How I value a small self-storage facility before I ever look at the seller's numbers

Question

Most new storage buyers start with the seller's pro forma. That's the fastest way to overpay. A pro forma shows what a facility could be. You should pay for what it is, then check what it could become.

Here's the first-pass filter I run on every deal before I spend real time or money on it:

• Call around and get local street rates for a 10x10 and a 10x15. Real rates from competitors, not the seller's asking rents.
• Turn those into an average rent per square foot and apply it to the facility's rentable square feet.
• Assume about 85% occupancy for a stabilized facility.
• Take out about 35% for expenses. Sellers almost always understate this.
• Divide that net income by an 8% cap rate. That's my stabilized value.
• My max offer is about 75% of stabilized value. That gap is what pays for the work, the risk, and the time it takes to get there.

Call around and get local street rates for a 10x10 and a 10x15. Real rates from competitors, not the seller's asking rents.

Turn those into an average rent per square foot and apply it to the facility's rentable square feet.

Assume about 85% occupancy for a stabilized facility.

Take out about 35% for expenses. Sellers almost always understate this.

Divide that net income by an 8% cap rate. That's my stabilized value.

My max offer is about 75% of stabilized value. That gap is what pays for the work, the risk, and the time it takes to get there.

Then one quick sanity check: compare the asking price to current monthly rent. Below 100x monthly rent is ideal. When a deal is way above that, the seller is usually pricing in upside you'd have to create yourself.

Adjust the cap rate and expenses for your market. This won't tell you a deal is good. It'll tell you quickly when one isn't, so you don't burn weeks on it. Every deal that passes still needs full underwriting.

For those of you buying storage right now, what does your first-pass screen look like? Do you use a rent multiple, or go straight to cap rate?

Ashish Acharya · Answer

Kevin, I like this approach. Starting with what the market actually supports instead of letting the seller's pro forma set the value can save you a lot of time.

I’d add one more layer to your first-pass screen: the after-tax economics.

Before getting too deep into a deal, I’d want to know how the acquisition affects depreciation, whether cost segregation makes sense, what happens to the property tax after the purchase, and how you're treating improvements and other capital expenditures.

Self-storage can be interesting from a tax perspective because the building and different components of the property don't necessarily all have the same recovery period. On a large enough acquisition, that can materially change the after-tax return.

I’d still underwrite the deal based on conservative operating numbers first. The tax benefits should improve a good deal, not be the reason a weak deal works on paper.

Your 75% of stabilized value rule is a good starting filter, but I’d ultimately compare the purchase price, stabilized cash flow, financing, and after-tax return before deciding how much of that upside is actually worth paying for.

Feel free to DM me, I’d be happy to send over a few resources that might be helpful.

How I value a small self-storage facility before I ever look at the seller's numbers

1 Reply