Day 30: Should You Avoid Self Storage Markets with New Construction? The Real Answer

All right. Welcome back to the Storage 100. This is day 30. I am, of course, Joe Downs with the Storage Mastermind. And today we are tackling the biggest question I get from new investors, which is, should you avoid new construction or go for it? Listen, folks, this is a high-stakes decision. The promise of new construction is huge, but the pitfalls can wipe you out completely. And I'm talking about millions of dollars and years of your life spent in the trenches type of wipeout. I've been there. I've done the math and I've seen the bloodbath when things go wrong. I'm going to show you the cold, hard reality of development so you can make an informed choice. We need to look past the glossy brochures and into real numbers. And we're going to start by breaking down the fantasy that draws everyone into this game. The allure of new construction is simple. You think you can build it cheaper than you can buy it. That might be true sometimes, but This is the siren song that sinks most new developers. You look at the price of an existing facility and think, I can build that for 6% of the cost. You see massive spread between the cost to build and the market value and start counting your paper profits. But the calculation's almost always wrong. You're comparing a finished stabilized asset to a pile of dirt and a stack of permits, and that's not really fair. What people sometimes forget to factor is the cost of time, the cost of mistakes, and the cost of the market moving against you. This fantasy of cheap construction leads directly into 3 things that will absolutely kill your development deal. The first is time. Every month you're in permitting, zoning, or construction, you're paying interest and taxes with zero income. That time is a cost and it adds up fast. A 6-month delay can erase a year of projected profit. Second is the cost of capital. Construction loans are expensive and the equity required is substantial. You're borrowing money for years before you ever see a dollar of revenue, and that debt service is a huge drag on your returns. And the third risk is the market risk. The market you underwrite today may not be the market when you open your doors 2 years from now. A competitor can start construction next door, or the economy can tank, and you have zero control over that. And when you combine those 3 killers, you get the J-curve of death. This chart is the J-curve of death, and it shows exactly why new construction is so dangerous. It illustrates your cash flow over the first few years of a project. You start deep in the hole. That initial drop is the construction cost and the carrying— and all the carrying costs, all those interest payments and taxes, and you're bleeding cash for the first 2 or 3 years before you even open your doors. Then you hit lease-up and you're not instantly full. It's a slow climb out of that hole. And it could take another, you know, 18, 24 months. I've seen it take 3 years to stabilize. That entire time you're operating at a loss or hopefully breaking even. The J-curve means you need massive staying power and deep pockets to survive this. You're betting that you can survive 5 years of pain for the promise of profit in what might be year 6, or even it's 4 and 5. It's a long time. It's a brutal path, and it's why I prefer cash flow over headaches for the most part. Are they all that way? No, but plenty are. All right, um, let's talk about how to dodge it completely. You buy cash flow. You don't build hope. Acquisition is your fast lane to profitability, plain and simple. When you skip the 3 years of permitting, construction, uh, lease-up risk, all the things that kill so many deals for investors. You're buying a proven income stream from day one. It's likely a stabilized asset. It's not the sexiest path, but it's the safe path. And the biggest mistake I see people make is by chasing the shiny new building. They forget that time is money. Every month you're not collecting rent, you're losing money you have to make up for later. Acquisition solves that problem instantly. You close, you manage your profit. It's that simple. But there are times when Building is the right move. And let's look at those rare exceptions. When does building actually make sense? Well, makes sense when you have a massive undeniable market advantage, that's for sure. Maybe you own a piece of land zoned for storage in a 5-mile radius and you're the only one. You're the only piece of land in that 5 miles. Well, that's a huge barrier of entry. Actually, there is no entry for anyone else, right? Or maybe you have a proprietary construction method, I don't know, that cuts your costs by 30%. Whatever it is, you need a secret weapon. Otherwise, you're just competing on price and hoping to win. Building also makes sense when you're forced to. So if your market is completely saturated and no stabilized assets are for sale in that market, you might have to build. But even then, be extremely cautious. You're taking on maximum risk for potential maximum profit, but it's still maximum risk. So don't just build because you can. Build because you have to and you have a massive edge. All right, that is the playbook for today. If you got value from this, do me a favor, like this video. If you prefer cash flow over headaches, uh, seriously, it's the only way to stay sane in this business. Subscribe to the channel because tomorrow, day 31, we are diving into the value-add playbook and talking about how to squeeze more profit out of the assets you already own. Uh, and please share this video with a friend. You may save them from a 3-year zoning battle. Never know. And they will thank you later.