Benjamin Franklin, the historical figure from American history, had many thoughts and comments that live on today. One of his famous thoughts was “it’s not the price of the fireplace but the cost to keep it stocked with wood”. How does that relate to improvements to self-storage facilities? That’s the topic of this Self-Storage University podcast.
Episode 53: What Would Benjamin Franklin Say? Transcript
Benjamin Franklin never owned a self-storage facility. However, many of his quotes related to things that self-storage facility owners may encounter. This is Frank Rolfe, the Self-Storage University Podcast. We're gonna be talking about one of Benjamin Franklin's quotes, which is, it's not the cost to build the fireplace, but to keep it stocked with wood. So what does that mean exactly? Well, let's start off with one thing that some self-storage facility owners ponder, and that is putting in expensive security gates. Now, of course, we all love security, and we're all impressed when we have the security gate where you punch in a code and it opens without any effort on your part. It's a great improvement over the old-fashioned ones where you have to physically get out of your car to open it, but it comes with very significant cost. Not only is the cost of building it, which is not cheap, but also maintaining it. Security gates are notorious for breaking down. They can break down just based on wear and tear, but more commonly, they get struck by an automobile. Now, when the security gate gets struck by an automobile, they can no longer open or close, and now you have a real issue because there's no way that your customers can get to their stuff.
So you've got a crisis at hand. Now you have to pay someone to get the thing manually opened unless it's bent so bad, you can't, and then you're gonna have to go in and repair it. So a security gate is a perfect example of what Franklin said. It isn't how much it costs in the first place, although that price is significant, but it's the cost of keeping it working, keeping it maintained. Fixing it when people hit it. Another thing the storage people ponder is if they have gravel roads, should I change that to paved, particularly on exurban storage facilities, and even some suburban. Now, in the big city, of course, everything is pretty much paved in asphalt. But when you get outside of the city, some people just leave the roads as gravel, and gravel works just fine in most applications. When you go to pave your roads, what they don't tell you is that only is it very expensive on the front end, it's just very expensive forever, because asphalt is a product that after you lay it, it starts going down hill almost immediately. It tends to gaiter, it tends to get pot holes, and it's very expensive to fix. If you have gravel roads, you just bring out some more gravel and you spread it, and you're good for another who knows how long? Perhaps years.
Asphalt needs constant maintenance. Puddle pair, resurfacing, sealing. All of these things cost a lot of money. Many, a storage owner has paved the roads and later regretted it. They loved it when it first came out, when it was all jet black and beautifully striped, but then they regretted the continual maintenance cost. The same is true of climate control. If you wanna go in a climate-controlled section of your self-storage facility, sure, you'll have a lot of expense on the front end, but it never goes away. You'll have continual energy bills to keep it climate climate-controlled, and then the wear and tear on the climate-controlled system which have to be periodically serviced and or replaced. Once again, you've created your own monster, because if you had occupancy and things are going fine without that edition, why the heck are you adding it on? Some people tell me, "Oh, I thought it might help me down the road if I went to sell or to finance." Well, not really. What people really care about his income. And don't forget, you're gonna have to charge a whole lot more now because you've gotta keep that system working. And that can be a problem. It's similar also when you start at a significant amounts of security lighting to your self-storage facility.
Some people wanna light it up like it's day time at night time, and I'm all for it. That's great and everything, but don't forget that by the addition of those lights, you will certainly have additional cost in electricity itself and the continual repair cost. Then there's, of course, the item of the manager. Many people, in their attempt to retain their manager of their storage facility, will start offering certain benefits, the most common of which is healthcare. Healthcare is a really tough benefit. Now, if you're required by law to offer it, well, then you have no choice. But if it was an optional item, don't forget that since the introduction of Obamacare, healthcare premiums have gone absolutely through the roof to incredible levels. Prior to the Obama's administration's enactment of the Affordable Care Act, the cost of ensuring an employee to today has changed by a multiple of probably five to one. If you gave someone healthcare prior to the advent of Obamacare, your premium today is gonna be a gigantic hit on your expense statement. Whenever you give a manager any increase in pay, you have to think, what is the recurring effect? It felt good at the time. It felt good when you said it, when you told someone, "Oh, hey, I'm gonna give you extra money."
But like Benjamin Franklin and the fireplace, the problem is, is that going to drag you down? A big item you have to remember as a self-storage owner is that the value of your facility is based on net income, and every time you do something that takes away some of that revenue in the form of expenses is there to haunt you continually, and it will lower the value of your facility by as much as 10 or more to one. If I put in security gates and the cost to maintain those gates cost me $10,000 a year, because people hit the gates on a regular basis, that $10,000 just reduced the value of that storage facility by over $100,000. This is the predicament. It's not that you're just going to lose the money just one time, no. When things get sold, they get sold on what's called the cap rate, and the cap rate is net income divided by cost of property. And every dollar that you spend will come back to haunt you tenfold, and that's at a 10 cap. If the cap rate is lower, it might even be 12, 13, 14, 15 times that annualized amount. So unlike Benjamin Franklin and the cord of wood, to keep the fire place stocked, well, the cord of wood wasn't very much money back in the 1700s. But it's certainly a whole bigger deal when you're losing upon sale or refinancing of your facility, tens or even hundreds of thousands of dollars because of the continual cost of things that you thought at the moment were a really good idea.
So what do you do? How do you go forward deciding what to do, what improvements to make to a storage facility? Well, focus on improvements that don't have residual cost. That's a good one. Your sign out front, having a professional looking sign, while that isn't gonna have much residual cost for you. Steer clear of things that do have high levels of residual cost. If things aren't broken, don't fix them. If you're functioning just fine with gravel roads, I don't think I would pave them. Just to always remember that at the end of the day, being a good steward of that property means maximizing net income, and to maximize the net income, you not only have to maximize revenue, you have to minimize cost. So as Benjamin Franklin said, "It is not just the cost to build the fireplace. It is in fact the cost to keep it stocked in wood." And for self-storage facility owners, that cost is even greater than Franklin would have ever thought. This is Frank Rolfe, the Self Storage University Podcast. I hope you enjoyed this. Talk to you again soon.