Would like to get your thoughts on the purchase of a 32 unit storage facility on a .29 acre parcel located in a small town (+/- 3,000 people) 50ish miles outside of Austin, Texas. The current owner inherited the property 10 years ago and has done almost nothing with it.
Occupancy has been a miserable 39% with no marketing and very little maintenance. A faded 24" x 36" sign is attached to the end of one unit that is nearly illegible. The grass/weeds are cut about once a month but no trimming/edging leaves grass and weeds growing tall in front of the roll-up doors. The local guy who has been representing the facility and cutting the grass gets $25/month and a free unit
Income for the past 2 years has been roughly $5,500 ($458/month). Pro-forma income could be as high as $14,400 ($1,200/month). Pro-forma expenses are $5,110 annually. As-is the estimated NOI is essentially ZERO - leaving no room for debt service, profit or anything else. Assuming occupancy can be brought over 80% it would bump monthly income to ~$1,000 which will yield $426/month profit. Better yet, the NOI would be ~$8,112. Assuming it could be sold at a 10% cap would yield a targeted gain of somewhere in the range of $40,000-$45,000.
My target purchase scenario would be either a short-term owner finance deal: $25,000 Purchase; $1,000 Down; $250/month; 24 Months; $20,000 Balloon, or, a long-term owner-finance deal: $30,000 Purchase; $1,000 Down; $245/month; 180 Months.
It's a pretty skinny deal but looks like a decent opportunity to make something out of nothing. Being able to do this with the involvement of my two teenage sons may be the highest value.
I look forward to your thoughts...
I don't have experience in mini-storage. My first gut response is the market is quite small. The poor occupancy level may not be due just to mismanagement but could also be the result of a lack of demand. I guess if you can get it dirt cheap where downside is limited it might be worth the adventure...but I am not 100% sold on that either. I know there are some people on BP that have experience in mini-storage and they may have a better perspective. Good luck.
I have some self storage units. 61 units in a town of 1000 people and it runs at 95% capacity. I've only owned since April so my experience is a little bit limited.
- No matter how you move forward there is huge value in the learning opportunity.
- You mention ProForma numbers allot. That's okay for looking at potential but make sure you see the actual numbers before you commit. One of my mistakes was not looking at actuals and the previous owner was including the sales tax collected in revenue. It didn't end up making a huge difference but lesson learned.
- You don't mention competition but you need to factor that in. Location, Location, Location... My units are on a busy street and that seems to help keep us full.
- Appeal property taxes to see if you can get them lower, this might be a way to lower expenses while you get up and running
Feel free to message me if you want to discuss more. I've just gotten started but I love talking about this stuff and evaluating deals.
Are there any other storage facilities in this small town?
I too have concern similar to @John Thedford that mismanagement alone is not the occupancy problem but the market as well. But @James Seely gives me great hope because his market is much smaller with twice the units. Nice!
The actual numbers were provided and are terrible. The current owner's gross annual income is $5,500 and her expenses are just under $2,000 in taxes and $325 for a handy man - leaving her with $3,342. She has no other expenses because there are no operational expenses or even insurance. Yikes.
This is why the pro forma numbers have to be used - it is a speculative deal. If I take the HUD-1 to the county appraisal district they will be forced to lower the assessed value to the sale price - at least for the first year. They they will recalculate it next year and make up the difference. This is a constant fight in this area where property taxes are so high. At least it would help with the first year.
There are no other storage facilities in the town @Brad T. and this facility is right in the CBD of a town that's only 1.5 square miles. From the 2010 census to 2014 estimate the town has grown its population 69.5%. It has a few banks, a feed store, post office, Dollar General, fertilizer plant, elementary/middle/high schools, a couple of convenience stores, beautiful new gun shop, a couple of sit down restaurants and the largest job creator - a small prison just outside of town.
@Jarrod Weaver , this will make you feel a LOT better. There are 3 storage facilities in a town of 1000 people for a total of 160 units. The nearest metropolis (100k people) is 15 miles away. I'm baffled by how the town can support this but happy it does.
I have a little experience - about 3,000 units and growing..
Ditto to all of the above. So here's a few other items to note:
Market equilibrium in Self-Storage is when there is roughly 7 square feet of Self Storage per capita, within a 5 mile radius of the facility. OBVIOUSLY other factors affect demand: Urban, Rural, median income, etc. And of course, you see oversupplied markets where the facility continues to hum right along, and undersupplied markets where no matter how strong you market the facility, it simply won't pop above 80% occupancy.
So the market is equally important when considering a self storage acquisition, and you need to underwrite it with ALL of the expenses for the facility, not the 3 expenses the seller shared with you on a scratch piece of paper.
Another general rule of thumb - in smaller facilities such as these, your expense ratio would be in the 25-30% range (based on 85% occupancy). So take your GPRI at market rates, subtract for vacancy, and multiply by .3, and that should give you a ballpark NOI to then apply your cap rate, probably around 9% for this property and market, and that will give you an estimated value.
Too much to consider and talk about on this post, but hopefully we have all provided some input to easy any indigestion you may be experiencing in this deal.
Love the asset Class, Love the Lifestyle - Hope it works for you.
Rock on Jarrod,
Thank you so much for the value estimate equations @Scott Meyers . I will plug this in as another way to validate my estimates.
3,000 units - I'm totally jealous. Will hopefully start with 32 doors and then move on to my next one. Am already working on my second facility and don't even have the first one inked yet. Loving this!