Analyze My Deal - First Time Commercial Investment

Commercial Real Estate Investing
5yFollow

Analyze My Deal - First Time Commercial Investment

Karen Devlin
Member since 2018 · 11 posts · 6 votes

I've been renting SFRs for about 15 years now and I'd like to step up to a larger commercial investment. I'm working with a local broker and he's presented me with this deal: 

Self-storage facility located in Oregon. Price is $1,315,000. 

I have $370K cash that I need to reinvest from a 1031 that I just completed. The plan is to use that plus $30K cash from savings as a down payment of $400K and finance the additional $915K @ 4.25 for 25 yrs. 

Here are the details: 

1-acre lot with approximately 19,000 sq ft across 8 steel buildings. 151 storage units total.

Built in 1986, new roofs and exterior paint in 2015

Includes office with bathroom/sink

On-site manager will likely stay on as an employee

Sale includes additional .22 acre lot. Opportunity to develop the lot to support 30 additional storage units (estimated cost $75K).

2018: NOI = $77,331.34

2019: NOI = $78,472.83

2020 to 7/31: NOI = $44,824.19

Storage rental rates are currently 10% below market value. Plan would be to develop additional lot with 30 storage units and bring rents up to market value starting with a 5% increase.

Thoughts on questions I should be asking? All advice is appreciated. 

2Reply
179 views

Most Popular Reply

Israel Garavito
Investor · Woodbury, MN · Member since 2019 · 41 posts · 33 votes
5y

@Karen Devlin that seems a pretty tight due diligence period. Have you built any extensions to your contract?

Let me step back and ask you if the PA was put together by your attorney or by the seller? A non negotiable for us is that we provide the PA in a commercial deal.

In due diligence make sure you (this is off the top of my head):

1. Review all leases, compare to rent rolls and bank accounts to verify income, regardless of what the tax returns say (this is why it’s a tight DD period, and we usually take a team on site to get through it in a week). Make sure you get a good pulse on the business and how and when the cash flows in. This includes delinquencies, late payments, evictions, etc. what do you do with stuff when you evict and they just leave it there, and do you have that underwritten properly?

2. Review all structural

3. Permits

4. City inspections and COs

5. All contracts and utilities

6. Can you open all units? Not sure how that works with storage, but I’d like to see all units. Every single one.

7. Licensing: make sure those are up to date and if they are up for renewal, make sure the cost is underwritten. Not sure the licenses needed to operate a storage facility.

8. Property tax increases

9. Easements

10. Any debts in property taxes? Utilities?

Etc.

And don’t do this by yourself. Take a GC or whatever or whenever you work with and have them give you a quote or an opinion. Example: are you 100% sure that adding those extra units will cost what you think it will?

And then you and your team come back with all this info, polish your underwriting, and re assess.

8Reply
See this reply in the discussion

32 Replies

Jump to latestLatest
  • Alex S.
    Investor · Metro East of St. Louis (Illinois) · Member since 2016 · 259 posts · 211 votes
    5y

    I just read Buy then Build by Walker Deibel (Ep68 of BP Business Podcast) and he does a great breakdown on due diligence for business purchases like this one you are describing.

    Presumably the $1.3M includes the underlying real estate...which is effectively a separate investment from the self-storage business.

    Good luck, sounds like fun!

    1Reply
  • Israel Garavito
    Investor · Woodbury, MN · Member since 2019 · 41 posts · 33 votes
    5y

    @Matt Skog any time! Send me a PM and we can connect

    0Reply
  • Kevin Bledsoe
    Real Estate Broker · Lancaster, PA · Member since 2020 · 25 posts · 25 votes
    5y

    @Karen Devlin I’m a broker who specializes solely in the self storage industry in the Northeast and Mid Atlantic. My team values 90 to 110 properties per year and we sell between $70mm to $100mm in self storage each year.

    I would agree with many of the comments offered. The cap rate being paid is fairly aggressive. I would base the NOI somewhere closer to a 7% to 7.5% cap rate. I'm not sure what expenses you have factored into the NOI equation but that plays a major part in the equation also.

    Honestly, a property of that size can be supplemented through the use of technology. I’ve managed more then 100 properties in my management portfolios prior to entering brokerage. You can set up online rentals, automated collections calls, revenue management and tenant insurance all through automation. Using this operations approach can help limit a lot of the need for an employee. If you aren’t close to the property geographically you can hire somebody to do a daily walk through, clean units and help customers who need the personal touch of an in person rental.

    It sounds like you might be close to a valuation of $1.1mm with the land included in that price.

    I hope this helps and best of luck! It’s a great business!

    1Reply
  • Ronald RohdePro Member
    Attorney · Dallas, TX · Member since 2016 · 5k+ posts · 2k+ votes
    5y

    Any update from OP? Curious if she terminated or lowered the price!

    1Reply
  • Karen Devlin
    OP
    Member since 2018 · 11 posts · 6 votes
    5y

    @Ronald Rohde, thanks for checking in! Price hasn't been lowered yet. We're in the early due diligence process... requesting tax returns, storage leases, etc. 

    As an aside, anyone have experience with SBA loans? We may go that route... 

    0Reply
Join the conversationCreate a free account to reply, vote on answers and follow this thread.
Log InJoin for Free