Self Storage- Am I overpaying?

14 Replies

Please help me evaluate this Self Storage facility. This is my first one. I submitted an offer now having some doubts.

Self Storage Facility 343 units. NO office. It is being managed remotely or part time by the owner. It was built in 2000 on 5.5 Acre. It is 4 building totaling 35,100 Sqft of rentable space. 

  1. Revenue = $233,000
  2. NOI = $150,000
  3. It is 98% occupied 
  4. Economic occupancy is at 88%
  5. Room for ~10% increase in rent
  6. Asking Price 2.6 million 
  7. I submitted LOI for $2,300,000

What do you think? at 2.3 mil will be over paying. Attached is 5 year conservative calc. If you were to buy this what would you offer? Thanks

I would be a bit more focused on the potential growth of the investment. Is there room to add additional units and seriously increase the value of the property? Or demand in the market to do so? 

Additionally, what is your financing plan, and what is your cash flow after paying debt service? The underwriting stops at NOI, but I think you need to go a bit further and figure out what your take home is.

Originally posted by @Taylor L. :

I would be a bit more focused on the potential growth of the investment. Is there room to add additional units and seriously increase the value of the property? Or demand in the market to do so? 

Additionally, what is your financing plan, and what is your cash flow after paying debt service? The underwriting stops at NOI, but I think you need to go a bit further and figure out what your take home is.

Thanks for the reply. Attached is the financial. The plan is to get a 3 year interest only loan. the down payment will be partly raised and part my savings (the cost is not in the spreadsheet). 

98% occupancy. I called around the area and very limited availability. These units are below market rent by about $5-10/unit. Another big opportunity is to bring up the economic occupancy from 88% and to increase rent right away $5/unit. The average rent is $60/unit now. 

I would say the expenses look a bit low. It also looks like return projections may not include closing and other dd costs. If you're bringing in investors, be sure to break out their projected return from yours, and of course do the deal in a securities compliant manner.

@Sohrab Ansari

Not enough info to answer "What do you think?".

Don't answer any of my points back on an open forum. You don't have a deal yet (you sent an LOI).

Here are some points, in no particular order since your question and info is really broad or lacking.  Treat any question as a call to action.

1. You sent an LOI in. It hasn't been accepted. Part of that should have been a 30 day due diligence. Do you have a list of due diligence items to check on? How many units used by the owner or relatives? Past Dues? Will they transfer over records and system access as part of LOI? Are taxes paid? Zoning? Facility repairs? Develop a list. Your bank or investors already approved? How long did you extend the offer? 3 days?

2.  You have either got a Fabulous deal, the numbers are wrong, or this is in the middle of South Dakota.  First of all, your from Ann Arbor, but this deal can't be in Ann Arbor.  Your average rental rate is too low per your numbers for this area.  Your running $58, which I will assume your average is a 10 x 10, but this is only about 1/3 the Ann Arbor rate for Drive up access.   Again, don't respond to me.  If your far out in the country your average should be about a 10 x 15.

3.  5.5 acres and 343 units.  This is good.  You have extra land to expand unless its wetland or hilly.

4.  Financing.  Don't know how your getting Interest only for 3 years on a going concern.  If this is a "special" loan then they should be charging you a higher interest rate.

5.  Financing.  Your keying on Cash on Cash metrics.  Don't know why you are putting $460,000 down.  Go for an SBA loan at 10% or $230,000.  Do a construction, interest only loan with a local bank, until they get you switched over to an SBA loan.

6.  Snow.  I lived in Grand Haven/Muskegon 60 inch snow.  Your in the 40 inch range.  5.5 acres, I would budget about $15,000.

7.  Risk analysis.  You did the projections.  Have you done a risk analysis?

8.  Financing.  $60,000 "interest only loan" on $1,840,000 for 3 years= 3.3% interest rate?  20 year amort, 5 year renewal?

9.  Management fees, what do they cover?  How do you plan to manage?

10.  35,100 sq ft in 4 buildings, sounds small on a 5.5 acres parcel.  How much bare usable ground is there?

11.  If this is recently developed, ask for the fixed asset records or details.  Help you do a Cost segregation.  Pay zero taxes for the first 2 years.

No matter what, sounds like a great deal since your moving forward.  Congratulations on your first "offer". Now close it.

@Henry Clark

Thank you for some great insight. I appreciate the detailed reply. I will not share anymore much on open forum. I didn't think of SBA that is a great idea. 

You mentioned risk analysis. How can I do that or what do you mean by that?

Management fees - I took an arbitrary number. Don't have a management plan yet. 

Risk analysis- 

1.  Find out the zoning for Self storage in your area.  Get the zoning and future/planned zoning map.  See how easy it is for other people to build from a zoning, price and availability standpoint.  Can people out position you.  Are you 4 miles out of town with no one around, and someone can build in town near the population?  

2.  Existing competition-   Look on Sparefoot map and Google Self Storage map, and see how you, competition and customers are aligned.  Also check out pricing.  Does it fit your model.

Management fees-  How close do you live to the location?  What style of management do you plan?  Validate your numbers in your model.  See our Youtube on our website for self service management.  We stay within a 40 mile radius.  Right now I am 70 miles away from this location to the farthest location away; but can get you rented in 2 minutes over the phone.

Again congratulations on moving forward.  Do more reading, podcasts, deal analysis, and go to training sessions.

@Henry Clark Thank you! I did watch your videos. Love the system of onboarding. This property is about 50 miles away from me. I am learning and not certain about how I will manage it. I will before I close. Any book or Course you would recommend? 

I haven't heard back yet. The owner was out of state. I should hear something back soon about LOI

Haven’t researched training before.  Recommend you find a seminar or course online or go to.  Narrow it down to the operation side versus the finance side.  That way you get a more focused training session. 

Future.  Always make an offer with a deadline.  Otherwise they will keep it in their pocket and wait for a better offer.  Good luck. 

Hi @Sohrab Ansari . At a glance it seems like you have a good deal. But there is so much you need to learn through due diligence, etc. to really know. I think it would be very wise for you, since this is your first deal, to get some serious training before you make a final commitment to this property. Or partner with someone who is already in the business.  Scott Meyers has training available and he’s only a few hours south of you in Indiana. He also partners with some investors who train under him.

Honestly, I wouldn’t even consider any deal at any price until you learn a lot. I’m actually publishing a book on self storage, but I wouldn’t do this deal on my own. I would partner with somebody with great operational experience. Happy investing!

@Sohrab Ansari The asking price is a 5.77% and your offer is 6.5%. Your question is "are you overpaying". The simple answer is maybe. A 5.7% cap for a class B or C facility is a strong ask in the market. However, if the revenue is not verified and the expenses are not accurate, then yes you will certainly be overpaying. We see many facilities that look great on paper until we dig into the due diligence and find out all that is included or more importantly not included to get to the real adjusted NOI. If you agree on a cap rate, you can make your offer based upon the cap rate applied to verified income.

@Sohrab Ansari@Scott Krone

Scott's points are really valid.

One deal I looked at, they did not show property taxes, normally one of the biggest expenses.  Zero is  a no go.  Found out it was part of a larger agriculture property and not yet subdivided.  Plus the government had not re-assessed the property as Self storage. Thus yes, they had paid minimal taxes, but you would with the subdivision and re-assessment.

Same deal, there was no management charges.  He was paying "cash" (25% of revenue) to the neighbor and not reflecting on the Sales data.

Both of the above are "okay????", but you would get hit with them.  Always start from zero on both your Revenue and expenses and challenge and build them up.

Make sure your offer has a 30 day due diligence period.  Then really fast you need to learn how to do due diligence (which you can't learn it fast).  Pay one of the folks on the Forum $3,000 to help you do a due diligence review.  This is a cheap spend. And I'm not in that business.

@Scott Krone @Henry Clark Thank you for the awesome feedback and input. The seller is back but wants close to $2.6 million. 

If it goes under contract, I will get help with due diligent and some other management help for sure. 

What percentage of tenants will get insurance? what would the increase revenue be on 343 from insurance? I see 4 add value components to this deal. 1. Adding insurance 2. Increase the rent 3. Increase economic occupancy (now its at 88%. Seem like an issue with collections) 4. Add additional units 

What you think about the add value component and how will this contribute? Should I not give any consideration when purchasing? Thanks

@Sohrab Ansari

Please walk away from this deal.  Not saying its not a good deal, but you haven't run your numbers.  You need to get to a higher level of understanding before having your very first deal be $2.6mm.

A.  All of the value add points you note above.  You have to "run" them.  Can't just say them.  "Adding Insurance" example   About 20% of your 343 units will buy your insurance if the world is great.  Most likely only 5% will buy.  But you will make about $1 on a $7.95 per month policy for $1,000 coverage.  So 20% x 343 x$1 x12 months= $823 of income from selling insurance.  It took you over 40 hours per year to achieve this.  My point is not about is Adding Insurance a value add model.  It is.  But if you did the numbers and saw what I just presented, you wouldn't have brought it up.  You need to do your numbers.

B.  Read my previous post above.  Don't trust anyone's numbers other than your own.  If you received numbers from the Realtor or Seller, don't trust them.  Build both the revenue and expense figures yourself.  Don't use an "Expense Ratio".

C.  Cost or Development basis.  Not including cash flow for existing rentals.

a.  Land 5.5 acres.  Say $100,000 per acre=  $550,000

b.  Buildings 10 x15 or 10 x 20 equivalents are running around $4,000 erected.  You PM'd me some info.  Over half of your units are 5 x 10 and 5 x 15.  Lets say your overall buildings are 240 equivalent.  240 x $4,000= $960,000

c.  Roads, say rock.  $50,000

d.  Fence  5.5 acres  $50,000

e.  Electric/lights- $60,000

f.  Security- $50,000; motorized gate $20,000

g.  Engineering, fire hydrants, water, sewer, office, landscaping, dirt work, water/sewer/electric to property, etc, etc. $$$$$

Total= $1,740,000

h.  Interest during construction period and rent up phase= rough 3 years= est $50,000

Total= $1,790,000;  Say $1,800,000 rounded.  Brand New.

How old are buildings?

i.  Cash flow stream: They show $225,000 net revenue stream for 2020 above.NOI $155k above. Real rough next. Deduct out depreciation, add in Income tax, add back depreciation to get to cash flow. Lets say $120k cash flow after everything. Say 6% over 12 years = $1,006,000 NPV.

$1,800,000  Development costs- really rough; brand new.

$1,006,000 Cash flow stream- really rough

$2,806,000 value for a brand new facility with a known value stream.

Change all of the figures above to "Boots on the Ground" information.

They are asking $2,600,000.  I actually like these people.  They think just like me.  The majority of our facilities are brand new.  All the development and Rent up phase risk/exposure has been handled by us.  I would never sell ours for the cost to develop or for the revenue stream individually.  Why give a person a property at cost, that will be worth the same amount in 15 years disregarding inflation, with very little repairs or tenant repairs; plus give them a revenue stream to pay it off.

There isn't a lot of Meat left on the Bone.  You have to truly nail the acquisition numbers, and then you have to nail the "Value Add" potential.  Otherwise you don't make any money or equity until after about 12 years.

Last:

Have you done a Risk analysis on the property and market?  How easy is it for someone else to build next to you?  Do the other competitors have extra land to build? etc, etc.

This is a great exercise for you.  Do about 5 more of these. Throw them out on BP like you did.  Just pick them off Loopnet, so people can easily see the property details.  Go to some training/seminars/coaching.  Then definitely jump out there.  Definitely buy a small location. You will learn more from that than 10 years of training or coaching.  Lets say you bought or built a small 25 unit location and the numbers or ratios were similar to the project above.  I would say definitely do it.  Start learning, with little potential for significant loss.  Matter of fact, ask one of the trainers to actually design a 25 unit location, that people buy, manage and sell for 6 months as part of their training.  Tell them to charge you $15,000 for this experience.  It will be worth it.  My favorite location is our first 35 unit spot.  Learned the majority of Self Storage there. 

Start small and Make Your Big Mistakes Early.