How much should I offer?

6 Replies

Looking at a 19 unit self storage facility here in town. Asking price is $55,000 with gross potential rents of $13680/year. Property tax runs $2600/year and insurance runs about $600/year. Estimating snow removal at around $1500/year. I also happen to know that the property needs some excavation work done to improve the driveway, which I estimate will run $10,000. That being said, I am going to make an offer somewhere around $35,000 using seller financing. Does this seem too low?

Craig, 

More Factors here than what you have listed, but for a QUICK Evaluation in Self-Storage: 

1. We value commercial RE based on NOI and Cap Rate

2.  Industry Norms for Storage:  Expense Ratio of 30-35%, so 35% of $13680 is $4,788

3. Your APPROXIMATE Annual NOI would be $8,892

4.  Apply a Conservative Market Cap Rate of 10%, and Your ESTIMATED Value would be $88,920. 

Now, this does not take into consideration the current occupancy, Deferred maintenance, Age of the property, amount of land, upside, supply index of the market, and getting the ACTUAL Expenses, rather than using an industry average of 35% as I just did in our little exercise.  etc. - All factors that will determine the value to you, and the value to a potential buyer upon your exit. 

I'm Sure many others will weigh in on this as well, but on the surface, it looks like you may have a potential deal on your hands.  

Thank you for the quick reply, Scott!

I should also add in that it's about a half acre size lot - so this will likely be a stand alone facility. There are 6 10x20 units that can be subdivided to create more units. I will be running the operation out of my real estate office, so no need to budget for overhead there. Also, I will be self managing through my property management company, and wondered what a normal management fee for storage units would be?

Thanks again in advance!

Craig, 

Remember, you still need to apply a CURRENT market valuation to the property to make sure you are buying it right - because when it comes time to sell, this is what any buyer will do - they add back all the management fees, unless you plan to manage it for them for free?  Get it?  So don't discount them in your valuation, or you'll shortchange your internal profits on your exit strategy.  

As for the actual management, 5% of Gross is what the banks will apply and gets it through underwriting.   But if you want to reduce your taxable income on the Self-Storage Facility, then pay your management company somewhere around 7-8%. 

Cheers,  

Thanks for this, Scott! In your 35% of gross for expenses, does that factor in Management, Maintenance and Property Taxes?

I spoke to the listing agent today and he seems confident that the owner will hold a note, so I'm thinking it should cash flow nicely if I'm able to pick it up for $40k at the highest.

Craig, 

Yes, the 35% includes EVERYTHING except your loan expense.  

And Dude, if you pick it up for $40k, I'll give you a FREE ticket to my Self Storage Academy 3 day intensive so that you can learn more about the biz, and present your deal at our "panel of successful deals" session. 

Keep me posted.  

That's very generous of you, Scott. Thanks!

Would you happen to have a "cheat sheet" of sorts, so I could use that, and maybe pass it along to a client of mine?

I ran all the numbers at 85% occupancy and it seems good!!