self storage advice

57 Replies

Hello,  looking for advice on this deal.

 I'm under contract on a 250 unit self storage business that is 60% occupied.   Its in great shape, with all concrete drives in a non drive by location but with a in city limits location.   The town is over built on storage units.  I've found a second self storage business that isn't listed but for sale that is 15 older units in a great location with good drive by visibility.   Its 100% occupied and slightly under market on rents.   It should sell for around 60 to 70k. Asking price is 95k.   if I buy it  I'd like to think I could put up a sign and name it the same as the larger facilty and draw business to fill the vacant units.   It cash flows barely at 95k but it is older with gravel and would need new doors at some point.

What should I give for the second location of 15 units?

Hi Patrick, 

That's a tough question to answer with the info provided. Generally speaking, storage is valued on the income currently generated (Trailing 12 months). CAP rates vary by market but as an example, if you are comfortable with your purchase price on the larger facility, you might just use that CAP rate as a bench mark for this smaller one. Not knowing your market at all aside from the fact that it is overbuilt, I would say you should probably be at a 10 CAP or higher. THis means that This smaller facility should generate $6-7K in annual NOI (excluding all non-debt expenses) in order to garner the $60-70K purchase price you presented.

The fact that it needs work is important to consider but less so maybe than other property types.  I realize you might be tempted to compare it to the big facility and think "hey this needs work so Its worth less" but the truth is that both properties need work.  The small one needs physical work and the big one needs operational work.  By basing value on income you can compare apples to apples.  When you start upgrading the smaller facility, you will be able to raise rates accordingly.  Even with that, if the owner will accept less because of the needed repairs, take it...I'm ust saying that Income needs to be the cornerstone of your valuation.

As for co-branding the facilities, that is easily done and you can run both from the larger location. My question for you would be whether the smaller facility is worth the extra hassle... While it only represents about 5% of the total portfolio (15 out of 265 units), you will have two lots two plow, two lawns to mow, two checks to cut for every expense etc....So its double the back end work for a minor tick up in revenue.  If its a steal it may be worth it but if you can only negotiate a "fair" price...you might be better off focusing on the 250 unit property. Just a thought...

Do you have previous experience in Self Storage? If so, the above paragraph may not apply but if this will be a learning process for you, I would stick to one at a time.  The small one isnt listed so unlikely it would sell in next 6-12 months and you could revisit it then.

 Lastly, you might find my blog an interesting read. Feel free to check it out and I am happy to answer any questions you might have as you move forward.  Also, consider sharing more details (almost like a real time case study) for more specific discussions on this forum.  Plus there are lots of us who love to crunch the numbers and would find your deal very interesting from a spectator standpoint.

All the best,

Mike

ok interesting,  yes I'm a first time self storage investor.   And I would usually always walk away from a low cash flowing deal.  The thought of filling up the vacant units with the advertising.  But I think its too much asking price.  Wondering how much the advertising is worth.  

From talking with the appraiser yes I think your right it should be a 10 % cap.   The location and the undervalued rents are the best thing going for it.  

I have a team in place to take care of snow and yards along with management.  

Thanks any other thoughts? 

Good insights, Michael. Welcome to BiggerPockets. 

@Jon Klaus  - Thank you. I perused your profile and it looks like you are making moves building houses! Impressive timeline!

@Patrick H.  - I somehow have two BP accounts and responded to you under an old dated one.....in case you are interested, here is a link to the SS blog that I sometime update from my other active BP account:

http://www.biggerpockets.com/blogs/3915-all-things-self-storage

Originally posted by @Michael Wagner:

@Jon Klaus - Thank you. I perused your profile and it looks like you are making moves building houses! Impressive timeline!

@Patrick H.  - I somehow have two BP accounts and responded to you under an old dated one.....in case you are interested, here is a link to the SS blog that I sometime update from my other active BP account:

http://www.biggerpockets.com/blogs/3915-all-things-self-storage

 Ah, you're not new, just incognito. 

@Patrick H. I'm very keen on self storage, but reading your post threw up a red flag. If the area is over built with storage, that is not something you can fix, so I'd personally be wary of both of these deals. If there's not enough population to support the number of storage units in the 3-5 mile radius, then you're going to have to compete on price. And that may not work out so well at the end of the day. As for the smaller property, if it is 100% occupied and the owner is no dummy then you will be paying max price for that NOI. Not much room to add value there (assuming you can't add other revenue). If the area has lots of vacancies then you may have trouble filling those units when people leave which would bring down the NOI and make it worth less, making your exit tough. Proceed cautiously.

@Patrick H.  

It's  a very innovative idea. Basically you are paying a premium for the smaller unit in the hope that its "awesome" location can be rubbed off on the larger unit through co-branding. Personally I love "innovative" marketing strategies that think out of the box. So that's an awesome idea. Question I have, is 25k worth it in marketing? If you pay more than the smaller unit is worth. You are basically paying a premium for the "brand". Which happens all the time, the question is, is it worth it. 

I have the same kind of "crazy out of the box" idea. If I ever venture and dip my toe into commercial it would be with a conventional strategy with a non-conventional idea . That being said, I would still buy the house under the conventional ideas. That way I have an exit if my "craziness" doesn't work. If you check out my profile or website, you will see that I don't go with convention or standard 1%, 2%, 50% and have done VERY well (if I do say so myself). On the other hand I KNOW my market. I will screw up at some point because that is just the laws of averages and probability. That being said  I am very selective picky and know what I am dealing with .

That being only you know your market. If you are hoping to lead people to your newer unit, you are going to have to keep that small building filled at compacity. So you probably won't be able to raise rents. You will also have to worry about your newer units higher rents turning people off. Some people care about price not offering.

Another issue, if the area is over saturated in storage units. Is there the "demand" to fill the units to 100%. Or are you going to have to reduce unit prices, canabolizing your current rates to fill it . So while you might get to 95% full, your overall net is the same or very close to 60%.

Personally I would love to do storage units at some point. My old boss and mentor loved them. So far I just haven't found a unit that makes sense. 

Hey all thanks for the replys!  I decided to offer 70k for the small unit and he turned me down.  Then I offered to rent a spot for a new sign in frint of his business.   Deal being we keep his full and I get all the overflow.   

The 250 unit is a smoker deal because it has a load of hidden opportunity!   My coc return after buying it will be. 40% at 61% occupancy.   Current management is a sleep at the wheel (respectively)

Nice. Sounds like you got a good deal on the larger property, and will also get what you need out of the smaller property as well. And he'll probably call you first when he's willing to sell and truly negotiate. Good luck with the new investment!

Thanks!  Yes I think so.  Any body go to the self storage business shows in vegas?

Would you recomend I take my property manager and go to it?

Yes, I went to the SSA show back in August and it was great- I'd definitely recommend it, especially if you are new to self-storage like me. I don't own a property yet, but have spent the last 4 months immersing myself in all things self-storage, so I was there to get other's views on the business. I didn't pay for the training sessions, just went to the vendor exhibits, but still learned a ton. I was definitely struck that EVERY owner I talked to had nothing but good things to say and encouragement. But once I get into a property I will definitely be going back and attend the training sessions they offered. I heard the ISS show in the spring caters more to the smaller guys. I also just attended a seminar over the weekend that included Bob Copper from selfstorage101.com. He does training / consulting for self-storage operators and was just a wealth of knowledge. Might be worth checking out in case you hadn't heard of him already.

@Michael Wagner  Have you attended any of this stuff? I think I may be where you were a few years ago, and it sounds like it's going well for you, so I'd be curious to hear your take.

@Patrick H.  ,

I have not been to any of the national shows but not for any good reason other than scheduling issues.  With a young son, I choose to stay as close to home as possible.  I go to as many of the State association meetings as I can and have been to other Industry meet-ups. 

You can't go wrong by getting out and meeting up with as many industry experts as possible.  

I haven't been to or been involved in any thing self storage yet.   I've been hard in to multi family and just cold called at the perfect time and got way lucky!   I will probably plan on attending one of the shows to learn.  I'm very green when it comes to self storrage.   I have a feeling there is a ton to learn at the show.

@Patrick H.  

I went to my state REIA conference and my mind is blown! I am now actively investigating self storage. Do you all reach out to commercial real estate brokers or reach out to owners like people do when marketing for single family homes?

Have you had any success getting owner financing for these facilities?

@Richelle T.  , I'm guessing you saw @scott myers speak.  His products are worth your serious consideration.  I have two facilities.....bought one via an broker and one direct from a seller.  So the lesson is to pursue both avenues!  Good Luck!

I had the opportunity to do owner financing but got way better terms at my local bank.  I haven't reached out to brokers in that area yet I have in anchorage.   All my deals were cold calls to owners.  I plan on attending the Vegas show in April. 

@Michael Wagner  @Patrick H.  

Yes I did hear Scott Meyers speak. Wow! I'm quite excited to learn a new segment of real estate. I think it will compliment my buy and hold strategy nicely. 

I have a question about how hands on the management is after acquiring a property. Is it best to be in the same city so you can physically handle things? Or could most of the management be conducted remotely? Is it like a rental property where it is best to be there in person for the initial acquisition and turn around, then once stable it can be maintained from a distance?

I have no experience with self storage, I have a property manager in place for 8% that will handle all calls, paperwork and data entry for the Site Link software.  My opinion is that you would need to have some boots on the ground some.  A kiosk is another complement to management. 

@Patrick H.  

Why exactly are they selling?

Until I know the answer I would not make an offer.  Once you know the answer, are you absolutely sure (1) the problem can be fixed and (2) you have the capabilities to fix it (not a market problem?

It sounds like this is not a good market to be investing in at that price.  Run your analysis and come up with an offer that will allow you to cash flow day 1 or I wouln't do it. You might be losing money for years while you wait for the market to catch up. A friend of mine was in a similar situation when he acquired a 60 unit self storage in the Dallas Area.  It was a loser for 3 years.

Practice patience and don't be pressured into making losing investments.

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The owner   originally built it giving his personal assistant a job to keep him busy while not doing other tasks for his wealth family.  The owner has a huge corporation ( once a fortune 500 co.) and is reaching a age that im assuming wants to simplify life. On top of that I happen to call the week after the owners personal assistant announced his retirement after almost 25 years. The expenses for the property are high due to there situation.  Management expense is 23% higher, Insurance is over 400% more than I'm getting it for,  and the current tax assessment is way high due to a large tax increase that everyone else in the area contested but they opted not to due to there large presence in the community.  And they are being taxed for a building that hasn't even been built.  

So at 60% occ with just fixing these three items it will be cash flowing at 38% coc the day I take ownership.  Ive done some market research for the area and it is overbuilt.  So I get all the open units for free and if the market doesn't improve no biggy. If it does, wonderful.  It also has a concrete foundation and drive poured for another 3600 sqft building that is cream on top.   The appraisal came in several hundred thousand over what I'm paying for the property so its not just my opinion.  Replacement cost is 371% over what im paying and the property is in great shape!

This market is a smaller one that has very solid and stable employment.  

I close Tue on the property!  I'm pretty jacked up about it!

Well its been 5 months owning the Storage facility figured id chime in with a update.

Occupancy was 61% at closing now its at 75%

Property came with a foundation for a 3600sq ft building that never got built. We are getting ready to build it due to the fact that we are filled up 100% on 2 mid size units.

It has been a dream come true!

I haven't bought the other property  that I wanted for the advertising yet still working on it.  So far I haven't needed it.

I went to the ISS expo in Vegas.  It got the creative juices flowing and learned alot.  I'm really starting to like this business a lot!

Thanks for all the advice!

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