Joe Downs breaks down self-storage management costs: third-party firms charge 6-10% of revenue, while self-management runs 3-5% through software and optional call centers. Lenders assume 6% regardless, but saving that fee on a $500k NOI facility adds roughly $500k to asset value.
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Hola folks, you have arrived at day 60 of the Storage 100 series. I am of course Joe Downs with the Storage Moguls Mastermind. Today we're diving into management fees— to have them or not to have them. Understanding these costs or investments can make or break your profitability, so we're going to explore if you're paying too much for management. Let's get into the 2 main types of management that you will encounter right now. So when it comes to managing your storage facility, you essentially have 2 paths. You can go with third-party management— often the big guys in the industry do this— or you can choose self-management, taking the DIY or do-it-yourself approach. Each has its own set of costs and benefits, so let's break down the financial implications of each, starting with third-party management. Which is, uh, or offers a hands-off approach for you as the owner, but it comes at a price. Standard fee is typically 6% of your gross revenue. However, many third-party managers, often the institutional ones, the big ones, also have a minimum fee, often ranging from, I don't know, $2,500 to $3,000 a month. And this means even if your revenue is low, you're still paying them That minimum. Beyond the standard fee, you'll often see additional charges for branding, call centers, marketing. When you add it all up, the real total cost can easily climb to 8 to 10% of your gross revenue. So let's compare that to the cost of self-management. So in self-management, the DIY route, you can be significantly more cost-effective if you scale your prop— if you scale it properly. Your primary cost will be software, and that's going to run you $200 to $400 a month. A call center is optional. I would advise it, but if you use one, it's typically $500 to $1,000 a month. Of course, you can't forget about your time. That's a factor here, and that's something you need to value somehow. So when you scale, the total cost for self-management can be as low as 3 to 5% of your revenue. This, that difference in cost is why the next rule is so important for underwriting, which is of course the golden rule of underwriting management. Nobody calls it that, but pay attention, it's important. Always underwrite a 6% management fee, no less. Even if you plan to self-manage, you have to factor in 6%. Why? First, the bank's going to require it. No lender is going to lend you money with a fee that's less than 6%, certainly not zero. Maybe you can make a case for something else. Second, the next buyer is going to underwrite it with 6% anyway. They're likely to, depending on who they are. So you got to be realistic. And then finally, your time isn't free. You should be paid for your work you put in. So the 6% rule is crucial for accurate financial planning. And future sales. But there are times when you really don't have a choice and you have to bring in professional management for your facility. So if you're a remote or out-of-state owner, professional management is often essential depending on the size and setup of the facility. You can't be there to handle day-to-day issues, so you got to have somebody local, some sort of local presence. For larger facilities, maybe over 50,000, 60,000 square feet, the operational demands often exceed what one person can handle. If you have a full-time job, your time is limited, and managing a facility can be a second full-time job depending on how big it is or where it is. So, and let's be honest, if you don't like dealing with tenants, uh, or, or, you know, issues or details or anything that comes with it, outsourcing might be a no-brainer. It frees you up to focus on what you do best, whether that's acquisitions or other ventures. But what if you do decide to self-manage? Well, let's take a look at the financial implications. So self-managing your facility can be significantly or can put significantly more money right in your pocket. If you manage a $500,000 NOI facility, you capture that typical 6% fee, that's $30,000 a year. And that stays with you, not a third-party manager. But this isn't just about saving money. It's actually increasing the asset value. Every dollar you save on expenses directly boosts your net operating income. And if you can find a buyer who wants to manage it the same way you do, then you've just significantly increased the value. A higher NOI means a higher valuation when you decide to sell. So this direct financial benefit is a powerful incentive for hands-on owners. But you got to find another hands-on owner. All right, let's look at a real-world example to see this in action. So this is the case study. Free Cutter really highlights the impact of self-management here. Imagine a facility where a REIT charges $40,000 management fee. By self-managing, taking— you buy it, self-manage it, that brings the owner's cost down to just $10,000. That's the savings of $30,000 a year. That goes straight to the bottom line. And at a 6 cap, that $30,000 in savings is a $500,000 increase in the asset value. That's not theoretical. That's a tangible boost to your equity. And that shows you how operational efficiency directly impacts your— the investment's worth or value. Keep in mind, You got to find a buyer who's going to manage it just like you. But this example underscores the power of controlling your expenses. All right. So what's the big takeaway from all this? Well, management isn't just a cost. It's an investment in your asset's performance, or can be. Actually, it always is. Good management protects your investment and drives profitability for sure. Conversely, bad management can cost you far more than a 6% fee. It can erode your asset's value and even lead to failure. So you need to be actively involved, whether directly or through a trusted manager. And if it's a manager, you got to manage the manager. Your facility's success hinges on effective, proactive management. This perspective changes how you view every operational decision. All right. If you wouldn't mind, hit the like button if you found today's insights valuable. Make sure to catch us tomorrow for day 61. I'm diving into repair reserves. So definitely subscribe if you haven't already so you don't miss any future episodes. And lastly, please share this video with someone who needs to hear these lessons about self-storage management, because understanding these concepts is absolutely vital for long-term success. And of course, they will thank you later.
