Underwriting the purchase of a new RV Storage Facility

[Chris McKenna]

I'm a Short Term Rental Investor with no commercial real estate experience.

Looking at an RV Storage Facility and hoping to get some help with how to analyze/underwrite. 

I have List Price, Insurance, Taxes, Utilities & Revenue projections. What I'm unsure of are loan terms and a range of what makes a good investment when looking at cap rate (or other metrics). 

I can eyeball a good STR in about 10 minutes but this is a whole new world. Any help or a push in the right direction would be greatly appreciated.

[Henry Clark]

@Chris McKenna

Don't worry about Cap Rate; look at cash flow versus Finance terms.

Finance terms;  a.  Collateral down?, b. Amort period- 20 to 25 years, c. 5 year or 7 year balloon, d.  Interest rate (what rate can you stomach in 5 years?  Build into your analysis 9% at year 5.,

E.  Purchase price, do both an asking price and a good buy price.  Run the monthly payments and tell us, the terms you used, and the two scenario monthly payments.

Cash flow:  Components:

a.  Revenue- do a full year projection.  You need to vet the average revenue and not the seasonal high and low.  Your aren't guaranteed straight line income with "movable" rentals.  Check the contracts and see the terms.  See if they have a 6 month or 1 year committment and renewal; or just month to month.  Don't figure in rate increases or increase occupancy.  Go with historical.

b.  Operating Costs- put line items in and send back your analysis for us to look over.  Insurance (give us an idea of physical structure size and type (for example if it is just Surface parking for 3 acres with and office, fence and gate, you might use $3,000 per year), Property tax (look up for your city/county), Repairs/ground/road maintenance (major cost will be roads), Electric/Utilities, onsite management (paid or you unpaid, selfservice), Website/internet/other advertising or costs, 

Just doing Operating Income above, thus disregard Interest expense, depreciation and income taxes for now.  Get to that later.

Deal analysis:

Let's say your Finance payment is $5,000 per month; with a balloon payment at year 5 or refinance at 9%.

Operating Cash flow- $8,000 per month average; you need to check on seasonal swings; don't trust their numbers, you want to see the month by month swings; also what happens around hurricanes.  You will get one in the next 5 years.  Does your revenue go away or are the tenants on 6 or 12 month leases.

So you are netting $3,000 per month cash flow, before impacting with Depreciation expense, interest expense and income taxes.  Now do that.  Question 1:  Are you cash flow positive, plus building equity?, 2.  Is the monthly Cash return sufficient for you based on your initial Downpayment, cash on cash; along with the equity capture each month?

Risk analysis:

A.  Hurricanes- both damage (insured or not insured); and revenue generation/contract terms.

B.  Interest rate hikes.

C.  Realize a lot of RV's have been sold into the market, but gas is up.  How will less discretionary income impact your financials?

 D.  Plays- Is there land to expand?  Does this land have a better usage and can be demolished and sold? Can you add self storage to this site for an additional revenue stream?  

[Ronald Rohde]

To expand on the rent, call nearby competitors, ask what their vacancy is and what the rate is. You'll know pretty quickly if it sounds attractive or not

[Chris McKenna]

This is a great start... a little more info for you as it looks like i will have to estimate and use data from competitors to get a month over month projection. 

This is new build. Open for about 4-6 weeks. Owner not spending a lot of time and money on marketing really just wants to flip it. 

2.5 acres / 18 Stalls 50' Deep @ $205/month/ 24 Stalls 45' Deep @ $185/month/ 60 open air slots $70/month (Approved to build 26 more stalls in the place where the open air storage is)

Full fence with gate on remote key pad and security cameras + lights. All stalls have 30amp service for an optional $50/month

Asking price is $1.6M / 6 stalls rented currently 

Finance Terms - Meeting with commercial lender this week. 

Insurance is ~ $5K annually.

[Henry Clark]

@Chris McKenna

Look at my notes above. You have to do the work.

a.  Take your info above and calculate the revenue at 50% and 70% occupancy (average for the entire year).

b.  Look at the contracts, are they month to month, 6 months or annual.  Based on that use two different scenarios:  1.  50% occupancy year round, 2.  70% occupancy.

c.  I would say look at his year over year revenue stream by month, but too new.

d.  Pull your annual costs together. "You" can look up the property taxes.  

e.  What is your Cash flow stream?

f.  What is your P/I monthly payment on $1.6mm?

-Based on my rough calcs your P/I will be around $9,300 per month or $112,000 per year.  7% interest with 25% down.  They will probably want 40% down.

-Your cash flow at 50% occup= $25,000; 70% occup= $47,000 per year.

-Your looking at P/I of $112,000 per year versus either $25,000 or $47,000 per year from the Business.  Plus you had to put down 25% or $400,000 down.

Pull up a spreadsheet or get with buddy on a napkin and ballpark the calc.

Then come back and adjust.  Ex.  You think you will be at 100% occupancy.  You think you can increase the rates by 25%.  Etc, Etc.  Do this before you spend anymore time researching the deal.