Self Storage Valuation

[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

[Henry Clark]

@Jun Wang

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.