July 1, 2013
Written by Charlie Fritts. This article was published in Self Storage NOW – May 2013 edition.
The number one priority for all owners, operators and managers must be the endless pursuit of how to increase income year over year. That’s what business is all about – the money it can generate. A business is an investment similar to purchasing stocks or bonds. The investor is willing to put in capital and in return expects that money to make them more money. The difference in a business versus a pure investment is the business usually requires more active involvement and oversight.
Why the never ending appetite for more income? A few reasons are the drivers for that. If you review your financial statements you will see that regardless of your best efforts, many expenses increase every year. As your vendors and suppliers raise their prices to cover the increases forced on them – so must you increase your income to offset that impact. Failing to do that will erode your net income and profits. Working equally as hard for less reward is not how we define success and could lead to financial disaster.
Another reason is the reward for the risk associated with investing your capital. Generally speaking the higher your risk, the greater the reward must be. Otherwise why take any risk at all if the reward is the same? In business we measure success in terms of income and consider achieving more income than the year before as success. The larger that increase is relates to the level of success we believe we have achieved.
Income growth creates value. Simply stated when a business earns more money its worth more. This benefits the investor when it’s time to refinance the mortgage and be especially beneficial if they sell the investment at a profit.
So we all know “why” increasing income each year is so important, how do I achieve it?
There are a number of methods to achieve more income. Some of the most obvious are to increase board rates, the rate you charge new customers when they rent. Then there are rent increases, when you charge existing customers more next month than they paid this month. You could also build more units which will increase income as they lease up but that also requires a significant capital investment and takes time to accomplish.
Have you really considered the potential hidden income opportunities? And I don’t mean looking under the chair cushions in your office for lost change. If I am responsible for success I am going to turn over every rock and investigate every possibility that could lead me to my target.
The Secret Sauce
Now my recipe for the secret sauce: how do I start and where should I look? Get yourself a beverage, a quiet place to work and a calculator. Gather every management report your software can produce and a year’s worth of financial statements. Sit down in a comfortable chair, now let’s get started.
Each management software developer has its own names for their reports but they usually contain the relevant information within a few reports. For this article I will use fairly generic terms. Idea: if you have never printed every report available – do it. Some will not be of value but many will surprise you with the wealth of info they can provide.
Being competitive is important when in lease up but if your property is stabilized and very full overall or even on some sizes yet your rates remain competitive – you are missing an opportunity. Hotels and airlines consistently use supply and demand pricing to enhance their income. Book a room 6 months from now and you’ll probably get some type of discount. Walk in tonight and ask for a room – be prepared to pay full rate.
Carefully review the full unit inventory on an Occupancy Report. Consider increasing rates on sizes which are very full. Now look at the sizes which have high vacancy. If your rates are competitive maybe you just have too many of that size. Consider making high demand sizes by converting vacant lower demand sizes. It’s quite easy to remove a partition to make a 10×10 out of two 5×10’s, etc. You might also substitute units for sizes that are very full. Many customers have no objection to having two 10×10 units if a 10×20 is not available and the 10×10 units are nearby each other, provided they pay the 10×20 rate. It’s always advisable to manage your vacancy reserving side by side vacant units of the same size for such situations. Better to rent a single vacant unit elsewhere in the building rather than break up a pair.
A quick story about grabbing opportunity that I’ve heard a few times over the years; A guy drives up to a southern storage property driving a y’all haul at 5 minutes before closing. When he walks into the office he asks “Do you have a storage shed?” The manager nods his head yes. The man asks “How much does it cost – I’ve got to return this truck tonight”. The manager who knows opportunity when she sees it but also knows this will be a late night for her responds “Well how much money do you have in your pocket?” The man replies, “a few hundred dollars”. The manager says “That’s just right, (thinking why not sell this $150 unit for $200) please sign here, initial there, etc.”
If you never increase the rent for existing customers you are missing opportunity. When and how to increase rents is both a mixture of art and mathematics. Be sure the risk of losing a few customers due to the increase is worth the reward of the new income they will generate. Many expenses are going to increase – you had better keep increasing income to stay ahead.
Sometimes it’s tempting to waive a late fee when a customer tells you a sob story about why they were unable to pay on time, especially when they are great story tellers. I just never realized that some people have three grandmas and then to hear they all passed away this year – gosh that’s devastating! Another time we are tempted is when an irate customer yells at us and infers we are heartless storage people who always want money. So we waive a few fees for what we deem good cause. However it can be eye opening when we review a “late fees waived” report and realize we’ve not collected an average of $200 per month or about $2,400 annually. In most markets that’s about the same income as an additional rental or two each month.
Here are two myths that need to change; It’s always good business to automatically give a rent discount to every prospective customer right? NO! It’s always price that is the deciding factor. NO! Storage customers all have their own reason for renting and their own concerns or requirements that will determine where they rent. The best sales people listen to the prospect to determine what their hot buttons are then explain how their property can fill those needs. Sure there are some people that would drive across town to save $3 per month however there are fewer of them than you realize. Believe it or not statistically price is third or fourth of the top reasons someone rents where they do. Location is usually #1, Staff is #2, Property condition/appearance/safety is often #3 then price for sure.
Certainly price will always be a factor at some point but let’s not feed that dragon by tossing out a discount right up front. As I indicated price is not usually the #1 reason for renting – except of course for the price shoppers. You will rent more units if you sell them what they want. I often hear of operators who assume an all or nothing posture. Either everyone gets a discount or no one. Anyone who is prepared to buy and is offered a discount would be foolish to say, “oh no thanks”. If you are selective and offer discounts when the conversation indicates it as a hot button you will achieve more income and at least partially offset those units that must be discounted to secure the rental.
Locks and Boxes
Most operators offer locks for sale and many offer boxes and moving supplies. The majority adopt a passive sales approach. They have a display in the corner of the office but never sell much. Try switching to an active approach for your merchandise. You should be able to sell a lock to the majority of renters. If you use a typical 100% markup that $10 sales nets a $5 profit. If you rent to 30 units per month, selling a lock to 20 of them, after a year you have realized new income of about $1,200! Sell to 25 of your rentals and its $1,500 per year. But you have to “sell” the locks to do this. Talk them up, remind people they need a lock and a nice new all brass padlock is a good investment to secure their goods.
The same goes for boxes, just by asking “How many boxes will you need today?” you will sell far more than a quiet rack of boxes can sell themselves. In this case, discounts can be good if they sell more products. Why not adopt a “bundle discount” offering maybe a 10% discount off all full bundles a person buys? It’s a bummer when you’re packing at 9 pm and run out of boxes. This opens the opportunity to discuss why they do not want to use super market or liquor boxes (unless they are fond of critters). Offer a buy back policy, allowing any unused and clean boxes to be returned for a refund. Customers are often more willing to buy more when they can return something for a refund. In reality you will see very few ever returned. An active merchandise sales program can produce $4,000 or more additional annual income.
If you are not offering this product and receiving an administration fee in return you should. First adding a layer of insurance for the customer’s property helps protect your business. We know and customers are told we do not assume responsibility or insure their goods. That’s fine until they have a loss then it’s our fault and they usually expect us to pay for their loss. Once I managed a property which suffered a flood, four feet of silt and water went onto every unit. More than one customer told me in no uncertain terms the flood was my fault. This didn’t faze me as the same thing occurred after hurricanes, tornadoes and fires which damaged buildings. Second reason – there is income to be had. An average 40,000 SF property can earn $4,000 or more annually
Staging units with “lost and found” property can generate additional income and eliminate the need to dispose of them. The better things that customers leave behind qualify for this purpose. Simply take a vacant unit and put those items in there over a few months. When you think it’s time include the unit in your next lien sale/auction. You may not earn big money but you do eliminate the expense of disposal.