Acquiring mini-storage units. Help on analyzing this deal.

6 Replies

Afternoon BiggerPockets Tribe! I have a 38 unit mini-storage building under contract. It is a one 2800 sq ft building facility (built in 2004) on approx. 1 acre of land. With the opportunity to build more buildings and/or offer Boat/RV storage. I had a mini-storage friend review the below with me and he essentially told me the business wasn't worth anything, that I should just offer to buy the land at market value. Realizing that is only one opinion and encourage me to prove him wrong, I want to gain additional insight for guys who have experience in self-storage. My wife and I plan to self manage. 

  • Self Storage Purchase Price: $169k

Current

  • Annual Income: $15,180
  • Annual Expenses: $3,487
    • Insurance: $1,636
    • Property Taxes: $1,177
    • Electricity: $762
  • NOI: $11,693

Year 1 Pro Forma:

  • Annual Income: $17,460
  • Annual Expenses: $4,720
    • Insurance: $1,220
    • Property Taxes: $1,375
    • Electricity: $762
    • Grounds Maintenance: $1,400
  • NOI: $12,740

38 Unit Breakdown (currently under market rents by $2-8/unit). 

Current Rents: 

  • (20)  10x10 @ $45
  • (14)  10x5 @ $25
  • (4)     5x5 @ $15

What do you think about this deal? What expenses am I missing? 

Very generically speaking....I would not personally look at a facility this small unless it were in my back yard and it has APPROVALS as well as market demand for another 15,000 square feet of storage. Otherwise it will always be too small to get me excited. At an NOI of roughly 11K, I would think this facility is worth, at most $110K....assuming you are comfortable buying at a 10 CAP. But you would want to add in neglected expenses and recalculate before making an offer. As for missing expenses....management software, management (regardless of if you are self managing), office supplies are a few that pop into mind.

@Jay Helms - @Michael Wagner makes some good points. Is it only the 1 acre with the current building for sale, or is there more land that would come with the deal? With it being built in 2004 (which is the same year as my facility Phase 2) You may be looking at needing to replace some doors, door handles, sliding locks on the doors, possibly repainting the building. You need to factor in these repair/maintenance numbers into your evaluation.

Is it gated? Security Cameras? Electronic keypad? Is it paved or gravel? Have you done a basic market demand study? What is the current occupancy %?

Thank you @Michael Wagner & @Tim Puffer . Great points. Tim - the property is only partially fenced, it is graveled, and historically has been 100% occupied.  

Quotes to completey fence with electronic gate is $15k. As for as management software, I plan on google sheets (free) and using docusign for lease “paperwork” (approx $10/month). I already have a P.O. box for my business which I’ll leverage here. 

And why is it to small? I keep hearing that but no one will tell me why. 

Also, where Im an I learn more about a market demand study? I do know my competitor down the street is in the process of building more. Thanks again for your feedback. 

It may not be too small for you...but it would be for me.  First, you can't take advantage of the economies of scale like you can in a bigger facility....meaning that as you expand, your revenue will increase faster than your expenses which will have a positive effect on profit.  So if you can expand, it might be worth it.   Also, it might be a good way to "cut your teeth" in this industry.

The other thing to consider is that your time is worth a certain amount of money.  Self managing a facility of this size will take you as much or more time than managing a facility 10-20 times larger with a part time employee.  I'm not saying its not a good deal for you, just consider what else is out there. 

From a valuation standpoint, you can't really run any facility for under $5K per year management expense so once you add that cost into your equation you are looking at an NOI of $6K or so, With that the value would be around $60K...and while I get that you will be self managing, I doubt you would agree to do so for the next owner for free of charge. The flip side, is this facility would cost about $100K plus the cost of land to build....just some things to think about.

To me, I would want approvals and need to have financing in place to expand right off the bat for me to consider this.  

Only being 38 units doesn’t really bother me if you live somewhat near the facility, but the sizes of the units bothers me. Of course, your market could be completely different than mine, but our 8’ x 10’ units are our most difficult to rent, while the 10’ x 15’ and larger are significantly easier to rent. Again, may not be an issue in your market but definitely something to look into.

Look at market supply and demand and gauge occupancy of other competing facilities. I've copied and pasted from another post that I wrote below. Also, the reason it's small is because the amount of time it will take you to manage it (collect rent, late notices, overlocking, auctions, etc.) versus the amount of money you will make. I would buy this only if I could expand, and I would expand only if the market supply/demand will make sense. But, if you won't be moved by any of that input, on the flip side I know 2 guys who's first storage properties were small, less than 10K sq ft, but now they are owners of multiple facilities and do very well. They both had other jobs when they bought because their first facilities didn't cash flow enough, but they stuck with it, paid off the debt and expanded and bought more! 

This is copied from another post of mine:

"I would recommend looking at the supply and demand in the market. One way of figuring out supply is to calculate how many sf. of storage per person is available for rent in about a 3 mile radius of your target facility. You can use Google Maps (GM) to measure out 3 miles from your target facility. Then, using Maps, search for "self-storage". GM will show you the facilities. Zoom in to each and use the measuring tool to measure each building of each facility. Use the "birds eye" view to see if building are multiple stories. A 1-story uses 95% of building size, 2-story 85%, and 3-story 75%. Those are ROUGH estimates. This part is time consuming, but it's important.

Now you need to figure out the population within 3 miles of your target facility. This can be done with software which I can't mention here or this post will be flagged as spam (ha). Now divide the sf within the 3-mile radius by the population. This gives you a sf/person number.

Supply and demand equilibrium is generally accepted as 8 feet per person. I know some groups that use 7 feet per person. Union Realtime has calculated it to 5-6 feet per person. I would usually use 8, but that may change based on UR's research. Regardless, 8 sf/person is acceptable to banks and investors.

Here's a simple example: if my population is 100 people within a 3 mile radius, and my storage supply is 800 sf., 800/100 = 8 feet per person. This market is in equilibrium. There won't be much more demand for storage and vacancy will generally hold at a steady state for that market (vacancies won't increase drastically). If the numbers are 600/100 = 6 sf/person, I know there is a shortage of 200 sf. and vacancies should be low in that market. If it's 1000/100 = 10 sf/person, I know there is oversupply and vacancies should be higher.

Lastly, call every facility in that 3-mile radius and ask how much the rent is for a 1 bedroom apartment worth of stuff. They will usually say you need a 10 x 10 unit. If every facility has a lot of 10 x 10s available for rent, you know vacancies are generally high. If every facility's 10 x 10s are full, you know vacancies are low. Tour facilities looking for a unit to rent and count units that don't have locks to get a rough feeling of vacancy rates. Then rent a unit at one of those facilities, even for a couple of months, to see how they handle management, notices, etc. Pick a month and go late on your rent to see how they handle the late notice and auction process. Don't let it go to auction though...You're just doing research.

I hope that helps and isn't confusing. Reach out with any questions, here or on LinkedIn. Good luck!

PS - Scott Meyers is excellent. Sign up for his webinars, and attend a boot camp if you can. Little pricey but worth it if you're going to jump into storage investing.

PPS - I just realized your target facility is small. This means you will likely be actively managing it yourself, or you will have a manager in place that will eat up a large portion of your revenue (payroll expense). That's okay if you need someone to manage for you, but if the facility takes cash I would switch it to credit card and auto-draft only (maybe checks too). I say this because a manager that knows how to run a facility better than you will be tempted to pocket some cash from time-to-time and will know how to hide it from you, so beware. Again, good luck!"

Join the Largest Real Estate Investing Community

Basic membership is free, forever.