Self Storage Valuation
Most Popular Reply
Henry ClarkPro Member
Developer · Member since 2020 · 4k+ posts · 4k+ votesALL of the figures below are WRONG.
You have to validate and change to Boots on the ground knowledge. You have to own the thought process.
Here is a "Cost" approach, you have to change the info:
$120,000 Land- 1 acre
$315,000 roughly 90 (10x10) units at $3,500 erected, brand new.
$20,000 Fence
$ 0 No Gate? If swing gate put $10,000; roll gate use $20,000 not automated.
$120,000 Concrete, you mean driveways?
$30,000 Cameras/lights
$ 0 Land prep, permits, entrance, fire hydrant, etc etc.
$505,000 on the light side. From a Cost approach.
Revenue Approach:
$60,000 $5,000 x 12; don't use your value-add number of $6,500 or you're paying them for your work.
$ 3,500 Property tax
$2,000 Insurance
$1,200 Electric
$1,500 mowing and other.
$ 0 management cost, you handle.
$50,800 NOI
7% Cap rate, I don't use cap rate.
$725,000 value.
Cash flow approach: We shoot for a 8 to 12 year payback.
$13,000 Depreciation
$37,800 EBIT
$11,000 Interest, I just roughed this you do the detail. $505k less 25%cash down; $325k loan; say 20 year amort at 6%; You do the actual calcs
26,800
9,400 35% tax rate Fed/State
$17,000 Net Income
$13,000 Add back noncash Depreciation
$30,000 cash flow
Payback= $500,000/30,000= 17 years. Cost basis approach.
Payback= $725,000/30,000= 24 years. NOI.CAP rate approach.
Payback Target= 30,000 in 10 years= price of $300,000; with a bank amortization period of 20 years.
Make a Deal:
1. I would make an offer at $300,000 before he offers a price. If you let him offer at, say $700,000 you won't make a deal.
2. Since its your first deal and a large component is to get into the Storage game and make some money, you could go up to 12 year payback or $360,000.
3. You could work with your bank to get 25 year amort term. This increases the cash flow between the 25 year amort term and the 12 year payback cashflow. You can either take the extra cash and pay down on the loan. Use the extra funds for your next deal. Or this will make up for any Deal Analysis or Capex errors you made.
4. If they are stuck on say $400,000 and your offer was $300,000. Then ask for Seller finance. Tell him you will pay $250,000 now. Then $150,000 5 years later at zero interest. With the right to pay down early. Due to inflation and interest rates, you won't really be paying $150,000 of value in 5 years. This is only if you're doing a Cash deal. If you're taking a loan, they will have to be willing to take second position behind your bank. Your bank won't take second position.
5. Remember your rent increase upwards.
6. Late fees say $25 for 20 of your customers. $500 x 12= $6,000. We don't charge late fees; we get rid of customers who continuously fail their Autopay. Pick your business model.
7. Cost approach. Right now, building costs are too high if your 10x20 prices are in the $60 to $80 range. So, the cost model above, I wouldn't invest at, if 10x20 market price is $60 to $80 in your market as a baseline.
Start small and Make Your Big Mistakes Early.
You're probably not going to do this deal. Not because of the Value or cash flow; but because of potential failure. Which you have not quantified.
Calculate your failure.
Cash flow- if you go for an 8 to 12 year payback with loan amort of 20 or 25 years; you are cash flow positive. Even if you screw up.
Occupancy goes from 95% to 80%. Run the numbers.
Expenses in your model were off by $5,000 per year? Run the numbers.
Expenses- you missed the Flood zone designation and have $5,000 more per year expenses which your bank requires. Run the numbers.
You failed to get your financing in place before you made the offer, and your interest rate is 6.5% versus 6%. Run the numbers.
Capex- didn't realize 5 of the doors needed replaced and all of the rest needed their tension springs adjusted. Cost $6,000. Run your numbers.
Test these failures. This will help you to quantify failures or risk management along with the Cash flow side, to evaluate the deal.
9 Replies
- Investor · Bentonville, AR · Member since 2014 · 759 posts · 379 votes4y
When you say raise rent to get to $6500 is that to neighbors prices? Any Capex needed?
What are they asking for it?
- Investor · New York City · Member since 2020 · 164 posts · 75 votes4y
Quote from @Jun Wang:
hi,
just got my first direct mail response back from the owner of the facility. hoping everybody can share their opinion on this deal.
10000 sq ft
90 units ( mixture of 10x5, 10x10, 10x15,)
currently 95% full with monthly revenue of about $5000
able to raise rent and achieve monthly revenue of about $6500
no extra land available for expansion
pretty much turn key facility with fence, concrete, some camera, light, and etc.
good location near residential house and apartments with 1 life storage about 4 miles out.
what would be a fair sale price?
keep in mind that this will be my first facility so not looking to get rich but more so educate myself about self-storage.
thanks everybody
There is quite a bit of debate as to whether to start with a small or large facility. In my opinion, whatever size facility will get you started - whether small or large - is the right size.
The simplest way to value a facility like this is to take the existing and pro forma net operating income and overlay that with the market cap rate. It is hard to say what your cap rate is without knowing more about your market, but, total guess, I'd think you'd be between a 7-9 cap. If it is near Birmingham, I'd guess on the lower end. - 4yWale LawalBusiness MemberReal Estate Broker · Houston | Dallas | Austin, TX · Member since 2018 · 5k+ posts · 2k+ votes
Deal analysis is a specialized skill and you can learn it from experience.
Check the prevailing Cap rates and potential rental income of similar units.
You can start understanding the local market and the rental behavior.
A local Investor-Agent can help shorten your learning curve and save you a lot of headaches as they tend to understand the market better.
All the best!
NETWORTH BUILDERS5237 Reviews - 4yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
ALL of the figures below are WRONG.
You have to validate and change to Boots on the ground knowledge. You have to own the thought process.
Here is a "Cost" approach, you have to change the info:
$120,000 Land- 1 acre
$315,000 roughly 90 (10x10) units at $3,500 erected, brand new.
$20,000 Fence
$ 0 No Gate? If swing gate put $10,000; roll gate use $20,000 not automated.
$120,000 Concrete, you mean driveways?
$30,000 Cameras/lights
$ 0 Land prep, permits, entrance, fire hydrant, etc etc.
$505,000 on the light side. From a Cost approach.
Revenue Approach:
$60,000 $5,000 x 12; don't use your value-add number of $6,500 or you're paying them for your work.
$ 3,500 Property tax
$2,000 Insurance
$1,200 Electric
$1,500 mowing and other.
$ 0 management cost, you handle.
$50,800 NOI
7% Cap rate, I don't use cap rate.
$725,000 value.
Cash flow approach: We shoot for a 8 to 12 year payback.
$13,000 Depreciation
$37,800 EBIT
$11,000 Interest, I just roughed this you do the detail. $505k less 25%cash down; $325k loan; say 20 year amort at 6%; You do the actual calcs
26,800
9,400 35% tax rate Fed/State
$17,000 Net Income
$13,000 Add back noncash Depreciation
$30,000 cash flow
Payback= $500,000/30,000= 17 years. Cost basis approach.
Payback= $725,000/30,000= 24 years. NOI.CAP rate approach.
Payback Target= 30,000 in 10 years= price of $300,000; with a bank amortization period of 20 years.
Make a Deal:
1. I would make an offer at $300,000 before he offers a price. If you let him offer at, say $700,000 you won't make a deal.
2. Since its your first deal and a large component is to get into the Storage game and make some money, you could go up to 12 year payback or $360,000.
3. You could work with your bank to get 25 year amort term. This increases the cash flow between the 25 year amort term and the 12 year payback cashflow. You can either take the extra cash and pay down on the loan. Use the extra funds for your next deal. Or this will make up for any Deal Analysis or Capex errors you made.
4. If they are stuck on say $400,000 and your offer was $300,000. Then ask for Seller finance. Tell him you will pay $250,000 now. Then $150,000 5 years later at zero interest. With the right to pay down early. Due to inflation and interest rates, you won't really be paying $150,000 of value in 5 years. This is only if you're doing a Cash deal. If you're taking a loan, they will have to be willing to take second position behind your bank. Your bank won't take second position.
5. Remember your rent increase upwards.
6. Late fees say $25 for 20 of your customers. $500 x 12= $6,000. We don't charge late fees; we get rid of customers who continuously fail their Autopay. Pick your business model.
7. Cost approach. Right now, building costs are too high if your 10x20 prices are in the $60 to $80 range. So, the cost model above, I wouldn't invest at, if 10x20 market price is $60 to $80 in your market as a baseline.
Start small and Make Your Big Mistakes Early.
You're probably not going to do this deal. Not because of the Value or cash flow; but because of potential failure. Which you have not quantified.
Calculate your failure.
Cash flow- if you go for an 8 to 12 year payback with loan amort of 20 or 25 years; you are cash flow positive. Even if you screw up.
Occupancy goes from 95% to 80%. Run the numbers.
Expenses in your model were off by $5,000 per year? Run the numbers.
Expenses- you missed the Flood zone designation and have $5,000 more per year expenses which your bank requires. Run the numbers.
You failed to get your financing in place before you made the offer, and your interest rate is 6.5% versus 6%. Run the numbers.
Capex- didn't realize 5 of the doors needed replaced and all of the rest needed their tension springs adjusted. Cost $6,000. Run your numbers.
Test these failures. This will help you to quantify failures or risk management along with the Cash flow side, to evaluate the deal.
- 4yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
Let me make a recommendation. You caught the tiger by the tail before you knew what to do.
if they accept $300,000 I would do the deal. Otherwise run.Looking at your background you just took a look at self storage
Recommend you do 5 deal analysis and develop a checklist, cost model and a revenue model
Recommend you use the magnifying glass above and type in Selfstorage. Read every post
Watch every podcast
Read every book
Go to seminars or join a group
Then invest. Don’t worry about the cost. If you just jump in and continue with self storage I know you will make over $100,000 of errors. At least I did looking back.Then get into Selfstorage. Although the 4 bankers I was just with said MFH in the REI model to be in.
thanks, everybody for the support.
I think the deal just fell thru. seller is asking for 1 million using a 5 % cap rate. I don't think I can even convince the bank to offer a loan considering the number. The debt to coverage ratio is nowhere near 1, so I don't think any bank would even consider it
The current owner is doing most of the maintenance himself, so his calculation has very little monthly expense which leads to the high valuation.
I think I should learn from this experience and walk away. =)
- 4yHenry ClarkPro MemberDeveloper · Member since 2020 · 4k+ posts · 4k+ votes
What were your numbers?
the current monthly income was ~5000
insurance: 2200 /year
tax: 2300/ year
monthly expense (software, electric, internet, etc) : ~500
he did not really account for monthly repairs or future CapEX ( good condition facility, and any small stuff he took care of himself)
he is currently in talks with another big group investor. maybe another reason he priced it so high,
it is definitely growing area.
thanks
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