Underwriting a Self Storage facility - Help needed

[Kaustubh Johri]

Need guidance and direction from the experts here. I am looking at a SS facility in GA. Following are the details - 

- 15000 NRSF 

- 110 UNITS

- 60 Parking Spaces 

- Physical occupancy - 93% , economic occupancy - 60% 

- Population - 1 mile : 5000, 3 mile : 35000, 5 mile : 115000

- Supply - 1mile:  20 SF/Capita , 3 mile: 9SF/C , 5 mile : 7 SF/C

- Traffic - 22000 VPD 

- Gross Income - 130K/YEAR , NOI - 75K

How would you underwrite this ? 

What are the important elements to look out for while underwriting this property ? 

What is a realistic physical vacancy in the SS industry ?

What are different ways to reduce Op expenses ?

Is this a "good" deal ? 

Any other tips/suggestions would be appreciated ! 

[Henry Clark]

@Kaustubh Johri

Your questions from above.

How would you underwrite this?  First of all, you should not make this investment unless you have already underwritten about 5 other deals for practice.

Same as you do for MF and SFH. Check your Revenue, check your expenses, run your financial projections based on how you would run it and not how they are running it.

What are the important elements to look out for while underwriting this property?  A.  Revenue- Validate the occupancy and make sure there are true customers and how many will leave if you buy.  Does the owner have 5 units or friends that will be gone?, B.    Expenses, validate the property tax, insurance, utilities, upkeep.  These are easy.  Disregard how they are managing.  Build in expenses for how you will manage., C.  Build a table of rental rates by size by competitor in the area., D.  Check on competitor occupancy., E.  Supply- 20SF/capita within 1 mile is crazy high versus say 7sf/capita.  Understand why.  Probably due to easy zoning there.F.  9sf/capita within 3 miles is also high., G.  Check if this location and other locations have added land to expand or if land is available in the area to expand.

What is a realistic physical vacancy in the SS industry?  I always use 90% when doing modeling.  More importantly model where your "Cash Flow" breakeven is.

What are different ways to reduce Op expenses?  Depends on how you will run the business.  Go Self Service.  Add solar. Do self maintenance and upkeep.

Is this a "good" deal? 

A.  Up front this is a very bad deal. Do your numbers just like you do for MF/SFH. If NOI is 75K. Say depreciation is $20k. Interest expense??? Then income is $55k. Tax at 30% then after tax is $38,500. Add back Depreciation = $58,500 cash flow. If you buy for $1.7mm. Divided by $58,500= 29 years payback not including Interest expense. Now you might say, but if I reduce costs and increase rents and other things, then the deal is better. But then you are paying the current owner for the improvements you do and not the value they brought to the table. Our deal analysis is an 8 to 12 year payback; with finance terms of 25% with 20 year amortization. This allows us to pay down on the debt earlier, bank cash for our next deal, or if we messed up on our deal analysis, we have cushion.

B.  This is a very bad deal.  If this is the only self-storage you will ever do.  Why learn and expose yourself to a new investment type.  Ask your self this.  How much cash do you have?  How much cash can you get on your collateral at 65%?  At $1.7mm say the bank wants you to put down 25% or say $400,000.  Do you have that $400,000?  Back to my question will this be your only deal.  After you use up the $400,000 will you have enough money or collateral to do the next deal; and how far out till you have enough funds to do the next deal?  This answers the question if this will be a one time deal.

Don't TRUST me.  You don't know if the info above is correct or not.  You need to do about 5 valuations before making your first offer.  You need to develop a deal/property checkoff list.  A cost to build analysis.  A valuation analysis. Keep improving each of these as you do your 5 valuations.  Follow the advice given above and start reading books, podcasts, doing analysis, joining groups, seminars/training.