Self Storage- Selling Process

[Henry Clark]

This is a process post and not an advertisement.  Also, key Due Diligence items.  Did one over in the Classified sections.  Don't contact me or respond on this post, unless about the process and Due Diligence.  Thanks.

My wife and I decided to sell 4 of our 7 locations.  They are in two towns in Iowa.  Positioning ourselves for debt reduction and also investments in other asset classes (Country Subdivisions and Teak Plantation).  Details 48,320 Sqft; 310 units with land to expand, Physical Occupancy 90%; Economic Occupancy 97%; List $2.1mm.  

Realtor- We have previously sold with Tom Flannigan of Argus Realty and we decided to stay with his team.  As I have mentioned before, we always try to stay with our "Team" whether sales, excavation, buildings, erectors, concrete, banking etc.  They know we will have more business for them, and we always pay when the bill arrives by hand.

Brochure process- you can google Self Storage and pull up a brochure for a location for sale.  Part of the behind the scenes is the following type of give and take.  They prefer to get your financials.  Luckily, we have our 2023 taxes prepared.  Some of the discussion points:

a.  Units and Revenue- questions on pricing, and potential for expansion.  You could also put lipstick on a pig before going to sale and lower prices to get higher occupancy.  Physical Occupancy at 90%, could have lowered prices to fill up.  Economic Occupancy is the main driver.  Ours is at 97% because the main open units are small 5x10 units or parking spots.  Could actually have driven our future projected revenue up, to drive the potential Net Operating Income up.  It's cold and we are in Iowa.  Could have sent Rate increases out prior to using Rent Roll for future revenue stream.  Very few people move out of storage in the middle of the winter and all locations around are full.  So, if you're ever buying a location, see when the last rate increase was, to determine if there might be an impact to your occupancy levels.  

b.  Could have built or added more Cargo containers.  Even though they wouldn't be occupied, we would still get a multiple on their future revenue stream.  Will use Cargo containers as an example, since we can do them any time.  Say $3,300 set in place.  Renting for $65/month.  12 months at 90% occupancy equals $702 for one unit.  No additional costs in projections.  No property tax on Containers.  If you use a Cap rate of 7%, the $702 cash flow on one unit becomes $10,000 added value.  Versus $3,300 cost, would be additional profit of say $7,000 per unit.  Times 20 units, that would be an additional Sale profit of $140,000.  It would only take us 2 phone calls to put those in place.  Now the new owners could do year 1 depreciation ??% in 2024.  So that would also be added value.  Our current Occupancy for both Physical and Economic would have gone down, but the valuation would have gone up based on projected revenue stream.

c.  Fees- We don't charge late fees or admin fees.  So, the Realtor will add those since that is the normal course of management.  Now that will be considered a Value Add by new buyers since it is an easy revenue add.  We have taken a different approach.  We don't want the headache of charging those fees, even though they can be automated.  We do autopay only, so we would get the question why our charge in x months back was different and higher.  We would have to take the time to look up on the system and find out, then call them back.  We do our management passively, and don't sit at an office and wait for the phone to ring.  Our approach to this.  If we get to know your name due to payment issues, we raise your rent.  We keep raising your rent till you're not late or you leave.  We have a high quality of customers after we cycle through poor payers.  Which way is right?  My buddy makes $3,000 per month additional on late charges and fees.  But he has a fulltime office person ($??,???), we don't.

d.  Office/Management payroll- We don't have anyone.  So yes, we should pay ourselves to make things comparable.  The realtor adds an estimate to the P/L since most buyers will want that.  Talk with your Accountant but generally it is recommended you don't pay yourself payroll inside your Self Storage.  This may open you up to Self-Employment tax on all of your Self Storage income.  Ask how the location is being managed.  Had one location we looked at, a person was managing but no payroll was reflected on the P/L.  The owner was just giving cash from the monthly rent receipts.  Decide on how you will manage and adjust your P/L estimates accordingly.

e.  Real Estate taxes- This is one of your largest costs for Self-Storage.  The realtors always hike this since they and buyers think with a higher purchase price the Auditor will hike the assessed value and thus the taxes.  The Auditors are not supposed to do that but understand the concern.  Ours got hiked from around $22,000 up to $32,000 for the projection.  Another thing to note if the sale is not going through the realtor, make sure you validate the actual taxes.  Ours for example only showed half a year.  Normally we have paid ahead the March payment coming due, back into the prior year for tax purposes, since we and probably you are Cash Basis.  In 2023 we didn't do that and only showed 1/2 a year of tax payments.  Actually, looked at a $2.5mm offering and they only had $800 of property taxes.  Researched the tax records the Storage 3 acres was still part of a 160-acre section of pasture ground.  Was not even legally subdivided yet.  You have to check the figures.  Validate all of the numbers.

f.  Repairs and maintenance- do an assessment of the property repairs needed and security systems.  One door replacement installed will run you around $1,000; a door jamb replacement will be $700, etc.

g.  Landscape and snow removal- take into account your climate.  Our realtors are based in Minnesota and originally estimated $5,000.  We are in the Middle of Iowa and had them reduce down to $1,000 at most.  Make sure you understand the mowing and snow removal depending on your weather.  The previous owner may have done it personally and it is not reflected on the financials.

Cons- Selling right now breaks two of my key rules in Real estate:

1.  If potentially interest rates are going up and inflation, always have hard assets like Self Storage.

2.  If potentially inflation will go up, never pay off debt.  Use cheaper future dollars.

But one of my personal rules- It's your money, your right, even if you're wrong.

 I'm breaking two of my rules.  Our actions with the profits and equity will need to offset those two rules in a large way.

Start small and Make Your Big Mistakes Early.

[Ronald Rohde]

I may sell one of my industrial properties too. A great question is, would I buy this asset right now for $3.9m?

I wouldn't, I paid $2.7 3 years ago, have had 12-14% CoC and perfectly happy to sell.

[Henry Clark]

Finally closed last Wednesday.  Buyer wanted 3 of the locations but not the 4th which is 40 miles away from them.

At first negotiated with all 4 locations.  Then narrowed the offers down to just the 3 in the one town.  Ended up getting our asking price.  

This is a "C" market about 60 miles away from an "A" market.  Were a lot of tire kickers, but only one real offer.  They already owned storage in that town.  Will be a good deal for them both the deal itself, but also since all towns around are full.  And they now own about 80% of the market.  If they raise all of the rents by $10, that will be $50,000 per year more.  10 x 20's rent for $75 as a base for reference.

Paid some debt down.  Bought a few things we have been holding off on.  Remaining funds:

Analyzing two new deals.  One self-storage and the other country subdivisions.

 Between the higher interest rates and increased construction costs the Self-Storage is not as beneficial, although it would be in a "B" market.  Would have a great re-sale potential of about $1.5mm profit on $500k investment over 2 years Cash on Cash plus the rental during that period, plus I've analyzed the market, and it is a solid location with little potential competition that could build.

The Country Subdivision has the greatest return with the least amount of input, but the housing market and thus lot sales are a little more questionable, although this is a great location. Would be $900k profit on $675k investment, plus the return of the $675k. This project could take up to 5 years to sale out. Whereas the Storage location would be in 2 years due to that market. We could take a loan out on the $675k versus doing all cash. But I'm a little more leery of this investment and the economy, so if we went all cash in, there would be no financing pressure selling over a 5-year period. This is not the best REI approach 100% financing, but our Risk/Reward Tolerance is very tight right now on new projects.

Basically, Cashed out of those 3 locations. Two REI rules broken:  a. If we keep the cash, we will lose out to inflation and opportunity costs.  b.  We did the worst thing during an inflation period and paid Debt down.  

It's about your Risk/Reward levels.  And as I always say, it's your money, your right, even if you're wrong.

Start small and Make Your Big Mistakes Early.

[Henry Clark]

All locations were 100% occupancy. The 4th location we did not sale. We will purchase 20 1 trip 20-foot cargo containers for $3,200 each set-in place and delivered. Will rent out at $65 per month. Land and all other cost already in place. Will be about a 4.5-year payoff on these units. Will pay cash thus no interest, no property taxes. Will be a $64,000 investment. $14,000 NOI at 90% occupancy, at 7% cap rate will be $200,000 value increase in 2 years. That will help keep some of the negative impact of inflation at bay.