems to be sticking when describing these kinds of developments.). These projects are similar and some are doing well I’m sure.

StorageShopUSA can be included in the “storage condo” industry; however, I feel we attract a wider range of buyers. There are certain buyers we don’t get that some of the other developments might. I will say there is one market that nobody is getting – I know because I see it plain as day. It may even be better than the StorageShopUSA concept. I am in the process of developing it and hope to launch it in the fall of 2009.

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The Profit Is In the Land

People are always talking about the cost of land. – mainly how it always seems to go up in price. Some will remember the same conversations with residential land years ago. What emerged from that were residential condos. Although a little over built today, they are solidly entrenched in the real estate market.

Today, we see the same thing happening with commercial land. There are some condominium developments in the commercial market but for the most part it is wide open. It seems like we are forced to go the condo route because land just keeps going up and the only way to get an affordable product to the consumer is to share in the cost of that land.

In my area, a commercial lot under $100,000 (even 150,000) is very hard to find. If you do find one, it might not be the area you want.

Basically what I do is sell commercial lots (a place to build a small office warehouse type structure) in areas all over the city for about $10,000/lot (unit).

Instead of each person buying a $120,000 lot, I get 12 people to throw in $10,000 and we all get a spot to build a shed on. Of course, it is more complicated than that. The profit is in what you charge each person for the ability to have building. If they are willing to pay $10,000, then they are willing to pay $30,000. It is still much less the alternative of paying $120,000. This is the reason the projects are profitable.

As a side note, the reason the project doesn’t work in areas where the land is too cheap is because the profit is in the land. StorageShopUSA doesn’t count on profit from the construction of each building. – it is the total package! It does however allocate money in the budget for the construction and project management.

It’s a duplex

You are kidding. No, this is a proven concept in the residential market - why wouldn’t it work in a commercial market. Buy the whole building and rent out half to offset the payment. – what a concept! The very truth is that you have people willing to buy a duplex but won’t buy anything with more units than that. They don’t want to be landlords but the simplicity of the duplex is attractive.

A duplex also provides flexibility for growth of a business, downsizing and/or freeing up a portion of the person’s assets. (selling the other unit).

The duplex is a very simple and more comfortable to manage as a real estate investment. The buyer personas show that the purchase needs to feel more like an investment in real estate and the duplex model provides that. I have to say, I chose to pursue the duplex design out of need. I wanted a low risk strategy and building smaller, separate buildings was the answer. Besides, the bank financing was easier if I did it this way.

Residential Labor vs. Commercial Labor

Maybe it is not common knowledge but the truth is that there are more residential contractors then there are commercial contractors. Better pricing comes from more competition. In my area, there are very few choices when choosing a metal building contractor.

Even though the developments are commercial, the traditional wood frame structure is more residential. It is simple and any builder/contractor can do it. The price difference was very significant. It allowed me to reach the price point necessary to make the project work and has given me more flexibility with sub contractors.

It also keeps the competition far away because the commercial developers wonder how I can provide the product at that price and the residential builders don’t really venture into the commercial market.

“Stand Alone” Building

Would you rather live in a multi-unit condo, a duplex condo, or a single family home condo? Clearly people choose the “stand alone” single family home even if the cost is a little more.

This has everything to do with the pride of ownership of the buyer. The buyer personas have revealed that they want to own and not rent. I have witnessed it first hand as I see the owners of “their building” care for and concern themselves with “their building.” That attitude is not the same as if they owned the middle unit in a 10 unit complex.

In multi-unit buildings, there is a feeling that the association (or management) will take care of things and that they are just another owner.

The stand alone building gets people to do things like wash off the parking area, plant a few more trees or shrubs, pick up debris, etc. I may not be explaining it the best, but, there is not a doubt in my mind that if they can stand out front and say “that is my building” it is powerful and adds tremendous value to the buyer.

This feeling is so powerful that a vast majority of people who have been attracted to the development because of the single unit price under $100,000, have purchased the entire building.

On my first project, 11 of the 12 buildings were sold as 1 entire building. On the next project, 9 of the 14 buildings were sold as 1 entire building. I think the combination of it being an entire stand alone building and being a duplex was the key.

Pricing

What are people willing to pay is the question? I didn’t know in the beginning but, I knew there was nothing out there in the $75,000 to $100,000 range. I wanted to provide the best economical choice.

The reason I am able to make this happen is because

1. I find land at the lowest possible price in an area. It would be hard to find a better starting point.
2. build the most economical structure. I controlled the total cost by controlling each and every component and the value it added.

I could line up 100 builders and ask them to provide plans, specifications and a price for 2500sf building and I don’t think anybody would beat the price (or come close). They would have to come up with the same building design as I did and even then, they would add on a profit – I don’t. This is a rock solid formula and that is why after 5 years, nobody has tried to compete in an area where there is a StorageShopUSA development.

Invest vs. Spend

The key to this strategy is that the buyer sees an immediate and recognizable value in the real estate – it’s not like spending money on a car, boat or motor home. The decision is still a lifestyle choice but it is a lot easier to make that decision when the purchase is an investment first.

I want to make one very important distinction with regards to how people view this purchase.

Let’s say a typical 2-3 bedroom starter home is $150,000 and the rental market for something similar is $1100/month. People will look at the age old “rent vs. own” analysis which corresponds to either investing in a home or spending money on rent. Five years goes by and they are making more money. They now want a nicer house that costs $275,000. This decision no longer is based on the rent vs. own analysis, it is based on a lifestyle choice.

The question becomes how much more “lifestyle” do they want and what does that cost. The buyer personas do not show a lot of “first time” rent vs. own buyers. The mindset of the buyers is “what value I get for the money I invest.”

The key here is to keep the price at a point where it becomes a small investment decision like building an addition on their home. Keeping the price within the rent vs. own area helps with the owner seeing value in the commercial market place should they decide to rent some space.

Duplication

This principle is used everywhere. We build the same building over and over again which makes the process get easier and more efficient. All the contractors, engineers, etc appreciate this and it is reflected in the pricing which is so crucial to this development. It also helps free up the developer’s time as you do more and more locations.

Do not underestimate this principle and look to enforce it through all aspects of development and construction. – enough said.

Low risk strategy

I absolutely love this strategy. I don’t have to build the entire project (or building) at once. I only build a little bit ahead of what I have sold.

In the beginning when I wasn’t sure the idea would work, I structured the development so that the units can rent (at a below market rent) if I needed to cover the debt service due to lack of sales. Since the down-turn in the economy, we still sell units and I am not buried in payments to the bank – how good is that!

If I want to venture into a new area, I can build one building and sit and wait until it sells. – it is that simple.

Residential look and feel

This is really hard to explain. I just know people prefer this look over some industrial building. Again, they like both the development and the unit to feel like an extension of their home. - what could be better than a “big garage” with residential features.

I was forced to modify the building design by a plan commission once. I had to change to a flat roof and metal siding. I did my best to dress it up but it is clear that the look and feel is not there. – I know people have told me right to my face!

We have some units sold but clearly have been hurt by the modifications required by the “all-knowing” plan commission members. – do I sound bitter? I just know that it won’t ever happen again!

The “WOW” factor

Don’t underestimate the WOW factor! When the price of the unit is less than the cost of what a commercial lot would be, you have a WOW factor.

When the price of the unit is less than half the price of any other commercial property in the area, it is a double WOW!!

The unit has an immediate and recognizable value!

Financing

The fact that we build smaller separate buildings makes it easier to finance the project – it is that simple. In addition, you can actually get paid on a building before you start another one. The first project I did, we never went over a $400,000 line of credit on a 1.1 million dollar construction cost. That saved a lot on holding costs. That is much harder to accomplish with 1 larger building.