Help valuing a self storage facility

33 Replies

I'm not sure why the talk about replacement cost. Income property should be valued at market value, minus the time value and cost to get it from its current performance to market performance. I look at commercial real estate appraisals all the time, and self storage facilities. Definitely worth finding an expert on the subject matter. Replacement cost is much less relevant than income approach, and many income approach appraisal don't perform, or don't weight heavily the replacement cost.

So that's what I would value it at. Now what to pay for it? Some discount to that value, at least partially due to the uncertainty associated with the unpaid rents, and all the hassle that will be. But at least you have some captive renters, in theory. You should be able to keep some. Hopefully that helps @Brandon M.  . Just think of it like buying a foreclosure with no records. Question is, how much will it cost you to get from point A to point B, how much will it be worth at point B, and how much below point A can you pay to get "excess" market returns?..

Thanks @J. Martin  , I mentioned the replacement cost as a possible other alternative way to calculate a true value because the records used for the income approach were so sparse. Since starting this post I have received tax returns but those show losses of 24k in 2012 (12k rents received, 36k expenses). I can already tell some of the expenses were fluffed up higher than true costs and I am sure they don't show cash received as part of the rents received.

That was essentially my original question: replacement cost or income approach in this scenario? Even if I had to kick out all tenants and start again, there is no way you can build a new 6500 sq ft block construction building under $20/sq ft.

I will likely "anger" Bob Bowling but I plan on offering the seller a low cash offer, quick close, (they are not even using an agent), and buyer paying all closing costs. That way they can just sign over the building, hand over the keys, and sail off into the sunset (the seller's words, not mine)

Will keep everyone posted how it goes.

If the comps are sparse, it should still be income, but here you go:

Call all the storage places in the area. Ask them how much the units are. Ask if they have plenty of units. BS with them a bit if it's just an employee at the facility. "If I wanted to rent half the units, are they available?" "You could rent 90% of the units!" OK. Bad sign. Vacancy is super high. If they have to actually check the availability to see, rather than know offhand, that's a good sign.

Get a realistic low/med/high on rents and vacancies - and remember there's a tradeoff between the two. What combinations would put you at break-even? What situations would you be losing, and how much? How long could you sustain that? What would the income have to look like for you to finance the loan with a lender? (if that's a goal). How much work will you have to do, relative to the upside, and relative to the risk? Is all that worth it for you? Just some food for thought..

You can do the "first month/two months free" bit to get them in, then charge some reasonable rate after that. Frontage location and signage is usually a big deal, as is being central to freeways or major residential areas. Online will be good for you too if it's underused by others in the area. Free boxes. Gotta get 'em in the door..

To me, self storage is so easily replicated and built, you need to understand replacement cost if you are going to understand if this is a good investment.  @J. Martin  

it is not like the Bay Area.  These self storage areas can go up quickly in a place like most of Florida and that would likely impact the investment materially.

Originally posted by @Brandon M.:

Thanks @J Martin , I mentioned the replacement cost as a possible other alternative way to calculate a true value because the records used for the income approach were so sparse. Since starting this post I have received tax returns but those show losses of 24k in 2012 (12k rents received, 36k expenses). I can already tell some of the expenses were fluffed up higher than true costs and I am sure they don't show cash received as part of the rents received.

That was essentially my original question: replacement cost or income approach in this scenario? Even if I had to kick out all tenants and start again, there is no way you can build a new 6500 sq ft block construction building under $20/sq ft.

I will likely "anger" Bob Bowling but I plan on offering the seller a low cash offer, quick close, (they are not even using an agent), and buyer paying all closing costs. That way they can just sign over the building, hand over the keys, and sail off into the sunset (the seller's words, not mine)

Will keep everyone posted how it goes.

The replacement cost can be totally irrelevant in a market without enough demand, and it can mean a lot sometimes when market costs are much higher. The fact that the building has a "Special Use" limits its functionality if there is not sufficient storage demand in the area relative to the supply. This can make the building obsolete, like so many golf courses across the country. The cost is irrelevant, because no one would ever build one because it is not profitable. And it may also be poorly run.

On the other hand, it could just be poorly run, but in an area where you could pull in enough "storers" to make good money on this. The overall demand/vacancy in the area will be key. If you can find an appraiser who does storage facilities, or call a bank that finances them, and ask for referrals, they might know a lot of info. Or do your own leg work! Go to the storage facilities yourself, and ask them to see a map of the facility and what is available, so you can look for a low traffic area or whatever..

This is important for the investment, not just to judge how relevant (or irrelevant) the cost approach is..

This is great info. I have checked into rates of the competition almost directly across the street. Competitor has security gate and an office, but I have not checked to see what percent occupied they are. They want $77 for a 10x10, this building I am looking at charges $45. So some small rent increases could be easy to do while still staying the more cost effective location.

To use specific numbers, I am planning on offering $90k cash, quick close. Have the cash but also have a small community bank willing to do 50% or more financing. Currently the building has 28 of the 37 units occupied, with 6 of the 9 vacant units being used by the owners. Given the current low rates and mix of unit sizes, if everyone was paying on time the rents received per month SHOULD BE $2075.

My first goal would just be to get all current tenants paying on time every month, no "pay me when you can" payment plans like the current owners do. I would also get all signed up with rental agreements. Between that and properly marketing the property (creating website, putting website and phone number on the big sign on the main road) I think I could generate enough leads to fill the existing units. The unit is located on a road with average daily traffic of 30k cars, 1/2 mile from road that gets 50k+ cars a day.

There are a few other similar facilities within a 4 mile span, none of them have websites so I will be contacting all of those today to see what their rates are and get an idea of occupancy.

@Chris Martin - Thanks for the post, I did actually go through with it. After going back and forth I got the owners to accept $120k purchase price with seller financing. $40k down, $80k financed. 30 year amortization, 3 year balloon, 7.5% interest, $1000 monthly payment. I knew I would need to carry some of the mortgage payment out of pocket until I could get the cash flow up. Fast forward almost 3 years later and it was the best decision I have made. The property now has 42 units total (a few of the units had 2 doors so I divided 1 big unit to make 2 smaller ones). I constantly stay between 85-100% occupied. I did have to do some maintenance/repairs, including $20k for a brand new shingle roof. The previous roof was leaking and causing damage to the drywall ceilings, which was causing a few tenants to move out. I have averaged about $2500 monthly gross rents for the last 2+ years with just a little bit of work/effort. I went to a bank last year to do a cash-out refinance to pay off the previous sellers. The bank had the property appraised at $220k, and that number was actually lower than true value simply because the appraiser couldn't find any other comps very close at all so he went very conservative. True market value if I tried to sell it would likely be $275-300k. So the bank loaned me $150k at the same $1000 monthly payment, so I paid off the sellers and pocketed the rest of the money. 

Long story short now I own the property with zero of my own money in the deal (and actually more money in my pocket) and I still cash flow the property about $900-1200/month after all expenses.  This was one BRRRRRRRRR method that turned out very well and likely will be one of the best investments I ever made. 

Hope this didn't come off as bragging, was not meant that way at all, just sharing a success story of stepping out boldly when you find a property that is truly a deal. 

I am glad to share any more details or answer any questions. Hope this helps! 

Thanks for sharing Brandon.  I have a similar potential deal and I am interested in how you came to a valuation with the seller.  What formula did you use?

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