What to pay for underperforming asset like self storage

[Steven Garfield]

How do you determine what to offer for an underperforming asset such as self storage? Do you pay based on a cap of what the property is currently generating or based on what it could generate after you put your efforts into turning it around? From what I have seen many buyers are willing to do the latter, perhaps because they are hard to find in the current market. I am looking at a small 50 unit with no room to expand, no outside parking, with a cap based on asking price of about 6%. The property is in good shape but there is little opportunity to raise revenue other than raising rents which do look to be below market in some cases.

[George Fitz]

Hi Steven, usually self storage is valued based on current NOI. It can be a competitive market and some buyers are willing to buy based on pro forma numbers. I would not do that. Why pay someone else for the work you're going to do? They should've already done it themselves! With that said, for very distressed properties, an NOI valuation may not make sense and so you may want to do comps based on acreage or square footage, or figure out a business plan and come up with a number that works. However this property does not sound like its actually underperforming in any significant kind of way. So even if there is some upside on the rents, I would definitely not work that into my offer price. If it was me and they are firm at a 6 cap, and there's not much room to increase revenues or cut expenses, then I would probably walk away and look for something better.