Negotiating Contract for Purchase of First Self Storage Facility

[Jarrod Weaver]

Would like to get your thoughts on the purchase of a 32 unit storage facility on a .29 acre parcel located in a small town (+/- 3,000 people) 50ish miles outside of Austin, Texas. The current owner inherited the property 10 years ago and has done almost nothing with it.

Occupancy has been a miserable 39% with no marketing and very little maintenance. A faded 24" x 36" sign is attached to the end of one unit that is nearly illegible. The grass/weeds are cut about once a month but no trimming/edging leaves grass and weeds growing tall in front of the roll-up doors. The local guy who has been representing the facility and cutting the grass gets $25/month and a free unit

Income for the past 2 years has been roughly $5,500 ($458/month). Pro-forma income could be as high as $14,400 ($1,200/month). Pro-forma expenses are $5,110 annually. As-is the estimated NOI is essentially ZERO - leaving no room for debt service, profit or anything else. Assuming occupancy can be brought over 80% it would bump monthly income to ~$1,000 which will yield $426/month profit. Better yet, the NOI would be ~$8,112. Assuming it could be sold at a 10% cap would yield a targeted gain of somewhere in the range of $40,000-$45,000.

My target purchase scenario would be either a short-term owner finance deal: $25,000 Purchase; $1,000 Down; $250/month; 24 Months; $20,000 Balloon, or, a long-term owner-finance deal: $30,000 Purchase; $1,000 Down; $245/month; 180 Months.

It's a pretty skinny deal but looks like a decent opportunity to make something out of nothing. Being able to do this with the involvement of my two teenage sons may be the highest value.

I look forward to your thoughts...

[Scott Meyers]

Hey Jarrod, 

I have a little experience - about 3,000 units and growing.. 

Ditto to all of the above.  So here's a few other items to note: 

Market equilibrium in Self-Storage is when there is roughly 7 square feet of Self Storage per capita, within a 5 mile radius of the facility.  OBVIOUSLY other factors affect demand:  Urban, Rural, median income, etc.  And of course, you see oversupplied markets where the facility continues to hum right along, and undersupplied markets where no matter how strong you market the facility, it simply won't pop above 80% occupancy. 

So the market is equally important when considering a self storage acquisition, and you need to underwrite it with ALL of the expenses for the facility, not the 3 expenses the seller shared with you on a scratch piece of paper. 

Another general rule of thumb - in smaller facilities such as these, your expense ratio would be in the 25-30% range (based on 85% occupancy). So take your GPRI at market rates, subtract for vacancy, and multiply by .3, and that should give you a ballpark NOI to then apply your cap rate, probably around 9% for this property and market, and that will give you an estimated value.

Too much to consider and talk about on this post, but hopefully we have all provided some input to easy any indigestion you may be experiencing in this deal. 

Love the asset Class, Love the Lifestyle - Hope it works for you. 

Rock on Jarrod,