Self Storage opportunity

17 Replies

I ran across an interesting little self storage opportunity. 

This facility consists of a paved lot with 80 concrete block storage units and a 160x200 open gravel lot (about 100 spaces) for autos, boats and RVs. 10’ tall concrete block walls surround the 5 acre premises with wrought iron around the front. Built in 2001.  Each unit has concrete flooring, with lockable metal roll-up security doors. The inside is drywall finished and has a security alarm system wired to each unit. Updated in 2007 with new stucco and paint, new roof and asphalt.  Owner is out of state and cannot manage it. Zoning: Light Industrial.  There is potential to run other types of businesses with this compound on 5 acres. Only 10 units are rented right now as there is no management here anymore and owner is out of state.

UNIT SIZES:

1-10, and 17-26 are 9x14

69-56, 54-49, and 34-47 are 9x9

the two corner units 48 and 55 are 19x9x11

27-32, are 4x9

11-16, are 14x4

It is located in an area close to where I have substantial real estate holdings and the area is in the midst of escalating population and economic growth. Price right now is $295k but the owner is pretty desperate and will take closer to $200k. The area is somewhat rural and I cannot project what occupancy would look like so it would have to be underwritten to low occupancy. 

@Brian Burke I know you own self storage, thoughts on how you would underwrite something like this? 

When I look at this, I wonder how such a small facility could support payroll and what the exit strategy would look like. Maybe it needs to be expanded to a larger facility but no telling if demand is there. I like the low purchase price and using this experience to learn self storage but not sure how viable it is financially.

Would love to hear thoughts from some of the expers.

As someone who is in the beginning stages of looking into self storage as an investment myself, I will be following this thread.

Thanks @Serge S. for starting this.

I'm following as well...interested to hear what the experts have to say.

@Michael Noto yeah I've also been interested in self storage. My initial take is that its overplayed as to how passive it is. Its clearly a business and that is ok with me. My problem is understanding how to accurately underwrite these deals. Not sure how to best project occupancy, rates, discounts, overhead and maintenance. This is a deal where I might be able to trade out of a few SFRs where my basis is $120k and I'd be buying for just about land value with room for expansion. All of which I like. With only 80 units though, nearly every which way I underwrite the numbers, payroll and fixed costs eat up any profit unless its either expanded or the RV/Boat/Car spots are fully utilized. 

This is another roll of the dice project it seems. As @Brian Burke says, might as well go to Vegas and bet on red:)

@Serge S. IDK jack about self storage other than renting out a garage or parking spots. Perhaps run a craigs tester for the rv/boat/cars,trucks,motorcycles and or storage containers. I know in LA that would be golden. Good luck!

@Matt R. yeah in CA land is at a premium on the coasts. This part of AZ is rural and the land has little value comparatively. I'm not sure running CL feelers will be a good gauge of demand here as it would for apartments. Self storage users are booking and searching online. This complex has literally no advertising and cannot be found online. The owner funded it and repossessed it in what looks like a private loan. She has been unable or unwilling to run it and wants out. 

I searched the competition and units these size look to rent for between $40-$100. There is quite a bit of economic growth. The RV/parking storage is uncovered so I'm not even sure they could rent. Nobody wants to park anything outside when its 110 degrees. I'd probably have to build some sort of structure.

I think the play here would be to build some sort of industrial warehouse space and expand on the storage if the demand is there. I'd have to dig in more on figuring out the highest and best use. Hoping some self storage investor experts can help with guidance on how to underwrite such an investment.

@Serge S. Right on. Yeah the craigs is not an end all but I do see all the non corporate and some large players run ads there. I do see many 100% outside RV storage lots in the desert climate areas in LA county looking pretty full still. My guess is they get a good portion from craigs if they regularly post.

Well, @Serge S. , one thing to consider is that in this property's history the only way it has traded has been via foreclosure.  That should tell you something.  :)

Nevertheless, you are right that it is a challenging size.  I have a 302 unit facility that I built brand-new around ten years ago.  It too was in a small town and it was cheap land that I thought would make me enough passive income to convince me to start buying self storages everywhere.  My balloon was quickly deflated, however.  My problem was that I built it...had I bought a facility using capitalized trailing income I would have been fine.  Unfortunately development comes with a lot of risks like rising construction costs, onerous unforeseen design requirements by the city, etc.  So without going into my woes as it related to the development, let's instead talk about how this relates to your deal.

The concern here is twofold.  Let's start with the big one.  The facility is 10% occupied.  I know how serious this disease is because when I built my facility it was 0% occupied to start.  The appraisal and market study forecasted that it would take 18 months to achieve stabilized lease-up, which was considered to be somewhere around 80% occupancy.  Instead, it took closer to seven years to get there.  Ouch.  Moral:  Don't trust paid studies.  Other moral:  Don't build self storage in small towns, the absorption just takes too long. 

Concern 2: A facility of this size can't afford payroll.  You might be able to pay a neighbor to go over and check on it for you once in a while, but how much can you really spend on that?  Not much, and not at all until you achieve a high enough occupancy. 

If you live down the street and want to check on it yourself, then no problem.  If you want to rent out units by advertising on Craigslist and meeting tenants out there, you might be able to make this work but your lease-up will be slow-going.  Another option is that you can get automated kiosks that tenants can use to make payments and even rent out units.  I don't have one of those so I'm not sure how they work but I'm sure you can research it and find out.  To underwrite, use a pretty high vacancy, long absorption period, and a fairly high uncollectable debt loss.

Don't get me wrong, I'm not a downer on self storage.  Now that my facility is 93% occupied and my delinquents are minimal it's a great business.  But the word "business" is important--it's not a passive real estate investment.  It's nothing like renting out houses.  It's a little bit like managing a 300 unit apartment building with just as many tenants to manage and phone calls to take and collection calls to make, just without all of the maintenance tickets.  But you do have to have advertising, a phone line, office equipment, files, management software, a website, etc.  For my facility, I have all of the above plus one full time employee and two part-time employees.  I'd hardly call that passive!

Originally posted by @Serge S. :

I ran across an interesting little self storage opportunity. 

This facility consists of a paved lot with 80 concrete block storage units and a 160x200 open gravel lot (about 100 spaces) for autos, boats and RVs. 10’ tall concrete block walls surround the 5 acre premises with wrought iron around the front. Built in 2001.  Each unit has concrete flooring, with lockable metal roll-up security doors. The inside is drywall finished and has a security alarm system wired to each unit. Updated in 2007 with new stucco and paint, new roof and asphalt.  Owner is out of state and cannot manage it. Zoning: Light Industrial.  There is potential to run other types of businesses with this compound on 5 acres. Only 10 units are rented right now as there is no management here anymore and owner is out of state.

UNIT SIZES:

1-10, and 17-26 are 9x14

69-56, 54-49, and 34-47 are 9x9

the two corner units 48 and 55 are 19x9x11

27-32, are 4x9

11-16, are 14x4

It is located in an area close to where I have substantial real estate holdings and the area is in the midst of escalating population and economic growth. Price right now is $295k but the owner is pretty desperate and will take closer to $200k. The area is somewhat rural and I cannot project what occupancy would look like so it would have to be underwritten to low occupancy. 

@Brian Burke I know you own self storage, thoughts on how you would underwrite something like this? 

When I look at this, I wonder how such a small facility could support payroll and what the exit strategy would look like. Maybe it needs to be expanded to a larger facility but no telling if demand is there. I like the low purchase price and using this experience to learn self storage but not sure how viable it is financially.

Would love to hear thoughts from some of the expers.

 Serge,

This is a small self-storage facility.  How will you manage it?

It's likely too small to generate sufficient income to afford a full-time onsite person.  Do you own a larger apartment complex nearby where you can have an employee you have working in that office manage this?  A contact of mine who owns self-storage, medical offices, and apartments has structured two of his smaller self-storage this way.

They say self storage the time to buy was about 3 to 4 years ago. It's frothy now just like multifamily.

I looked at a few but do not want to buy a business. I also do not like the numbers of doors you have to scale because the rent is very low per door compared to other investment types.

Right now a lot of value add in the cycle is office and industrial type properties. I don't focus on those sectors but I stay very busy with retail and the occasional MF. MF they say velocity of transactions has slowed down considerably versus other commercial sectors.

I do not like office because overnight someone can move all their stuff out and vanish easily. At least with retail I have heavy equipment attached and often expensive build outs tenants have completed making it harder to move.

I am just staying in my lanes and not veering.

  

  

Ex employer of mine took a self store facility that was in bank foreclosure, bought it, gutted the offices and built offices that he rented out to sub contractors and remod companies. he then put an outlet of his company . a flooring wholesaler in the location as a second store and voila built in business.

Sorry, he also kept the self storage part and used it to rent to the subs and built upon that to get business. I was his marketing manager and the complex is now 98% occupied.

There's one here in Tucson where the owner built a small living quarters (a mother in law house) on the facility and let's the manager live there in exchange for maintaining the place. I think it's some retired guy that's now living under a free roof and keeping busy and no additional overhead for the owner! Good deal for both parties I think.

Not that this fixes the vacancy problem, but it's a management solution in a box (pun intended).

Serge, 

The price is right, and the asset class is outpacing all forms of real estate - bar none!  (regardless of the opinions of others on this thread). 

AND, Now is DEFINITELY the time to buy!  We're snatching up every facility, and land/warehouse to develop and convert to Self-Storage we can get our hands on.  With Over 92% AVERAGE Occupancy nationwide, and waiting lists in all 50 major MSA's, and 4% interest rates - Makes this the greatest Storage Grab in History.  

No more tenants, toilets, or trash for this investor - give me the metal boxes on concrete slabs generating over $1.20/sf per month all day long.  

That being said, the 1st order of business is to pay for a basic market study.  You can get a preliminary report for $100, and a more thorough analysis from an industry consultant for $500.  Otherwise, you're throwing darts, and taking the bad advice/opinions of other members on Bigger Pockets. 

Too much to talk about here, but the 5 acres has me intrigued.  

Contact me off line if you need more assistance and/or perhaps we can discuss a wholesale or jv opportunity.  We have the money and the ability to close if it's the right opportunity. 

Talk soon,  

Originally posted by @Justin Ellis :

There's one here in Tucson where the owner built a small living quarters (a mother in law house) on the facility and let's the manager live there in exchange for maintaining the place. I think it's some retired guy that's now living under a free roof and keeping busy and no additional overhead for the owner! Good deal for both parties I think.

Not that this fixes the vacancy problem, but it's a management solution in a box (pun intended).

 Justin - we've seen it from both sides.  Is it a benefit for someone to live there?  Yes, IF they do the job. And if not, then you not only have to let them go, but, usually, you have an eviction. 

Personally, Give me the Rock Star Manager that will drive my $Million Asset Forward, and we'll pay them accordingly, AND with Bonuses.  We've found that the type of person we're looking for is not driven by free rent, and would rather NOT live at a Storage Facility. 

Make Sense? 

Just my $.02

Cheers, 

Originally posted by @Brian Burke :

Well, @Serge S. , one thing to consider is that in this property's history the only way it has traded has been via foreclosure.  That should tell you something.  :)

Nevertheless, you are right that it is a challenging size.  I have a 302 unit facility that I built brand-new around ten years ago.  It too was in a small town and it was cheap land that I thought would make me enough passive income to convince me to start buying self storages everywhere.  My balloon was quickly deflated, however.  My problem was that I built it...had I bought a facility using capitalized trailing income I would have been fine.  Unfortunately development comes with a lot of risks like rising construction costs, onerous unforeseen design requirements by the city, etc.  So without going into my woes as it related to the development, let's instead talk about how this relates to your deal.

The concern here is twofold.  Let's start with the big one.  The facility is 10% occupied.  I know how serious this disease is because when I built my facility it was 0% occupied to start.  The appraisal and market study forecasted that it would take 18 months to achieve stabilized lease-up, which was considered to be somewhere around 80% occupancy.  Instead, it took closer to seven years to get there.  Ouch.  Moral:  Don't trust paid studies.  Other moral:  Don't build self storage in small towns, the absorption just takes too long. 

Concern 2: A facility of this size can't afford payroll.  You might be able to pay a neighbor to go over and check on it for you once in a while, but how much can you really spend on that?  Not much, and not at all until you achieve a high enough occupancy. 

If you live down the street and want to check on it yourself, then no problem.  If you want to rent out units by advertising on Craigslist and meeting tenants out there, you might be able to make this work but your lease-up will be slow-going.  Another option is that you can get automated kiosks that tenants can use to make payments and even rent out units.  I don't have one of those so I'm not sure how they work but I'm sure you can research it and find out.  To underwrite, use a pretty high vacancy, long absorption period, and a fairly high uncollectable debt loss.

Don't get me wrong, I'm not a downer on self storage.  Now that my facility is 93% occupied and my delinquents are minimal it's a great business.  But the word "business" is important--it's not a passive real estate investment.  It's nothing like renting out houses.  It's a little bit like managing a 300 unit apartment building with just as many tenants to manage and phone calls to take and collection calls to make, just without all of the maintenance tickets.  But you do have to have advertising, a phone line, office equipment, files, management software, a website, etc.  For my facility, I have all of the above plus one full time employee and two part-time employees.  I'd hardly call that passive!

 This is a terrific post.  It makes it all worthwhile spending time fishing through these BP forum posts for good info.  It's one of the great things about BP that someone of Brian's experience level takes the time to give us a non sugar coated, un-biased, non "rah rah"  cheerleader view of his real life experience in SS.  Thanks Brian!

@Scott Meyers your last response was great. So how would you approach an acquisition with an existing on-site manager, that during the due diligence process, you come to the conclusion that having a part-time off-site manager would be a better business move? Would you have the seller handle it and you take possession without a manager? Or would you take possession with the existing on-site manager and make a new agreement with them to work off-site?

Thanks!

I used to take on the current manager, have them train us, and then move on. 

NOW, I don't want to take on any previous liability, or be responsible for vacation pay, etc. so without exception, I will require the owner to release the manager, and we'll slot somebody in immediately. 

Have a great weekend!

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