Buying an Existing Self-Storage Facility
Whether you’re an experienced self-storage investor or exploring the opportunities that exist in this industry, a baseline understanding of the steps to consider when acquiring a facility will aid in making smart decisions. The entire process and step by step process could better be explained in volumes, rather than a few paragraphs – So this introductory article will attempt to serve as a framework for future considerations.
One of the first steps is to contemplate why you are embarking on this journey to begin with. Are you already aware of or currently in the industry and looking to grow? Or have you heard that these properties are cash cows that provide massive amounts of passive income, and decided to look further into the business. What experience and resources do you bring to the table to successfully follow through on starting the business? Do you plan to perform the onsite or offsite management duties or will you hire a third-party management company? Do you have the financial wherewithal and means to finance such an under taking? Will you have other investors and, if so, how will their returns requirements factor into your business model?
Next comes the task of finding a property that matches your personal investment criteria. Are you looking for a Class A, institutional grade property, or are you more interested in buying a Class C “fixer upper” with the ability to create value? A Brief list of the Physical aspects to consider are as follows:
Is the property in a residential/retail setting?
Is it conveniently located to its market – or off the beaten path?
Does the property have good visibility on a road with a high traffic count?
Does the site layout provide for ease of access?
Is the Unit mix desirable, or functionally obsolete? If not, can they be changed?
Is there a leasing office on-site?
How’s the Curb appeal? Are the buildings, roof, paving in need of repair?
Can the facility be expanded?
Is there an opportunity to create value with retail, truck rental, temp control, etc?
Operational Performance:
How does the historical performance of the facility Look?
o Review both economic and physical unit occupancies to look for trends and any cycles due to the market. This may also uncover hidden opportunities.
o Is the revenue trending upward, downward, or stagnant. Has all the revenue been identified? Are there additional opportunities for untapped revenue by adding ancillary income streams?
o Are expenses between 28-35%? Can they be reduced? Do the reported expenses look realistic (unfortunately, in most cases, they are not!
Cap Rate and Valuation
How does this facility perform as an investment? Does it meet your required rate of return given compared with the amount of equity and time you plan to contribute to the project? Would you be better off in the stock market? (I’ll withhold weighing in here, as I am definitely biased towards Self Storage and Commercial Real Estate. Most buyers (this author included) focus primarily on the trailing income and expenses to derive a current Net Operating Income and attempt to determine a value by applying cap rate in line with the market, or their desired rate of return. Other investors will look at the cost per unit, or cost per square foot, cash on cash yield, and internal rate of return. I tend to focus on NOI and Cap rate, but it’s important to use all the information gathered to project future income and returns.
The reason we care how the property has performed in the past is to project how it will perform in the future. Further Items to Consider when basing your investment decision are as follows:
o Can rates and additional revenue be realistically increased and, if so, when and how often?
o Will Property Taxes increase based on the sales price, and when?
o What will the payroll/management costs look like under my ownership structure?
o Are there deferred maintenance items that will need to be addressed immediately after acquisition?
o Will the Advertising budget need to be increases or will it decrease?
o What is the cost of my Debt capital (1st and subsequent mortgages)
o What will be my exit strategy? Time Frame? Projected Profit upon Sale
Market Demographics
Most Professionals in the self-storage industry believe that demand should be estimated based on available square feet per capita. Each market is different which is why it’s useful to look at current demographics to determine the drivers of demand. Some key parameters include:
o Number of Housing units
o Housing type-rental, single-family, multi-family
o Household size
o Household Median income
o Percentage of renters vs. Home owners vs. commercial clients
o Home and lot sizes
o Retail activity levels
Those parameters should then be considered in the light of projected demographic trends. What is the Projected population trend over the next five years? Will there be income growth? Does the average income or net worth in the marketing area support self-storage rentals? Is the market essentially stabilized, or in a state of decline in both # of potential renters and average income level.
Competition
When sizing up the competition, it’s important to include location but, more importantly, their management and marketing prowess. Do they cut rates dramatically to build occupancy or strive to raise rates in the market? Are the properties comparable or off the beaten path less and with less than attractive curb appeal? Are there significant barriers to entry in the market?
Barriers to Entry
Barriers could be financial such as the cost of the land, availability of sites or community attitude as reflected in zoning ordinances. A call to the local planning and zoning authority will provide information as to future competitors.
Intrinsic Value – What’s it worth to me?
This may be the most overlooked aspect of the analysis by a buyer. Unless a buyer defines expectations, how can he/she know if the property will meet them? Unfortunately, most buyers spend a great deal of time considering their entry to a specific industry or market but little time contemplating an exit. Target how long the property will be held as defined by time, occupancy, income, Return on income/equity, or other parameters. When considering a property and its viability as an investment, a buyer should strongly consider how those parameters will impact the property’s eventual sale/disposition.
Buying a self-storage facility is much more about the investor’s goals, objectives and expectations than the facility itself. The acquisition process should match the qualities of a facility to the goals and required rate of return of the buyer to find a ensure success.