Self-Storage Facility as First Solely Investment Piece?

Question

Good evening, everyone.

Last year, I purchased a house for myself with 3 additional rooms to rent.  So far, this has been going very well.  I have two vacancies coming up soon that have me a little worried, but this certainly won't be a show stopper.

Now, I've been on the look out for some good deals with everything that is going on; mainly for my dad or girlfriend to get some additional streams of income flowing.  This led to finding some potential foreclosure opportunities, maybe tax liens, but also a storage facility.

The storage facility has 34 units, and a 700 sqft office space.  It's currently bringing in about $1900/mo, and the owner is considering selling at $160k.  This seems like a pretty solid deal to me at first glance considering it's at 90% capacity, he's done no advertising, and the office space is currently sitting simply unused.  We have ideas on ways to capitalize on the space and encourage timely payment compliance from the renters, which he did note has been an issue.

A restaurant right near it has just changed hands for no less than $220k.

My question to you guys is two fold: What else would you be looking at/for? Would this be a good group-venture and first real estate asset with the sole intention of investment?

And if so, how would you go about financing it?  I believe we should be able to scrape together about 32k, which is what I'm imagining the down payment requirement will be, but if there was a way to make it less so that we could diversify- that would be awesome too.

We all currently hold LLC's in our state of operation.  One of them is turning hefty profits if this helps.

Thanks in advance!  I look forward to the creativity!

Joseph Cacciapaglia · Answer

How are you planning to manage the property? 34 units is too small to justify an onsite manager. Do they already have kiosks in place, or are you planning to add those? Are there electronic locks on the units? Also, you mentioned income, but what are the expenses? Or, was the $1900 the net income? What is the unit mix like, what's the occupancy, and how does the pricing compare to competitors? These are the first few questions to come to mind. There are a lot of moving parts to consider with self storage.

Self storage is really an operating business, more than a real estate play. The same property will perform much differently for one owner than another. If you're thinking about getting into the self storage business, you might want to try working part-time for one of the majors. They're always hiring, and you'll learn so much about how they operate in just a couple of months.

If you were planning to occupy the office for another purpose, and run the storage as an ancillary business from that site, it may make a lot of sense. If you're just planning to rent out the office space, managing the 34 units might be more trouble than they're worth.

There was a time that the SBA 504 loan was a good option for low down self storage financing. It's been a very long time since I've been involved in one of those deals though, so I don't know if it's still the case.

Peter Korty · Answer

Hi @Elijah Miller,

I would love to get started in the self storage business. 34 units are only bringing in $1900/month? That's only $56/unit. I've noticed that the self storage places near me are pretty consistently renting at $1/sq ft.

You could potentially build climate controlled units in the office area. Those tend to go for higher rent than non climate controlled units.

I don't think I'd worry about the sale prices of neighboring businesses since businesses sell based on the cap rate instead of comps. To figure that out, you'd have to know the gross income and the total expenses of the business.

Lance Langenhoven · Answer

I own a boat & rv storage facility which is not exactly self-storage but kind of similar in some respects. When I bought it in Jan 2016 we had problems collecting rent....people were dropping off envelopes with cash, mailing checks, dropping off checks and they paid when they wanted. Which was never when we wanted i.e. the 1st of the month. It became a nightmare of chasing people, calling people, etc.

After 12 months of that we changed the rules. Everybody pays with a credit card and we run the credit cards on the 1st of every month. Now.... no more problems with monthly payments!

Of course a decent management system helps. We use SiteLink.

Joseph Cacciapaglia · Answer

I find the idea that he's coming in once a month pretty suspect. I've managed storage units before, and that has never been my experience. The average stay of a self storage tenant is about a year, but probably half of them move out within just 6 months. This means you'll probably have about 45+ unit turns each year, or close to 4 per month. This means you're making 8 trips out there, unless you can get some of those to happen at the same time. You would typically want to be there when the rent the unit, and again to check the unit when they move out.

Of course, it's possible the property is full with longer term tenants. That happens on occasion. If not, using cameras, kiosks, and electronic locks can reduce your trips dramatically. Also, auto drafts make collections easier, but only until your tenants change bank accounts or cancel their credit cards.

Overall, it sounds like a decent deal, I just think you might not realize how much work it could turn out to be. A lot of self storage operators won't touch the properties with smaller unit counts, because they're often just more trouble than they're worth. I did used to work with one guy that loved this size property, because he was using all the technology I mentioned, and running several from a single off site location.

Lance Langenhoven · Answer

Hi Ronak,

We did have to approach the credit card only strategy really carefully.

We started warning all tenants in October that on the 1st January we would be switching all payments to credit card only. November we reminded everyone again. December we reminded everyone again.

So, it took three months of warnings to make sure nobody could say they didn't know it was coming.

But, it was worth it. A few people said they would move out as they didn't want to give us their cards and we said we'd be sorry to see them go but we couldn't make exceptions and in the end they never left and gave us their card details.

B. Regards,

Lance.

Lance Langenhoven · Answer

I own a boat & rv storage facility which is not exactly self-storage but kind of similar in some respects. When I bought it in Jan 2016 we had problems collecting rent....people were dropping off envelopes with cash, mailing checks, dropping off checks and they paid when they wanted. Which was never when we wanted i.e. the 1st of the month. It became a nightmare of chasing people, calling people, etc.

After 12 months of that we changed the rules. Everybody pays with a credit card and we run the credit cards on the 1st of every month. Now.... no more problems with monthly payments!

Of course a decent management system helps. We use SiteLink.

Peter Korty · Answer

@Elijah Miller,

We're actually next door neighbors. I'm in rural central Indiana. If you're units are only 5'x10', then you'd be right on track with my market too. Slow and steady does win the race, I was just thinking that you may have the opportunity to increase rents and gain more value out of your business in case you hadn't noticed it already. I've only just started my journey of real estate investing, so other than a few tips that I can provide from what I've learned so far, my opinions are very inexperienced.

I do like the idea of the lease to own with the purchase option. IMHO that seems like a win win for you and the seller.

George Fitz · Answer

Hi @Elijah Miller On the surface this looks it could be a solid deal. But you will need a lot more info to make an informed decision. As for your first question, "what would you be looking for", here's some back of the napkin math: $1900/mo in revenue equals $22,800 annually. For sake of quick analysis, assume 30% goes to expenses which leaves you an NOI of $15,960. So if seller is asking $160k then that is a 10cap and probably not a bad price. Obviously the devil is in the details. You will need to ask for full P&L's if they have them. Also ask for tax return. If you decide to move forward I would ask for bank statements. Be sure to analyze all expenses and get an accurate picture as possible. Also, ask for rent roll and verify the monthly income. You should eventually walk the property and be sure what they say is rented appears rented (look for locks on units). Obviously you will also want to inspect the condition of the property and make notes of any deferred maintenance or future expenditures.

As to your second question, "Would this be a good group-venture and first real estate asset with the sole intention of investment?" Personally I'd say yes. I invest in residential and self storage, but much prefer self storage because there are so many ways to increase cashflow and force appreciation. I simply make more money on my storage vs my residential. It's just that the SS deals are hide to find because the secret has been out a while now. This one appears to be a decent deal and might have the potential for upside. Have you looked at their rates and compared to facilities nearby? Is there room to raise rents? If it's mostly full, is there room to expand and add more units? There are a host of other ways to add other revenue as well- too many to go over here.

As for you financing question, someone mentioned the SBA. They finance self storage and have some really good deals in terms of LTV the last time I checked. Be sure to talk to an SBA lender who does self storage. Also, local banks generally like it a lot. Covid has made the lending markets a little volatile, but you shouldn't have trouble finding a lender. I'm refinancing a property right now with a local bank. It's going smooth so far.

I know others on this thread are talking about how running a SS property is work, and I agree it is. But just like everything else, if you put an efficient system in place then you reap the benefits and minimize your time spent. Most properties can be run with very little human interaction through automated processes. There's lots of good tech out there for SS. I also always have boots on the ground nearby, since I don't live near the properties I own. I pay part-time help to maintain properties and sometimes rent units (rentals can generally be done via an app or a phone center). I try to personally visit each property quarterly. I would say on average I spend about the same amount of time on my storage units as I do my apartments. Obviously the apartments keep me really busy during a move-in or move-out. Most of the time, I'm not involved whatsoever for a storage move-in or move-out. But I spend more time on the financials in SS versus apartments.

Keep us posted on where you end up with this and good luck!

Elijah Miller · Answer

@Justin Frank, long term would likely be to continue the use of the property as it is and maintaining the cash flow from it.  We would want to increase rental rates, not immediately, but soon after taking control of the property to drive cash flow as much as we can. But I understand where everyone is coming from in saying that as a buy and hold type deal- it may not necessarily be the best for a first property.

Short term: I'm trying to help my dad get enough supplemental income that he can quit his salaried job and focus full time on his farm land/hunting property business.  This would help him do that by replacing almost half of his monthly salary.

Long term: To be honest, I suppose that I haven't really thought passed the next couple years.  I'm set to begin medical school and hopefully an army contract next year, so I figure a little supplemental income and building what I can in that time may be nice, but not necessarily necessary.  My real investing for the income will come after completing residency.

Any thoughts?  This is really about trying to figure out how to take a good first step.

EDIT:  Follow up thought: would it be better to be looking harder for a flip for the first property?  The reason I say this is the amount of instant equity we could get from rehabbing it, then do the whole BRRR thing.  Ironically, I've got a guy that used to manage crews and do flips for a reliable reference several years ago living with me and he's itching to get back into it.  We found one, and I've been trying to get a hold of them but it's not on the market and they're not returning my calls.

Self-Storage Facility as First Solely Investment Piece?

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