My possible first self storage deal

[Jerrmarco Rhodes]

Hello all. I am a newbie to commercial real estate investing. I am focusing on self storage units and have come across what seems to be a good deal but I need some help to analyze it and make sure its solid. Thank you very much for your help. Here goes:
289 Units Gross Income:$255,850 NOI: $177,694
Price: $1,850,000
Building Size:40,340 SF
Price/SF:$45.86
Cap Rate:
9.60%
Occupancy:92%

Purchase Details:
THIS PROPERTY CAN BE PURCHASED THROUGH A LEASE/PURCHASE DUE TO THE OWNER'S CURRENT LOAN. IT IS A LOAN THAT HAS A HIGH PRE-PAYMENT PENALTY. THE OWNER WILL ALLOW A QUALIFIED BUYER TO TAKE FULL CONTROL OF THE PROPERTY AND LEASE IT FOR THE REMAINING TIME IN HIS LOAN. THE PROPERTY WILL CLOSE OUT IN JUNE OF 2010. Also this property has 2 managers.

I think this is a good deal but I am a bit confused by the High Prepayment penalty. And also, what would make me a qualified buyer in this case. Since its a lease option , I don't need a down payment. Is that correct. Thank you very much.

[Scott Hubbard]

Originally posted by Jerrmarco Rhodes:

289 Units Gross Income:$255,850 NOI: $177,694
Price: $1,850,000
Building Size:40,340 SF
Price/SF:$45.86
Cap Rate:
9.60%
Occupancy:92%

One important consideration in being successful in commercial is how to improve the return on capital. Ultimately, if you can do this, then you can create instant equity.

The published numbers are usually not accurate in terms of considering all the operating costs and at 92% occupancy, there is no a lot of room to improve in terms of increasing NOI. In order to improve your return, you will need to look at increasing rental rates, capital improvements, and/or decreasing expenses.

In my opinion, you need to figure of what the current owner has done to get to 92% occupancy. There is a good chance an investor has already beat you to this deal by improving on the past performance of this property.

The tip off that there is probably an investor flipping this property is the prepayment penalty which usually means there is hard money involved. A pre-payment penalty is a stipulation in the loan agreement calling for a specific payment to be made to the noteholder if the loan is refinanced or paid off. This pre-payment penalty is usually in place to assure the noteholder a certain return in interest and probably means the note is an interest only arrangement.

If your asking about a qualified buyer, your probably not qualified. In commercial real estate, a qualified buyer will need to meet certain financial requirements in terms of net worth. Assets+Liabilities=Net Worth

Lease options do usually require down payments and are usually much higher than in residential.

Good Luck!